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Tenant Buyouts: Strategy for Success

by Dave CrowCrow & Rose Blog
February 2nd, 2010

Before I begin, I need to tell you that some landlords, regardless of their real intent, simply wonít pay you more than the statutory relocation payments. They think theyíre being generous. Or, and I canít tell you how many times Iíve heard this one, they claim they just donít have the dough. The $2.4 million they paid for two units just tapped them out. This is probably a topic for another post, but holy hosanna, you came up with the $2.4 million and didnít consider the tenants?  Itís unbelievable and it demonstrates callous disregard for the impact on the tenants individually and the community at large. Many of these buyers consider themselves to be politically liberal or progressive. Yeah, right.

Youíre not going to get your down payment.

I occasionally meet with tenants who tell me that they want and even expect the landlord to pay them $300,000.00 to move. An ancient part of me wants to try the drugs theyíve been taking. But I do know what theyíre going through. The fact is that the landlord considers a buyout to be a settlement before litigation, not after a tenant has been wrongfully evicted and all evidence collected during litigation points to a smoking gun. At this stage you are not going to get but a small fraction of a potential judgment. If the damages are going to be that great, itís a good idea to move out and sue later or fight an eventual eviction.

The two most common scenarios for buyouts are OMI (owner-move-in) threats and Ellis eviction threats. With OMI evictions you have to prove that the landlord does not intend to live in the unit for three years. Proving intent is difficult, especially in the absence of an overt, wrongful act. For all intents and purposes, Ellis evictions have no defenses. The point is youíre not going to get rich with a buyout.

Subdivision Code ß1396.2

There is one more element to consider before you can begin to negotiate. If you believe the landlord wants to eventually convert the building to condominiums (in San Francisco with six or fewer units) take a look at San Francisco Subdivision Code ß1396.2. The code essentially provides that when the landlord evicts two or more tenants using the Ellis Act or uses a no fault eviction to oust a senior 60 years of age or older or a disabled person (Americans with Disabilities Act standard), he will be prohibited, forever, from converting the building to condominiums.

Some landlords, especially with larger buildings (four to six units), claim they donít care if the building can never be converted. They point to the length of time that it takes just go through the lottery and the (although diminished) availability of fractional loans to finance TICs. But everyone knows that a given unit is worth more as a condominium. It can be sold separately as a single family dwelling. Loans are easier to come by and buyers feel more secure owning their own ďhouse.ĒThe real question is how much value is added. 10%? 20%? I havenít found an exact answer. I still think that if you are elderly or disabled or the landlord is threatening to evict more than two units, Section 1396.2 should put some more chips in your stack. I love using it when bargaining with owners of two-unit buildings not subject to the lottery.

Negotiate before the notice is served.

Bear in mind that if you want to negotiate a buyout with your landlord it is important to do it before he serves (and files with the Rent Board) an Ellis or an OMI notice. The Rent Ordinance only allows a landlord to rescind a notice if the tenant does not move out.

Negotiation

You know your absolute bottom line. The real question becomes, how much can you add to that? And finally, is worth it to you to take a buyout when the deal is done? Here is a scenario to consider:

Two tenants (partners) have lived in two-bedroom apartment in a six unit building in North Beach for ten years. Their rent is $900.00 per month. They do not have any disabilities and they are both under 60. The landlord asks them to consider a buyout based upon his assertion that he will Ellis evict the building which has only one more occupied unit.

Gather information: Our tenants should speak to the other tenants in the building. Find out what the landlord said to them. Ask them about their plans. Find out if the other tenants are protected on some level by age or disability. They should also find out as much as possible about the landlord, what heís done in the past, what other properties does he own, etc.

Form alliances with other tenants: It is always a good idea to speak to and, sometimes, to join forces with other tenants in the building. this is especially true with Ellis threats because more than one eviction can screw up the landlordís future condominium conversion. With Ellis evictions landlords often want to make deals with all of the existing tenants at the same time. They donít want to spend money to move one tenant and fail to make a deal with the others because, ostensibly, they would still have to invoke the Ellis act.

Do the math: These tenants are entitled to approximately $10,000.00 plus security deposit and interest. They would get a 120 day notice to move per the Ellis provisions. If the market rate of a similar unit is $2,000.00 per month, they will save $4,400.00 just by moving pursuant to a notice. Their real bottom line is closer to $15,000.00.

Assess the landlordís intentions: Is he a developer who will definitely Ellis? Or is he fishing?  Whatís it worth to him?

Assess the value of the unit: How much did the landlord pay for the building? How much will it take to renovate the building for resale? Most importantly try to figure out what your unit will be worth. In our example, if the landlord paid $1 million for the building and the units are all about the same size with the same layouts, the landlord paid about $170,000.00 per unit. If the building is in okay shape, maybe the landlord will have to spend $70,000 per unit to renovate. Because the building is in North Beach, the average sales price of a given unit could be more. If there are no garages the unit could still sell for maybe $500,000.00. (These days the market is lousy. the same unit may have sold for $800,000 two or three years ago. This is another topic, but the so-called free market ainít so free when itís being manipulated by purveyors of funny money.) In our example the landlord may be expecting about $260,000.00 in gross profit.

Start high, but not too high: Hereís where the game of chicken begins. If our hypothetical tenants think the landlord is serious about evicting and it looks like the other tenants will move voluntarily, they may not have much room to negotiate. They should consider the implications of a smaller settlement, but still try to negotiate something higher. They donít want to leave any money on the table.

Our tenants think the landlord is expecting to make about a quarter million bucks per unit. In this scenario and this market I think the tenants would be very lucky to receive $50,000.00, so I might start the negotiation at about $60,000.00. Landlords and landlords lawyers will tell you that they just want to get to the bottom line, but if you give them your real bottom line immediately, theyíll always lowball you. Unfortunately in this scenario, the landlordís top offer may still be low, as little as $20,000.00.

Donít whine: Tenants often believe that they prevail in negotiation if they point out how hard a move is going to be for them and show, earnestly, what they will be losing. Think about it. Does the guy on the other end of the conversation really give a rats ass? If he did he wouldnít be in the business in the first place. I make it my job to point out the benefits of the deal to the landlord. Thatís why itís important to do the research.

More time = less money: This may be obvious but the more time you demand to stay in your unit, the less money you will receive in a buyout.

If the deal doesnít make sense, donít take it.

Remember you are selling your future rights to sue. If there is a chance that the landlord just wants you out because your rent is too low (and there is always that chance) and you could demonstrate considerable damages in a future lawsuit, be very careful about taking the money and moving. In the example above, I donít think Iíd recommend that the tenants take $20,000.00.

Like a high stakes poker game, buyouts are complicated. If you want want to get the best deal possible, you must be prepared to analyze the deal using the strategies here. Just plug in your own set of facts. Obviously if you are protected in some manner by the Rent Ordinance, that will change the game considerably. Get ready to stare down the landlord.

Next week Iíll finish up the series with a discussion about buyout agreements.

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