Ellis Act and Future Valuation / Financing

The intention of the Ellis Act is to provide property owners with a process by which they can evict a tenant under the premise that the property owner is “going out of the rental business” and therefore wants to take the rental unit off the market. In the past, evictions invoked under the Ellis Act were commonly used in conjunction with a condo conversion. That is, property owners would “go out of the rental business”, evict their tenants under the Ellis Act, convert the units to condominiums, and sell the property.

In 2006, Mayor Gavin Newsom signed into law legislation that limits a property owners options regarding condo conversion for a building that has evictions on its record. Any condo conversion of a building that has had –since May 1, 2005, either multiple evictions of tenants or any single eviction involving a senior or disabled person is ineligible for condo conversion.  It is important to note that this rule applies regardless of whether the existing property owner is the evicting landlord or not.   

How does this effect valuation and/or financing? 

The valuation of a property is affected in that, if the property has reached its eviction limits, the property can not be converted to a condominium.  Condominiums generally receive higher valuations in the real estate marketplace as they are singularly owned.  They tend to be easier to buy and sell as there are no TIC agreements, there is only one mortgage on the building, etc.  A prospective buyer or seller would be wise to check the eviction history of any building under consideration. Moreover an existing property owner should be prudent in applying their eviction rights as an eviction may negatively affect the property valuation upon sale.  

As for financing, every real estate financing company is different when it comes to financing a mortgage loan.  There is no across the board truth when it comes to mortgage financing. However, anytime a scenario exists where the value of a property is limited is cause for a lender to adjust the terms of financing.  Some lenders may view a property with too many evictions as reason to charge a higher interest rate or require a higher down payment. After all a property that can’t be converted to a condo is less attractive than one that can. As such it makes sense that a lender may view a property with too many evictions as higher risk and therefore demand a higher interest rate or down payment to offset that risk.  Conversely, the San Francisco real estate market is booming and some lenders may view too many evictions on a property as being inconsequential in determining terms of financing.  Either way, it is worth inquiring about this to your lender.