Airbnb and the Ellis Act

There’s a big fight brewing up in SF over landlord’s use of the Ellis Act to get into the short-term rental business.

What’s the Ellis Act? Well, in CA, the law is that no one can force a landlord to remain in the rental property business. So, the Ellis Act creates a procedure whereby a landlord can declare his intention to take his apartment building out of the rental market and then force out rent control tenants by paying them approx. $19,000.

The Ellis Act is most often used by condo-converters who buy a rent controlled apartment building, force out the tenants, get a condo map approved, and then sell of the units individually. This is, itself, a controversial business, because it removes apartments from the rental market, and LA, among other cities, has created some pretty tough rules intended to make conversion much harder.

Now landlords have identified a new opportunity to use the Ellis Act: Airbnb.

If you have a fixed up apartment in SF or in a desirable part of LA, you can get $200+ / night by renting your unit out on Airbnb. That’s $6,000 / month, or, say, $3,600 assuming 60% occupancy. Even if you spend $1,000 / month on expenses ($12,000 / year, much more than you would spend to operate a standard apartment), you’re still netting $2,600 x 12 months = $31,200 net per year.

Compare that to a rent controlled tenant at $1500 / month. That’s $18,000 gross, less, say $6,500 in annual expenses, or $11,500 net.

Assuming that, in our present low interest-rate environment, landlords are happy with a 7.5% return, they would be willing to spend $266k to get that additional $20k / year in net operating come.

So, you can see that spending the $19k on the Ellis Act, plus, say, $50k fixing up the apartment, is a very good deal from the landlord’s perspective.

The question, though, is whether it is fair to use the Ellis Act in this manner. I don’t see much of a distinction between renting a unit out on a standard lease and renting one out short-term. That, to me, doesn’t rise to the level of “exiting the rental business”, which is supposed to be the standard for Ellis Act evictions.

As regular readers know, I’m not a fan of rent control. But, so long as we have rent control and other laws governing the relationship between landlords and tenants, we ought to enforce them. To me, this case is pretty cut-and-dried… renting your units out on Airbnb is not exiting the rental property business and is therefore an improper use of the Ellis Act.