The Trouble with Legalizing Illegal Units

The recent example of a dramatic rent increase in San Francisco may be less about loopholes in current housing laws and more about failing to consider all the implications of rushed legislation.

9 minute read

March 24, 2015, 2:00 PM PDT

By Reuben Duarte @reubenduarte


Accessory Dwelling Unit

radcliffe dacanay / Flickr

As readers interested in things like housing in our cities, you've probably noticed posts about a San Francisco resident, Debra Follingstad, whose rent was increasing to very high levels. A friend had actually shared the woman's original Facebook post with me last weekend and asked me 1) if I thought the increase was legal and 2) how it could happen. I thought about it for a while and then decided it would be more beneficial to provide my response in the form of a post here on Planetizen, because I think it's a discussion worth having. Specifically, Follingstad's case offers an example where we may thoughtfully review existing policies and find that some passed in earnest, and with too little forethought, can actually create a perfect storm scenario where something like this can happen.

The story you know

Debra Follingstad's story, though in many ways an extreme case, is increasingly common as property owners convert low-value rental units into higher-value condominiums in in-demand markets, such as San Francisco. Follingstad and others are claiming that the landlord used a loophole in San Francisco's rent control ordinance and the state's Ellis Act to move the tenants out of a rent controlled building without having the pay them relocation fees, as required under the Ellis Act.

Specifically, Follingstad argues that the landlord muscled a tenant out of a second unit and then converted that unit into a storage space. By converting the unit, the landlord turned the property into a single-unit building, allowing the landlord to raise the rent to a prohibitively high rate, leaving Follingstad with little alternative but to move. Further, by exempting the property from rent control, the landlord was no longer required to pay the relocation fees required under the Ellis Act.

Simply reading Ms. Follingstad’s Facebook post may get you riled up, but it doesn’t reveal all the information, let alone allow me to answer my friend's question. When we look deeper, this appears to be less of an end run around the Ellis Act and more the result of poor conceptualization of San Francisco’s well-intentioned attempt to legalize illegal units.

Version 1: Ellis Act Loophole

First, we have to get one thing settled. Simply raising rent, even to a number as high as Ms. Follingstad's landlord did, is legal. Unless you live in a rent controlled unit, California state law does not cap the rent that can be demanded on rental property. Follingstad's unit was not rent controlled at the time when the rent was increased. Of course, therein lies the rub, which brings us to the discussion of how this could be considered a loophole in the Ellis Act.

The Ellis Act (CGC § 7060) allows property owners to get out of the apartment rental business. Property owners are allowed to evict tenants in rent controlled buildings for the purposes of removing the units from the rental market. When property owners utilize the Ellis Act, it's usually for the purposes of converting low-rate rentals into higher-valued and in-demand for-sale condominiums. There are many rules and restrictions in the Ellis Act, but the part at issue here is that Ellis Act evictions require the property owner to pay relocation fees to the tenant. These relocation fees vary based on the size of the household and the presence of children, seniors, or persons with disabilities. In San Francisco, the relocation fee can vary from around $5,200 to $20,300 per household.

Unsurprisingly, landlords and developers are not keen on paying this money, though many do because it's usually easier than any conspiracy-theory alternative. However, Follingstad's Facebook posts suggest she believes her landlord was one who was purposely trying to remove rent control protections so the landlord could raise rents and/or kick her out and avoid paying relocation fees. By strict accounts, Follingstad is correct.

While many people are aware that rent control only covers building built before a certain cut-off date (1995 in California, though many cities push this date back even farther), many are less aware that rent control rarely applies to single-unit buildings. By removing the other unit from the building, Follingstad's landlord would have placed the building in this exempt category, freeing him or her to raise rent as high as desired as well as allowing him or her to avoid paying any relocation fees.

But is it possible for this to be less a story of an end-run around the Ellis Act and rent control and more a story of clumsy rules around illegal units? Yes, and here's how.

Version 2: Illegal Units

Under normal circumstances, this whole situation would not have actually played out the way it has. The main reason is that, even if the landlord had successfully got the second tenant to move out, the landlord could not have removed the building's second unit without Follingstad knowing. To remove a rent controlled unit, a property owner must first receive all the necessary permits from the city of San Francisco, which would have included a noticing requirement. In other words, Follingstad would have been at the top of a list of people who would have received some notice that something was up. But she didn't.

In her Facebook post, Follingstad argues that the landlord changed the title of the property to reflect only a single unit in the building to avoid requiring such approvals. However, this is unlikely. If the title of the building originally reflected two units, it would imply that the unit was on record with the city, which means the landlord would still have needed to get city approval to convert the unit well before a title company would remove that element of the property record. However, according to a Curbed SF post, the city had no records to indicate a second unit was ever permitted for the building. In other words, the second unit was an illegal accessory dwelling unit.

Most cities require that illegal units be either 1) brought up to code and permitted or 2) removed. If the unit is removed, the property owner may do so with only building permits—a ministerial act—and does not need to give notice to anyone because, officially, no one knows the unit is there. Many cities allow tenants to live in illegal units, but warn that they do so at their own risk for these very reasons.

Follingstad’s Facebook post also noted that the tenant in the illegal unit moved out. How that tenant moved out is still up for debate since I haven't read anything to account for his decision to move. Nevertheless, once vacant, the municipal code would require the landlord to either comply with current code or remove the unit. In this case, the landlord appears to have opted for the latter. Other sites have argued that a recent "sunshine ordinance" passed by the San Francisco Board of Supervisors last year legalized all illegal units, which would have made my previous statements moot and that Follingstad's landlord would have still needed to post notice of removing the unit and, thus, skirted the law. This too, however, is incorrect.

The final ordinance only permitted the existence of in-law/accessory dwellings as uses in zones where they were otherwise prohibited—a planning approval. It did not, however, grant a citywide certificate of occupancy to all illegal units—a building approval. Instead, it created a voluntary "no questions asked" program in which the property owner may apply to legalize (bring up to code) the unit and receive his or her CofO. Unfortunately, the ordinance required that the property owner bear all financial costs to bring the unit up to code. This is understandable, as the property owner is likely the one responsible for the illegal unit to begin with, but in effect, this requirement made it financially irrational for property owners to voluntarily comply.

Remember, illegal units are illegal not simply because they exist in a zone where they are prohibited, but because they likely don't meet the development regulations of legal structures or habitable units. Trying to allow them after-the-fact is an attempt akin to the land use concept of "grandfathering" or "legal non-conforming" use.

A legal non-conforming use is a use that existed prior to current regulations that would otherwise make the use prohibited. The use is nevertheless allowed to stay, barring restrictions on major modifications or expansions of the use. For example, a 1920's brick retail building that had no parking spaces is quite common. They clearly don't have the required number of parking spaces but are allowed to stay. This is because, under a legal non-conforming provision, the property owner would be exempt from providing parking because it's considered an undue hardship on the owner for a nearly 100-year-old building. Now, imagine if that property owner was told he or she actually did have to provide parking or move out? The sunshine ordinance was the equivalent of saying: "we won’t ask and you don’t have to tell us about your illegal unit, but we would really like you to and when you do we’re going to make you pay a lot of money to get up to code."

Because the Curbed SF article noted that city departments showed no accessory unit for the property, it likely means that the landlord never went through the steps to legalize the unit, which the ordinance clearly says is fine. Therefore, the second unit in the building remained illegal, leaving the only option under the municipal code, once the unit was vacant, was to remove it. Removing an unoccupied illegal unit that has no documentation would require only a ministerial building permit from San Francisco's Department of Building Inspection.

Of course, once the illegal unit was removed (such as removing kitchen, bathroom, etc.), the building ceased to be a de-facto multi-unit building (San Francisco's rent control ordinance applies to buildings with multiple units regardless if the unit is considered legal) and lost its rent control protections. Thus, the landlord was free to increase the rent to market value. Follingstad says that the new rent was well above market rate, which at first glance seems true. However, based on San Francisco County Assessor numbers, the building area is 2,227 SqF. If we assume a $4.00 per SqF market rate for rent, then the market rate for Follingstad’s new 2,227 SqF apartment would actually be around $8,900 per month. High? Yes. Above market? Sadly, no.

There's nothing wrong with low and slow

In the end, I do think it's a shame that Follingstad's rent was raised so high, so abruptly, and I hope she is able to find comparable housing. However, it's important that we not jump to conclusions and rush to create policy that fails to recognize the consequences of its own actions. San Francisco's attempt to legalize illegal units was well intentioned, and legalizing illegal units is a cause I can get behind, but the current law was perhaps rushed in the face of the city's current housing issues. To use a cooking phrase, there's nothing wrong with going low and slow. Policies are, after all, about the long-game. We need to be able to play them out and review and evaluate their real life affects, lest we risk passing laws that do more harm than good because we failed to appreciate the minutiae.

At the time, San Francisco Supervisor Katy Tang voted against the sunshine ordinance, stating: "I don’t feel that property owners, despite the fact that this is a voluntary program, will want to take advantage of it."

The statement seems rather poignant now.


Reuben Duarte

Reuben Duarte is a Land Use Planner at Sheppard Mullin in Los Angeles, California, where he assists real estate developers, property owners, and other business entities in guiding their projects through the entitlement process, including permitting, regulatory and environmental compliance (CEQA), stakeholder engagement, and community outreach. Reuben has also written as a contributing editor for the Climate Change Law & Policy Reporter.

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