Cash for Keys
To get around rent control, Santa Monica landlords are paying tenants to leave
By Bonnie Eslinger
When a housing market heats up, homeowners have an opportunity to cash in on the equity of their houses — if they are willing to move, presumably to a less-expensive location.
For renters, it’s usually the opposite. When a landlord chooses to capitalize on increased housing demand by raising the rent, there’s typically someone else eager to move in if financial shortcomings force the current tenant to move out.
Rent control restrictions are on the books in Santa Monica to ensure that longtime tenants — lower-income residents and seniors in particular — are not priced out in the name of increased profits, a city policy often credited with stabilizing neighborhoods and preserving economic diversity.
But booming Westside real estate values also mean that long-term tenants of rent-controlled apartments who are willing and able to move can now profit from what’s being called their “renter equity.”
Santa Monica’s rent control laws allow landlords to boost a unit’s rent to market value when a tenant moves out, with the next inhabitant paying more but getting the safeguard of limited rent increases going forward.
Thus, when market forces push rents upward, landlords have a financial incentive to get existing tenants to move out — particularly if those tenants benefit from very low rents as a result of extended occupancies.
A cash buyout offer is a legal way to do that.
Data collected by the city suggests that buyouts can be an attractive and profitable option for both tenants and landlords, but community leaders and tenant advocates are concerned about residents who don’t know their rights — including the power of their own leverage related to the appreciated value of their unit — when a landlord makes a cash-in-hand offer.
Santa Monica Mayor Tony Vazquez recognizes it’s a tough choice for city residents asked to leave their longtime homes when money is put on the table.
“For me it’s kind of like a double-edged sword. You run across a lot of folks who may be attracted to the financial incentives to move with a good sum of money, but then you lose the unit,” said Vasquez, who has lived in Santa Monica for more than 30 years. “That’s the thing that we’re struggling with — there’s a lot of gentrification going on in our neighborhoods.”
KNOW YOUR RIGHTS
Santa Monica Rent Control Board Chair Nicole Phillis said city leaders decided to track buyouts after hearing from an in-
creasing number of tenants feeling pressured by a landlord who wanted them out.
“The people who are the most vulnerable to buyout offers, and the ones who are mostly harassed, are the ones who have very, very low rents,” Phillis said.
Knowing how much other tenants are being offered for comparable units and locations, she said, can increase the negotiating power of tenants who find themselves in such situations.
“We thought the risk of predatory behavior was high. And so we decided the best way to respond to [buyouts] wasn’t to try to restrict, control or stop it, but to make sure that tenants have the information they needed to come to the bargaining table,” Phillis said.
Last year, when the city first began collecting buyout data, at least 40 apartments were vacated because a landlord paid a tenant to leave — with payments, on average, ranging from $13,000 for a studio to $45,000 for a unit with three or more bedrooms.
Buyouts are poised to far surpass that number in 2016, with 36 already on the books at mid-year.
Santa Monica Rent Control Board General Counsel Stephen Lewis said some of the increase in reported tenant buyouts could likely be attributed to the fact that the city rules requiring the board to compile the data wasn’t fully in place until mid-April of last year and that it took some time to publicize it.
Additionally, a portion of buyouts relate to a property in the process of undergoing rehabilitation, “and we understand from the property’s tenants that several have sought buyouts,” Lewis wrote in an email, adding that under law he couldn’t disclose the property address.
CHOICE UNDER PRESSURE
Denise Barton, 48, has experienced first-hand the pressure of a landlord all too eager to get tenants to move out. When Barton was in her 20s, she moved into a studio apartment off Arizona Avenue, one block from Ocean Avenue’s hillside ocean view, which she recalls came with a monthly rent of about $237. By 2016, the amount due on the first of each month had increased to $527.
In 2012, a new property owner took over her 49-unit building at 1305 2nd St., then called the Mar Vista Apartments, and began pressuring tenants to leave, she said, making it clear they had the ability to make residents’ lives miserable if they didn’t.
“We were all long-term. I had been there since 1989, and many of the people who were there had been there before me,” Barton said.
Property managers Wilshire Skyline Inc. would make frequent inspections of her apartment and others — sometimes under the guise of making repairs, but really to look for reasons to harass tenants, she said. They also told tenants they’d have to pay for previously free parking spots on the property.
“Once they took over the building, they were trying to get people to buyout,” Barton said. “They wanted to do inspections all the time or they wanted to see something, but then when they’d come in to see the one thing, they didn’t even look at it.”
Barton, who is disabled, was told she had too many items in her apartment, creating a safety hazard.
“They wanted to say I was hoarding stuff, but [city] code compliance came in and said ‘No, you’re fine,’” she recalled.
Barton and other residents were offered buyout amounts as low as $5,000, she said.
Instead, Mar Vista Apartments tenants organized and began filing complaints with the city.
WIN, LOSE OR DRAW?
In 2014, the Santa Monica City Attorney’s Office announced a settlement agreement resolving the harassment allegations, which residents said also included unfair guest policies and privacy-invading security cameras.
Under the settlement agreement, the owners of the Mar Vista Apartments and Wilshire Skyline Inc. agreed to take tenant harassment training and accept enhanced penalties ($2,500 instead of $1,000) for any future violations of tenant harassment laws.
The building owners and manager, who signed off on the agreement without admitting liability or fault, were also told to stop paying commissions to employees who persuaded tenants to give up their parking spaces or leave.
At the time of the March 2014 settlement, Wilshire Skyline issued a statement saying it was not their intent to inconvenience the tenants or give them the impression they were not welcome to stay in their homes, but were only trying to make upgrades to the building.
Wilshire Skyline counsel Alan Tzvika Nissel told The Argonaut that the company decided to shutter the 100-year-old brick structure because it needed “major work to revitalize the historic building and extend its useful life.”
Given the investment that required, Wilshire Skyline decided against keeping the building’s current single-room occupancy configuration and is planning to reopen it as a commercial building with a restaurant, offices and possibly retail, he said.
A state law known as the Ellis Act allows property owners to evict all of a building’s tenants in order to take that property off the rental market.
In addition to complying with the city’s tenant relocation requirements, Wilshire Skyline took the “added step,” he said, of hiring a company to assist tenants in finding new homes before withdrawing the property from the rental housing market under the Ellis Act.
“Nine tenants signed voluntary vacancy agreements before the Ellis process was commenced and, of the 22 tenants remaining at the time of the Ellis withdrawal process, 19 entered into move-out agreements for additional relocation sums and assistance,” Nissel wrote in an email.
Of the 40 tenant buyouts recorded in Santa Monica last year, the average payout was $27,435, according to the city’s data. The average to date this year is $24,738.
That’s a potential windfall for tenants willing to vacate affordable housing for quick cash, but Santa Monica landlords stand to make considerably more from such five-figure deals in the long run.
Worse for tenants, $25,000 won’t last very long if they’re forced to pay market rent in a comparable neighborhood.
Phillis said that when she talks to tenants who have received a buyout offer, she encourages them to work out the math to see if they’ll be able to afford new housing for the long term.
“I remind them to think about the value of their tenancy and what the market rate is,” Phillis said. “If you’re paying $700 a month for a two-bedroom apartment, your landlord’s going to be able to get $3,600, $3,700, maybe $4,000 for it, so I would say, minimum, that’s around a $3,000 difference per month. How many months does it take to get to that? That’s not going to help people get into another apartment.”
Santa Monica landlords are commanding record-high rents — about 10% more for new tenancies in 2015, according to city data — with a one-bedroom unit, on average, going for $2,050 a month and a two-bedroom reaping about $2,750.
These are the initial rates for Santa Monica’s rent-controlled units, which are the ones in buildings that existed when the law was enacted in 1979.
Factor in the rental units that came online within the last 37 years — the units that are not subject to rent control — and the averages go higher: $3,206 for a one-bedroom in a building with 50 or more units, and $3,898 a month for a two-bedroom, according to November 2015 data collected for the city by Real Answers.
And it’s not unusual to see one- and two-bedroom units in the city priced at $4,000 and above, a cursory look at Zillow will confirm.
HARD TO SAY NO
About 8,000 units — around 29% of Santa Monica’s rent-controlled housing stock — is inhabited by tenants who have lived in their units for more than 15 years, the type of stability that the law aspired to engineer. Their rents can be half the price of market-rate units,
For example, the median maximum allowable rate west of Lincoln Boulevard and between Pico and Wilshire boulevards is $763 for a one-bedroom that’s occupied by a tenant who moved in prior to 1999.
For someone who moves in today, the median market-rate for that same unit is about $2,574, according to city data.
A buyout agreement can be a “win-win” for both the tenant and the landlord, said Eric Velie of Victory Law Group LLP, an attorney who represents property owners.
“I rarely find two parties who are dissatisfied after they’ve signed an agreement,” he said.
Nonetheless, the city requirement to report tenant buyouts also make it more difficult for building owners to move family members or new tenants into those units or redevelop the property. For example, a tenant has up to 30 days to rescind a signed buyout agreement, Velie said.
Anti-harassment provisions of last year’s city ordinance also specify that owners must put buyout offers in writing and provide tenants with a written disclosure of their rights, including the right not to enter a buyout agreement.
But saying no to a landlord who has his or her sights set on making more money off your rental is easier said than done.
“I know of people who rejected buyouts and then had subsequent offers made, and the buyout offer itself becomes a form of harassment,” Phillis said. “Landlords will make them feel like they have a target on their back and the behavior that lets the tenants know they’re not wanted escalates.”
One Santa Monica renter who spurned his landlord’s buyout offer says he now feels so insecure about his ability to remain in his home that he’s afraid to offer his name for the story.
“I’m really sorry, I’m just under a lot of pressure from harassment from a landlord,” the tenant said. “The only thing I will say is the only buyout offer I was given was under the threat of an upcoming eviction afterwards for a family occupancy that never happened.”
Such warnings by landlords — that eviction is imminent and the tenant’s best option is to take a buyout and go quietly — is frequently not a bluff.
According to Ellis Act notices provided to the city just last year, as many as 153 units will be withdrawn from Santa Monica’s rental housing stock.
When the owners of the Mar Vista apartments shuttered the entire building earlier this year, Barton lost her home of 27 years. Under the city’s relocation fee requirement for tenants forced out by Ellis evictions, Barton received $9,900.
“I think there’s so much culture and richness you get from a diverse community,” Mayor Vasquez said. “And I think we’ve done a pretty good job, but there’s obviously pressure and outside forces we can’t control. And I’m worried because that almighty dollar is hard to compete against.”