The Ellis Act: Going-Out-of-Business Bill for Santa Monica Landlords?

“This is my turf,” John Rodriguez said, standing alongside the peppermint-striped barber pole outside his shop on Wilshire Boulevard. “My parents came here from Mexico, and I was born a few blocks away on Westgate Avenue.”

It is a turbulent turf in Santa Monica these days, seven years after passage of possibly the strictest rent control law in the nation.

And the newest storm is gathering.

On July 1, the Ellis Act will take effect statewide, permitting landlords to go out of business if they so desire. Until now, in Santa Monica, the Rent Control Board had authority to preclude an owner from emptying an apartment building other than through attrition.

Just how many owners in the often low-rent beach community will take advantage of the new law--said to be the first of its kind in the nation--remains to be seen. Relocation benefits awaiting final approval by the City Council, including payments of as much as $4,000 to evicted tenants, may be a factor.

Robert G. Smith, executive vice president of the California Apartment Assn. in Sacramento, said 1985 statistics indicate that nearly 38% of California residents live in rental units. Nationally, the figure is about 35%; in Santa Monica, population 90,000, it is 80%.

And the city Rent Control Board keeps rents from rising rapidly. A rent increase of 2.5% will be permitted this year, beginning in September.

One apartment building owner who says he will definitely take advantage of the new statute is John Rodriguez.

“When I bought the property in 1973 at 2812-2818 Santa Monica Blvd. (then called Las Palmas Motel), my intention all along was to demolish it. I wanted to relocate my barbershop there.”

The 47-year-old barber started in the Wilshire shop at age 18, bought the business a few years later, and has called its eight chairs his workplace for the last 28 years.

Three blocks away is the former Las Palmas--14 cottages, each with a kitchen, bathroom and adjoining garage. Over the years it has become, by Rodriguez’ own admission, an eyesore--a dilapidated disgrace rotting in a commercial neighborhood.

Property’s Fate Uncertain

Although the Ellis Act will permit landlords to go out of business, there is controversy as to what Rodriguez will be allowed to do with that property.

“The Ellis Act simply allows an owner--after going through certain procedures--to sit with an empty building,” said Howell Tumlin, rent control administrator in Santa Monica. “He can’t do anything else with it unless he gets appropriate permits from the Rent Control Board, even if it is in an area commercially zoned.”

On this point there is disagreement from Dugald Gillies, lobbyist with the California Assn. of Realtors, which sponsored the new law.

“If the property is already in an area zoned commercial, an owner should be able to convert to a new usage under what is known as a ministerial act--something allowed without discretion,” Gillies said in his Sacramento office.

‘Automatic’ Permission

“If the owner conforms to the building laws, the permission is, in a sense, automatic. If he isn’t given permission to convert, he should be able to go to court and file for a writ.”

At this point, all Rodriguez knows for sure is that he has had it with being a landlord; he plans to cease offering the property for residential rent and would like to tear it down and replace it with stores, including his barbershop.

“But I applied recently for a barbershop license, without demolition, on my own property. It was denied by the city, pending approval by the Rent Control Board.” Rodriguez said that since the long-term lease on his Wilshire shop expired in 1980, he has been renting the shop there on a month-to-month basis.

His target date to rebuild on the motel site was 1980. “When you are raising four kids,” he said, “there isn’t much left in your wallet, and I was trying to save up.”

In 1979, however, the city passed a stringent set of rent controls including one provision banning the demolition or conversion of rental units.

“I am of Latin extraction, I speak Spanish, and I was letting Latins of modest means occupy the units,” Rodriguez said. “Admittedly, the cottages weren’t in the best of shape, but it was supposed to be a temporary arrangement, and I was charging only $165 a month. I required no deposits of any kind. I even wrote job recommendation letters for some of the occupants. My attitude was: ‘For this short period, be my guest.’ ”

Making $1.50 a Day

But then he sat down and calculated his 1983 expenses--the last year most of the 14 units were rented: “My annual expenses were $20,840--which included my mortgage payments, all utilities, the annual rent control fee, and the property taxes. I divided that figure by 12, which gave me a monthly expense of $1,737.

“Dividing that by the nine units which were being rented at that time gave me an expense of $193 per unit per month. My monthly income for each was the rent of $238. Subtracting one from the other left $45, which meant I was technically making $1.50 a day.

“Since then the permitted increases have brought the monthly rent to $262, but I have master meters for water, gas and electricity, and the steep increases in utility rates have wiped out anything I might have gained from rent hikes.

“You are talking to a barber ($9.50 per haircut). I cut hair to make a living. I am still making mortgage payments, I am running in the red on my property, and I can’t afford to anymore.”

There also were a few expenses Rodriguez did not anticipate. He said he had to “buy back” his own apartments in order to keep them vacant.

“Had I not bid for them, I would have been stuck in perpetuity with eight or nine people living in each unit, and my utility bills would have continued to climb.” He said the only alternative would have been to take legal action and that would have cost more than his bids.

“Originally, 27 people were legally entitled to live in the 14 units. Eventually, I counted as many as 93 who had set up house on the premises.

“One day, in 1981, I went to collect the rent. There was a crowd gathered around one of the porches, where a guy was standing and dangling keys. When I asked somebody what was happening, I was told the man was selling the apartment.

“I stood there incredulous. I asked people on the porch where the tenant, Mr. Fernandez, was. I was told he had gone to Mexico and that they were taking care of his possessions.

“ ‘I know you bought that apartment,’ I said in Spanish to the ones who were outside it. ‘Other people saw you do it.’

“When I said I was there to collect the rent, they admitted they were living there now. I told them that wasn’t the way it worked, that I had a written agreement with Mr. Fernandez, and that they were trespassing on my property.”

Further conversation ensued, but the bottom line, Rodriguez said, was that he had no recourse except to collect the rent from both those newcomers and residents he had never before seen in many other apartments.

Only five of the 14 cottages are now legally occupied by rent-paying tenants. The rest had been what the owner calls “takeovers.”

“I had to beat others to the punch and bid at the auctions for my own apartments,” Rodriguez said. “Or sometimes occupants would call to tell me they were leaving, and that I could come over with money to reclaim the place. I paid from $500 to $700 for each of the units.”

In 1981, he was also required by the Rent Control Board to pay $22,000 to the 27 occupants of all 14 units for alleged overcharging relating to utilities. He maintains that because of ambiguity of the law at that time and denial of compensation for utilities, he shouldn’t have had to pay anything.

Rodriguez nowadays keeps a hammer and a package of nails on the floor of his car. Before work in the morning, during his lunch break, and on his way home at night he checks his property.

Although Rodriguez has boarded up and nailed shut the doors and windows of the vacated units, he said transients break in and sleep overnight. He said he returned once from a weekend trip, peeked inside one of the garages, and found that a bed and color TV had been moved in.

“In number one are five people,” Rodriguez said of his current tenants. “Number seven has six in it, number eight has seven, number 10 has nine--and as for number 14, nobody knows how many live in it.”

The Ellis Act will provide Rodriguez a way out of what he calls a nightmare. What, if any, other use for the property will be allowed him is questionable.

“I have no choice but to leave it as an eyesore,” he said. “I don’t want to. It could be put to more productive use.”

Landlords in the 18 cities and eight counties in California that have rent controls have been smarting since March, 1985.

That was when the U.S. Supreme Court dismissed a landlord’s appeal challenging the Santa Monica ordinance. When the city refused to permit demolition of a six-unit apartment building owned by Jerome J. Nash, he took the case to court, contending that the city’s charter amendment violated his right to go out of business. Nash won in Superior Court but suffered a reverse by the State Supreme Court. The U.S. Supreme Court refused to hear the case.

Not having done well in the courts, not having an outstanding batting average in local elections (earlier this month, voters defeated a measure that would have allowed vacancy rent hikes and cash benefits to remaining tenants), the landlords have found success with a different approach--the state Legislature.

A bill sponsored by the California Assn. of Realtors made its way through the two houses and was signed by Gov. Deukmejian.

“It makes a simple fundamental declaration,” Gillies said. “It says the government may not compel the owner of any residential real property to offer, or to continue to offer, accommodations in such property for rent or lease.”

The bill was carried by a senator from a city that has no rent control.

“I did it because it is a philosophical matter with me,” Sen. Jim Ellis (R-San Diego) said in his Capitol office. “Under the Constitution, a person has certain protections. It seemed odd to me that if someone wants to stop doing something, you have to pass a law to allow that.”

Ellis, a 57-year-old retired Navy carrier pilot, said that although neither Santa Monica nor Berkeley (which also has strict rent controls) is specifically mentioned, the bill will have a practical application mostly to them.

“And to any communities which in the future might enact similar rent controls,” he added.

Under the legislation, a person owning one building and wanting to toss in the towel must do so for all units on that piece of property. The owner cannot evict tenants selectively.

But the new law, according to Gillies, also includes this provision: “Say you had a development with several apartment structures. You could go out of business with one or more of them, each in its entirety.

“In other words, say you have six buildings, then you could go out of business with three. Or even in the case of two separate structures with the same owner, one of them could conceivably be shut down. The owner might have another future use in mind for it.”

Indeed, one owner in Santa Monica has already used his own strategy: Whenever a tenant voluntarily left, he kept the unit vacant until the entire building was empty. Then he moved in and made it one single-family residence.

Ellis said mobile homes and residential hotels are excluded from the legislation. Another amendment states that if an owner closes an apartment building, then reopens it within one year, the building again comes under rent controls.

A block away from the Capitol, in the office of the California Assn. of Realtors, Gillies reflected on what had been accomplished:

“As Justice Stanley Mosk said in his dissenting opinion in the Nash case, the decision whether or not to be a landlord isn’t solely an economic one. We at the CAR feel the point is that property rental also involves the devoting of personal service and management in most instances. It is an emotional and physical commitment, sometimes involving retired people who are using the derived money to exist on.”

Does this mean that on July 1 the necessary steps will be taken to empty apartment buildings by the thousands?

“No,” Gillies said. “Most owners can’t afford it.

“But at least relief will be available to some. Before the Ellis Act, there was only one remedy: Sell.

“The problem was that in rent-controlled communities, nobody wanted to buy, or else a potential buyer was willing to pay only a price well below the market value.”

Gillies predicted that only landlords with economic independence will choose to go out of business.

“If he doesn’t need an alternative source of income, he can let the property sit, and ask the city, ‘Do you like this eyesore of an empty building or would you rather have a boutique here?’ ”

What are the tax implications for someone calling it quits?

“As long as you don’t give away the property to someone--to a lender (mortgage holder) or any third party--then there shouldn’t be any income tax effect on you,” said certified public accountant Stan Ross, co-managing partner of Kenneth Leventhal & Co., headquartered in Century City.

“If you just put a padlock on the apartment building and stopped doing business, you could lose your depreciation, but you wouldn’t have to recapture or pay back any previous tax deductions,” Ross said.

“The real issue is: You no longer have revenue to pay your debts or expenses, so how do you survive?

“In New York City, some owners simply abandoned their old apartments. They also could do that in, say, Santa Monica, but the value of property there long-term would make it economically inadvisable.

“You could, of course, sell the property, and have either a gain or a loss. If it were a loss, it could be deducted against other income.

“Another person could purchase it, possibly at a bargain, remove the padlock, and resume renting it. Or else he might have the staying power to hold it closed long-term.

“The vulture buyers may begin showing up,” Ross said.

The Ellis Act, Gillies said, “is designed to help an owner keep his property but go out of the business of being a landlord--and wait for better times and better opportunities.”

While the new legislation is a victory for apartment owners, some rent-controlled communities such as Santa Monica have come up with strategies to deal with it.

Tumlin, the city’s rent control administrator, said the Rent Control Board has adopted procedures that will require legal steps taking at least 60 days before an apartment house can be closed. Additionally, the City Council is scheduled to take final action on relocation benefits, after earlier this month hearing proposals by City Atty. Robert M. Myers.

At a first reading of the ordinance, the council approved essentially these payments by apartment building owners to evicted tenants: $2,000 for a bachelor or single unit, $2,500 for a one-bedroom, and $3,000 for two or more bedrooms.

The proposed municipal law also would require that an extra $1,000 be paid to tenants 62 or older, or who have minor children, or who are disabled. Payments are per unit, regardless of the number of occupants.

“I have already talked with the tenants in my eight-unit building, and told them I intend to use the new law to close down,” Al Markevicius said. “At first they didn’t believe it, but I assured them I will have that fundamental right.”

Markevicius, head of the Santa Monica property management and investment firm of Roque & Mark, owns the building with his wife, and has a partnership with in-laws in another 10-unit structure in Santa Monica, which he said also will be closed.

“Each building is in the 25-year-old range,” he explained. “If the plumbing goes, you are talking about $1,000 a unit to replace the pipes. A new roof, which will be needed eventually, would cost $6,000 for each building. I am already just about breaking even, or in the red. I would rather close both places down, and then know I will have only specific and predictable expenses.

“I’ll nail the places shut and know that I will only have the mortgage payments and property taxes. And no more hassle.”

The 56-year-old landlord said it is an economic decision dictated by the effect of strict rent controls.

He plans to put the commercially zoned 10-unit building to “the most economically advantageous use, such as offices.” On the eight-unit site, in the desirable north-of Wilshire area, he said, “I could build a condo. Some people feel that is a dirty word, but a condo would add to the housing stock and upgrade it.”

Markevicius said that although he doesn’t want to, if the rent board permits no other uses for the apartment buildings, he will leave them empty.

Which is, understandably, not a happy prospect for the current tenants in the north of Wilshire property.

“I think closing the place would be unfair,” said Andrew Plukas, a young supermarket stock clerk who pays $326 monthly for the one-bedroom apartment he said he shares with his girlfriend. “I have lived here five years, everybody is nice, and I don’t want to move. I don’t want to go through the hassle of looking for another place.”

A 76-year-old woman paying $397 for a one-bedroom, who asked that her name not be used, said: “I am a widow living alone, and I have had three back surgeries. My doctors are all within several blocks, as are the hospitals. One of my two daughters lives in Pacific Palisades, and I like having her nearby, but I would never move in with her or my other daughter in Woodland Hills. I want my independence, and they have a right to their own lives.

“I moved into this apartment nine years ago, after my husband died. During our 48 years of marriage, we moved only three times. I don’t know how to move, and in my condition I can’t go out looking.”

In another unit were Carolyn and John Konecki, a young married couple who were familiar with the Ellis Act. She publishes a residential real estate guide, and he is a commercial leasing agent.

They pay $472 for their unit, a one-bedroom with a patio and enclosed garage, where they have lived about 18 months.

“Obviously, I would like to see any closing avoided,” said Carolyn Konecki. “We like living near the beach, and we like the economics of the rent. More than likely, we would have to move out of Santa Monica, and there would be a definite difference in the rent we’ll have to pay for the same quality of apartment.”

John Konecki said he thinks landlords most likely to use the Ellis Act are those who believe they have been most abused by rent controls.

Perhaps unpredictably, Carolyn Konecki added: “I sympathize with the owners. It is obvious rent control isn’t working. There are an increasing number of intentional vacancies all over town. A vacancy sometimes costs an owner less, because there is no possibility of tenant damage.”

And so a seven-year battle is taking a new twist.

Markevicius, a refugee from Lithuania who came to Santa Monica 30 years ago, said: “It is a heartbreaking situation. Where I came from, real estate was the most stable investment there was.”