Federal judge asks SF to show new Ellis Act payouts don’t take from landlords

San Francisco must show that increased payments required to be paid to tenants evicted under the Ellis Act do not serve as “taking” of private property in a way similar to eminent domain, a federal judge said Monday.

Amid still-rising rents and an ongoing housing crisis, The City is defending in federal court a recent law designed to de-incentivize use of the Ellis Act.

Since 2005, landlords who have used the controversial state law to evict tenants from rent-controlled housing in order to exit the rental business have been required to pay relocation fees of up to $4,500 per tenant.

But under new restrictions approved by the Board of Supervisors and signed into law by Mayor Ed Lee this year, Ellis Act-using landlords must also pay the evictees the difference between their current rent and what it would cost to rent a similar unit at market rates for two years.

That could amount to a payout of $100,000 or more for tenants who have lived in rent-controlled units in desirable neighborhoods for some time, according to attorneys for landlords and property owners who filed suit against The City in July to have the law overturned.

On Monday, lawyers from City Attorney Dennis Herrera's office sparred with counsel from the Sacramento-based Pacific Legal Foundation, a prominent property owners' advocate, in front of Judge Charles R. Breyer.

After hearing testimony for about 45 minutes, Breyer instructed The City to file a brief by Friday explaining how the increased payouts are not an example of government placing so much restriction on private property that it deprives owners of the property's value.

There is no comparable law in the United States like San Francisco's, which amounts to “extortion,” Pacific Legal's J. David Breemer argued.

The City countered that the payouts are a control similar to rent control, which has already been successfully defended in federal court as legitimate, Deputy City Attorney Christine Van Aken said.

Only about 20 percent of properties in The City subject to the new law would trigger huge payouts, Van Aken said. And even with the payouts, property owners would still be able to enjoy “94 to 97 percent of their value,” she added.

Such high profit margins for real estate “does not put us into the realm of taking,” Van Aken said. “Not even close.”

City leaders have been challenged to do something about skyrocketing rents and what tenant advocates say is an eviction crisis in tenant-friendly San Francisco, where as many as two-thirds of voters rent apartments.

Use of the Ellis Act has also increased sharply during the tech-fueled economic boom. Ellis Act evictions nearly doubled, from 116 in 2012-13 to 216 in 2013-14, according to the Rent Board's most recent annual report.

The lawsuit is the most significant challenge yet to the law on Ellis Act payouts. It's not clear when Breyer will rule. A reply to The City's brief is due next Tuesday.

Either way, if the plaintiffs lose in district court, they pledged to press on.

“We'll take this to the Supreme Court if necessary,” Breemer vowed.

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