Real Estate

Tenant buyouts: would you give up your home for $475,000?

Tenant attorney Jacqueline Ravenscroft is sifting through emails from prospective clients when she spots a howler: a single father of two offered $5,000 to vacate his home so an international developer can begin construction. They want him gone in two weeks.

Ravenscroft balks, then explains he can probably get 10 times that amount, likely quite a bit more. San Francisco tenants’ rights are among the strongest in the US, making it difficult for any landlord to oust them without just cause.

So even in the worst-case scenario where the landlord wants the unit back to move in themselves — not possible here because the owner is a business — a three-person family would be entitled to roughly $25,000. If the dad or children have a disability, they could be looking at $40,000. “That’s without negotiating — it’s just what the law requires that he be paid,” she says.

Ravenscroft, a foe of landlords in a royal blue jumpsuit, grey blazer and snakeskin stilettos, says most people who receive an eviction warning tend to think, “Well, this sucks”, and assume there’s little they can do. But with real estate prices booming and tenant protections enshrined in stone, renters here have rare bargaining power to stay put — or only leave in exchange for a lump payment.

Steven A MacDonald
San Francisco tenant attorneys Steven A MacDonald . . . 

Jacqueline Ravenscroft
. . . and Jacqueline Ravenscroft © Cayce Clifford for the FT

More than 330 of these “tenant buyouts” were agreed to last year in San Francisco County, and the renter takes home an average of almost $50,000 to pack their bags. One person, in 2019, gave up a one-bedroom apartment in exchange for $325,000 — a tidy sum larger than the median home price in the US, albeit not necessarily enough for a downpayment in this tech hub, where the “typical home” has doubled in price during the past decade to almost $1.5m in June 2021, according to property platform Zillow.

Landlords have had an incentive to buy people out of their contracts since San Francisco enacted rent control in 1979, limiting owners from hiking rent beyond a cap set by the Rent Board. This year it is 0.7 per cent.

Owners typically pay to remove one rent-controlled tenant and bring in another, because it re-anchors the lease to the market rate. Increasingly, however, they have an incentive to exploit the booming resale market: as of last month, San Francisco metropolitan rents were 7.2 per cent lower than at the beginning of the pandemic, according to Zillow, but the median house price is up $150,000, or 9 per cent over the past year, according to estate agent Compass.

Column chart of % change from previous year showing Rents in the San Francisco area fell last year while prices rose

“The real estate market for purchasing right now is hot hot hot — totally counter to what people thought would happen,” Ravenscroft says.

This can be good news for renters willing to vacate because the pitch has been tilted in favour of tenants since at least 2015, when the city mandated that “cash for keys” agreements be properly disclosed. Landlords, who unsuccessfully sued to overturn the law, must in­form tenants of their rights and make all agreements public.

“There’s an inherent imbalance in terms of rights, in terms of liabilities for doing it wrong, in terms of the budget for legal fees,” complains one landlord attorney. “There’s a built-in incentive for the tenant to take their chances and shoot for the moon.”

Thanks to a temporary eviction moratorium enacted because of the pandemic, landlords have an even worse hand now. “You can still go to court and evict somebody if they are a threat to your and other tenants’ health and safety — like they have a meth lab in their apartment or they’re running around threatening neighbours with a knife,” Ravenscroft says. But otherwise, evictions are blocked at least until the end of September as long as tenants have been paying a quarter of their rent.

These dynamics paved the way for a $475,000 tenant buyout signed in May, eclipsing the prior official record by $150,000.

The property in Presidio Heights where nine families are suing rather than negotiate a buyout, furious after more than four years of construction disruption
The property in Presidio Heights where nine families are suing rather than negotiate a buyout, furious after more than four years of construction disruption © Cayce Clifford

The agreement, reported here for the first time, was for a seven-bedroom, eight-bathroom home in Presidio Heights, the city’s most expensive neighbourhood at $1,600 per sq ft and a median house sales price of $6.75m in July, according to Compass.

The family had spent three decades in the two-unit apartment, paying roughly $12,500 a month; about half the market value, thanks to rent control. Accor­ding to public records, the landlord, Marty Friedman, agreed to settle allegations, which he denies, of “substantial interference with tenants’ quiet use and en­joyment of the premises”. The tenants also received three months of free rent and agreed to vacate before June 30.


Average buyout amount in San Francisco

Behind the deal is Steven A MacDonald, a 72-year-old lawyer who, when we meet, is dressed in a tailored Glen Urquhart plaid grey suit. He says the family who took the deal is just one of 10 clients he is representing at 145 Laurel Street, a historic 17-unit corner complex with pristine views of the Golden Gate Bridge.

Photographs from 2016 show an elegant brick building with arched white windows towering over nearby single-family homes. Today it looks like an X-ray of its former self: the brick rep­laced by scaffolding, windows boarded up, ladders traversing each floor, the outside wrapped in plastic and the pavement blighted by orange construction signs and a turquoise porta-potty.

Presidio Heights properties are some of the most expensive in San Francisco
Presidio Heights properties are some of the most expensive in San Francisco: a $475,000 tenant buyout was signed here in May © Cayce Clifford

All of the tenants, furious after more than four years of construction, retained MacDonald in February and declared “constructive eviction”, vacating on the grounds that they can no longer enjoy the place. He calls it the case of his career, as nine families have opted to sue rather than negotiate a buyout, demonstrating the limitations of a cash-for-keys deal when what the tenants really want is to stay.

Jeff and Janie Green, fifth-floor inhabitants of the building for 15 years, say they did not even consider a buyout deal given their years of frustration.

“I thought this was gonna be our home until Janie and I died,” Jeff Green says of the near $8,000-a-month apartment. “They should have offered to move everybody out, get the work done all at one time, shorten the timeframe and then move us back in. But that’s only if he wanted to keep us. If he’s trying to force us out — and this is how it feels — then you do it the way he’s doing.”

MacDonald reckons a reasonable settlement would be in the ballpark of $25m. Wrongful eviction maths produce big sums when applied to Presidio Heights: the average rent differential between market rate and what his clients were paying was $5,000 a month, or $60,000 a year. If he assumes the tenants planned to live there another decade, damages are $600,000. The city’s rent ordinance entitles tenants to triple their damages in the event of wrongful eviction, bringing the total to $1.8m, plus attorneys’ fees, for each client.

“So, conservatively I think we’re in the $2m range for each of these cases,” MacDonald says. “Plus, I’ve got a claim for punitive damages for [any] provable malice. So let’s call it $25m.”

The FT was unable to reach Friedman for comment on any of the above points.

The phenomenon of five and six-figure tenant buyouts is mostly unique to New York and the tech hubs in and around Silicon Valley — big liberal cities where some two-thirds of residents are renters, property prices are sky high, and laws limiting hikes in rent stretch back decades.

Around San Francisco, the number of people paying below-market rents has risen sharply because of how quickly home prices have shot up, reflecting a massive housing shortage relative to the influx of tech jobs. From 2011 to 2015, the Bay Area added one housing unit for every eight jobs created.

Bar chart of Housing permits granted per job created, 2009-2019, in selected US metro areas showing New housing in San Francisco has not kept up with jobs growth

Tenant buyouts originally gained traction with the dotcom boom in the 1990s. Ragi Dindial, a low-key attorney with a side hustle playing backing drums, lays claim to inventing the buyout idea when his artist friends started getting eviction notices in the trendy Mission District. Even when a wrongful eviction case was won and resulted in a $300,000 windfall, the ousted tenant would suffer years of anxiety and then cough up 40 per cent of the lump sum to their attorney.

“So we offered a new model: speak to us before you go down to litigation and try to serve an eviction. Treat us like humans,” Dindial says. “My solution is where both parties walk away feeling good about the situation.”

In his first case he demanded $15,000 for a buyout and was promptly branded “an extortionist”. Neither side liked him. “The landlord attorneys didn’t trust me. They didn’t know who I was and thought I was trying to pull something,” he says. “The tenant attorneys hated me too, because they said that I was selling out the rights of the tenants — I wasn’t fighting for their right to be in their apartment.”

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But landlords came round to the idea, as buyouts offered two things of immense value: the tenant’s departure was certain and they’d forever waive their right to sue.

Today, buyouts are often seen as win-win. “They are great because tenants get to share the wealth,” says Robert Sheppard, a mediator at law firm Sheppard-Uziel. But he acknowledges that housing activists often disdain the concept, as every deal readjusts rent to the market value and undermines rent control.

“One attorney I’m close with says, ‘They’re not buyouts, they’re sell-outs’,” he says. “But that’s putting principle before the client. Most clients want the cash.”

As for their attorneys, they often get about a third of the buyout amount.

J Scott Weaver, a longtime tenants’ rights activist, says he hates buyouts. People, he says, are often harassed into deals and threatened with eviction by way of the Ellis Act, a widely abused statewide law allowing landlords to evict residents — and pay a relocation fee of about $7,400 a head — if they are withdrawing the property from the rental market. “It’s like long-term psychological warfare,” he says.


Proportion of US households that rent

Even in a win-win, the rest of the market loses “one more affordable unit”, Weaver adds. And many come to regret it, even if they receive $100,000. “Because if your rent is going to be $2,000 more a month, then in four years and a few months you’ve broken even,” he says. “And after that it’s a loss.”

It might be easy to dismiss tenant buyouts as a quirky phenomenon. But a 2017 study by the Pew Research Center found that 43 per cent of US households were renters, the highest figure in half a century and double the percentage in 1965. As renters become more numerous, they gain political clout.

LA-based attorney Sasha Struthers: ‘I’m all about the buyout’
LA-based attorney Sasha Struthers: ‘I’m all about the buyout’

In the past two years California and Oregon have enacted statewide rent-control policies, and if all proposed tenant-protection policies in the US are passed, “12.7m renter households will be stabilised”, a 2019 study found.

As rent control spreads, LA-based attorney Sasha Struthers predicts tenant buyouts will be a natural byproduct.

“I’m all about the buyout,” she says. “If you’re gonna have rent control and stick it to the landlords, then fine, so be it. But give them, at least, an avenue where they can negotiate because this is really the only solution that landlords have. They are cornered into it and their only way out is to throw money at the issue.”

New York stories: a $17m buyout and Trumpian intimidation tactics

A view of Central Park
© Erik Pendzich/Shutterstock

The record $475,000 settlement in San Francisco is a pittance when compared with the tenant buyout capital of the world: New York City.

“I haven’t done a case for that amount of money in 25 years,” says David Rozenholc, a famed tenant lawyer in Manhattan. His best-known client was a 73-year-old recluse who refused to leave a “one-room apartment in a hotel with a kitchenette” on the Upper West Side, Rozenholc recounts, when “condo king” William Zeckendorf sought to erect a 35-floor building.

Rozenholc secured a $17m lump sum buyout plus a cushy lifetime deal for the man to pay $1 a month for a 2,200 sq ft apartment overlooking Central Park.

Buyouts are a different beast in New York, where renters are more often chased out of a building to make way for a multibillion-dollar skyscraper. There’s no better place to understand the tactics landlords will deploy to get people to sign on the dotted line. Rozenholc learnt this in the early 1980s, when Donald J Trump tried to house homeless people in the vacant units at 100 Central Park South to intimidate those who wouldn’t leave.

Trump lost the proceeding, sued for $105m, lost that too, and only then left the tenants alone. PM

Patrick McGee is an FT San Francisco correspondent

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