Truth be told: Protected tenants and what you need to know

This is from “Zang” on Ask Us: Upside to purchasing 2 units with protected tenants. This is just plain wrong:

Having just dealt with a greedy protected tenant I have more than a few thoughts about the tremendous downside of buying a property with protected tenants.

My case started in 2001 and just settled this summer. I innocently purchased a 2 unit bldg. to live in, with a protected tenant, and thought I’d slowly go about doing needed repairs, renovations and offer the tenant a huge lump sum (50K) to move out. At this point I didn’t know how greedy the tenant was and didn’t know about his financial resources. The tenant laughed when I made this cash offer and said he wanted $150K to move out. Seriously.

Shortly after I was sued by the tenant for all sorts of murderous activities thats on the boiler plate lawsuit forms the tenant’s lawyers use… for $500K, yep, half a million, not a typo. Not one of the charges stuck when it got to court recorded depositions…since in fact the tenant had only nice things to say about me but he wanted money and had me hostage.

My options were: sell the property at a minimum of 50% loss in value, pay the tenant his request of $500K, or Ellis the building & start a legal defense. I ended up hiring a bunch of attorneys, filing insurance claims and Ellising the property. I even had to hire a firm to keep the insurance companies and the insurance lawyers “in line” because of course, the first thing any insurance company says in response to a claim, is “we’re not responsible”.

Even though it was clear that I had NEVER done anything wrong to the tenant, his lawyer threatened a trial. I wanted my day in court, but my attorneys (I had an ever growing team of 6 attorneys by then) were deathly afraid of trial. Seems in SF most judges are pro-tenant. And even if the jury hears that the “protected tenant” plays golf all day, sails on their private yacht, drives a new Mercedes Benz, while checking on their bonds… (I wish I were making this up)…and has their own vacation property in Carmel, all while claiming disability and hardship… the case is bound to go the tenant’s way. HERE’S THE RUB: Even if the jury DETESTS the “protected tenant”, if they award the tenant even $1 of damages, the landlord automatically has to pay ALL of the tenant’s legal fees (in this case his fees were over $78K). All jury judgments are tripled and the juries are not told this while they are deciding the case. So there are cases where the juries, thinking they are doing the right thing, give a low award to a greedy tenant, only to discover later that the award was trebled AND all legal fees automatically awarded. And, insurance companies might pay towards the landlord’s defense but they WILL NOT pay judgments….so, trial is for the foolhardy.

How to calculate the downside and the cost? Difficult, because how do you calculate the grief and loss to life when going through something as crazy as all of this. The building was tied up for years… when it could’ve been generating money. My funds were tied up. I couldn’t enjoy being at the building and wanted to minimize my contacts with the tenant, who was paying $389/mo. rent, as much as possible. Legal fees, NOT reimbursed by eviction insurance and personal umbrella policies, were roughly $90K.

WHAT DID I LEARN? Ellis the property the day after you buy it, before you’ve met the tenants and they get a chance to claim you’ve done something wrong to harm them personally. It’s a business decision and you just move forward. Ellising would’ve saved me, but I thought the tenant deserved something for moving from a place he’d been in for 28 years… and that I’d try to negotiate something. I was so wrong. Lest you think Ellising is easy… it isn’t. You MUST have a law firm who has a GOOD track record with Ellis filings. There are strict deadlines that must be observed for several months and SEVERAL YEARS after you file for it…. one missed deadline means you have to start all over again AND can result in a harassment lawsuit from the tenant. In retrospect, filing for Ellis would’ve been a lot easier than the dealing with a frivolous, costly, time consuming lawsuit for 6 years!

I always wonder what Dashiell Hammett would have done with a story line about a tenant extorting a half a million out of their landlord…it’s a crime novel begging to be written.

Thanks for the insight and thanks for reading. We hope a few people pass this on.

Time for cocktails!

17 thoughts on “Truth be told: Protected tenants and what you need to know

  1. I don’t know much about real estate other than owning a SFR but if I was in the market for a duplex and I heard “protected tenant” I would be out the door in a second or I’d discount the value of the property by the differential between the protected rent and the market rent. . I’m guessing a good percentage of protected tenants understate real estate law better than most lawyers.

    I find it a little disengenuous for this guy to be playing the innocent victim.

  2. unbelievable. this is amazing and so sad at the same time. these types of tenants are ruining this town by keeping hard working people out of the city and by stuffing city hall with sympathetic sycophants like chris daly.

  3. Agree with exSFer. Protected tenants are bad news. This tale falls into the “What were you thinking?” category.

    Can’t help but get the sense that there is more to the story, though. $500K? Six lawyers? $78K in defense bills? What didn’t we hear about in this story?

  4. Sounds about right!!!

    In City of San Francisco’s own housing survey, the San Francisco Housing Data Book, dated 2000, 26%, or 38,400, of all rent controlled tenants make over $100k per year compared to 30%, or just 7,000, of market rate tenants.

    I find these figures pretty amazing and demonstrate that rent control helps people it doesn’t need to help, at the expense of other renters and landlords.

    And then you look at the fact that this guy was paying $389/mo. So what happens if the other unit was to be rented as well? The rent needs to be very high just to cover debt service. Let’s assume this 2 unit building was in a good neighborhood (why the guy stayed so long) and the note Zang had to take out was $1M at 6.5% because the property was $1.2M. Lets assume that Zang just wanted to break even on debt service ($6,321/mo) and wasn’t going to try to recoup property taxes, insurance, had no maintenance expenses, no management fee, and wanted no profit. Add in this guys meager $389 rent and the rent for the other unit needs to be $5,932/mo.!!!! This is why rent control makes rental housing more expensive!

    As for the tenant playing the victim, the system is set up almost entirely in the tenant’s favor and the rewards go to the people who can effectively game the system, tenants like this guy.

  5. Mikey, There’s A LOT I won’t say. The actual story is worse. I’ve been down the litigation road and I don’t want to go back. I share my story so others won’t fall into the same trap. Before purchasing this building, I thought the movie “Pacific Heights” was fantastical. I still think it’s over-the-top, but the scheming tenant putting the landlord in a legal vise, is the reality I lived for 6 years. My family and friends who don’t live in SF couldn’t believe this either. And I know mine isn’t the worst story.

    The tenant played me like a song…. always nice and “befuddled” about things…giving gifts at Christmas to my children, etc. He didn’t know where his original lease was when the selling realtor and I asked for it in 2001, and then it magically turned up in his lawyers hands a few years later when it was to his advantage for it to appear. I learned later that he had started way before the property even went on the market in 2001 to study all of this. Most of his legal help was free until he filed for the lawsuit when it went on detainer, so he had no out of pocket expenses… while I was struggling to pay my mortgage AND legal bills.

    Also, the $78K were HIS lawyers fees over the 6 years of litigation… that’s a lot of filing of briefs, days of depositions, letter writing, etc. I saw the bills. My legal costs were $90K because I had to chip in on the settlement, pay for Ellis filing(s) and pay all the legal fees my insurance companies wouldn’t cover.

    You ask why $500K? So did I!!! It was loosely based on accusations of harassment, negligence, discrimination, etc. while I owned the building… times THREE!!! They don’t use the tenant’s current rent as the cost basis, they use the current market value of the unit. In this case the market value was approximately 8 times greater than the meager $389.mo. It adds up quickly when they are claiming harassment, negligence, malfeasance, etc.

    Why six lawyers? 1) a landlord/tenant firm, 2) a landlord/tenant firm with the smarts to “oversee” the insurance companies as SF Rent Control is such a specific and bizarre area of law and most insurance companies don’t have a clue, and 3) one or two lawyers from each insurance company

    that came to the settlement table.

    If you talk with any good landlord attorney in SF they will be surprised I got off as easily as I did. Elderly persons who have occupied a unit for more than 5 years have a lot of power in this town and their lawyers can make a lot of money off of them. My saving grace was that the tenant, when deposed by the court, could never say anything negative about me. Not one word. If I had told him off even once in all those years, my lawyers told me the tenant would’ve walked away with a substantially larger settlement. The day of the final settlement my attorneys made much of the fact that in all the years of “tension” with my tenant, I had kept the relationship completely cordial.

    Again, my advice to anyone stepping into this quagmire is to Ellis immediately after close of escrow with a law firm specializing in landlords only. Wait the mandatory one year for them to move, knowing you have saved piles of money, grief and time. Even if you have to have the sheriff come at the end of the year to move them out, it’s still less money and hassle than a groundless lawsuit designed only to extort money that still ends up in an Ellis.

    Time for yoga…

  6. Has anybody done a survey to figure out which districts in SF have the highest # of tenant complaints per total # of rental units? From statistical perspective, it may be helpful for people who want to purchase investment properties.

  7. maybe your tenant is that loser balanced viewpoint that says renters can be millionaires. he just didn’t admit what a piece of [removed by editor] you have to be to get there.

    ;)

    why aren’t there rules like income qualification for rent control just like for bmr’s when purchasing? you should not get any help with rent when you are single and make too much to qualify for a bmr. rediculous!!!!

    [Editor's note: Please attack the issue all you want, don't attack the other readers.]

  8. The additional lesson to be learned by all landlords, willing or otherwise, is NOT to lease to PROTECTED tenants ie. elderly or disabled folks. They will ruin any chances you may have to sell the place in the future as well as being a ton of trouble if they proved to be problem tenants down the road.

    [Editor's note: It doesn't sound like Zang's tenant was elderly or disabled...that's the rub!]

  9. I’d just like to know ONE example where rent control/protected tenants laws are to the ADVANTAGE of the tenant. So far I’ve never found one (beside the rich single abuser of the system – and I’m not even sure it’s really to his/her advantage),

    no rent means no money means no maintenance of the place. What does it give after 20years?

    I know a lady who pays less than $200/month. She has had 4 or 5 landlords .. but the last 3 ones never spent a dime on her unit – which after 20years of NO maintenance leaks everywhere. Roof, bathrooms, plumbing etc.

    The current deal is that her own family does the maintenance “for free” (like they come to fix the unit during week-ends) – she wont complain, and the landlords keep her around (never been any disagreement from what I know)

    In that case, she simply refuse to leave the place she has been living in for many decades. BUT IT’S “hazardous” “dagerous”. It’s not accessible, there is old peeling lead paint, mold, no proper heating, no double glazing etc.

    From a pure financial point, I figured out that IF the city is getting the chinchin from the property taxes (which are proportional to the sale price thus to the current market value), THEN the city should refound some of it in “voucher” . So the protected tenant wont pay more, the landlord will get more, and the city gets the right to stick their nose and disqualify some “cheaters”.

    (I know, it would be very difficult to enforce and make it fair.. but right now, they dont do anything at all)

    anyway. I’ve seen rent control in several countries/cities, and I’ve never seen it work. Quite the contrary. Some cities with NO rent control manage to have a better rent market: rents are not artificially raised to anticipate the frozen rents for many years to come, people are free to move around as their needs change (old lady moving to an accessible unit) etc.

    what were they thinking. Who was the ChrisD at that time?

  10. It was 1979. Elvis was dead. Disco was king. A weird mixture of inflation and recession — called stagflation — was so wracking the U.S. economy that Ronald Reagan was able to base his presidential campaign on a promise to address the crisis through an untested set of policy initiatives known collectively as supply-side economics.

    In the spring of that year, San Francisco landlord Angelo Sangiacomo abruptly raised the rent on 5,000 middle-class tenants. Renters across the city revolted, organizing themselves to put a strict rent control ordinance on the fall ballot. Then-Mayor Dianne Feinstein and the San Francisco Board of Supervisors pre-empted the tenants’ initiative by quickly enacting rent controls that were more moderate than the ones headed for the ballot.

    Feinstein’s rent control law was intended to be temporary, lasting only as long as the hyperinflation that was then afflicting the economy. This initial version of rent control was intended to serve a definite group: “senior citizens, persons on fixed incomes and low and moderate income households.” People, that is, who were having a hard time paying rent.

  11. zacks, utrecht and leadbettor (sp?) are the best in the city. they deal with this kind of issue every day.

    andrew zacks is the ellis king and has done more of them than anyone else.

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