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Speculators, Banks, and Developers Seeking to Unlock Value in San Francisco's Rental Housing Are Pouring Money Into the City's Politics. Tenants Are Fighting Back

San Francisco’s Displacement Crisis

by DARWIN BOND-GRAHAM

The tech boom has made San Francisco’s real estate the most expensive in the nation. Tech companies, from startups to Fortune 500 firms, are cleaving more and more income for themselves out of the U.S. economy, mainly through advertising, smartphones, and tax shams. As the preferred domicile of the tech workforce, and now even as a choice address for tech offices, San Francisco’s housing and commercial space is in hot demand from buyers who have seemingly unlimited cash. This has pushed up prices considerably. Add the background effects caused by several years of bond buying by the U.S. Federal Reserve —the rise in all real estate values nationwide— and you’ve got a city where the median home price topped $1 million last year, and monthly rent for a one bedroom is averaging just shy of $3,000.

Into this maw of demand the developers are shoveling units and square feet. Take a look at the development pipeline (available online courtesy of the San Francisco Planning Department) and you’ll see a map of the 49 square miles of the city, much of it, especially the eastern half, is crowded with projects packing in housing, retail, and office footage. There’s 50,600 proposed units of housing coming to San Francisco. Approximately 27,000 of these housing units have already been approved by officials, with 6,100 currently under construction. Most of the housing being built is “market rate,” meaning that it’s priced for those who can afford to spend roughly $36,000 a year on rent, or who have a quarter million in cash to drop on a down payment. Despite the popular myth that “nimby” forces have retarded growth, San Francisco is a real estate development beast.

Beast is the operative word. Landlords, developers, and their lawyers are mauling thousands of lower-income renters. The crisis is displacement. The tech boom has conspired with rising housing prices to create an incredibly profitable incentive for landlords to push out low-income tenants and replace them with wealthy buyers, in spite of all the new units coming to market. The favorite tool, although it’s unclear how widely it’s used, is a quiet buyout, telling renters to just leave, and offering a tidy little cash sum to help them say yes. Maria Zamudio, a community organizers with Causa Justa, Just Cause, says many of these so-called “self evictions” are coerced. “Really when your landlord is calling you every night and pressuring you, is it really a choice to leave?,” Zamudio rhetorically asks.

But if they go on their volition, the renters go quietly into the night, and the landlord can do practically whatever they want with the apartment, or the building. They can jack up rents, or convert to condos, or go for the clean slate demolition to build taller and more luxurious. No one, not the city, nor the state, nor any community organization has a handle on how many of these kinds of evictions there are.

The increasingly common tool wealthy investors use to unlock value in San Francisco real estate is the Ellis Act. Speculative investors are buying small apartment buildings and invoking the 1986 law to remove rental buildings from the city’s housing stock. The Ellis Act is named after State Senator Jim Ellis, a conservative San Diego Republican who framed the law as a defense of beleaguered landlords who were just trying to keep Big Government off their backs. “Ellising” a building allows landlords to convert apartments into condos. During the Dotcom boom of the late 1990s and early 2000s there was a rash of Ellis Act evictions across San Francisco.

Ted Gullicksen of the San Francisco Tenants Union says Ellis Act evictions have risen this past year to another crisis point. “People are terrified,” he told a gathering of tenants and activists recently. “We know that if we lose our homes we will be forced out of the city, or in the worst case onto the streets.” According to Gullicksen Ellis Act evictions were up 140 percent in 2013 from the previous year.

The only problem for investors seeking to use the Ellis Act is that in San Francisco condo conversion was strictly controlled for years through a lottery that awarded only 200 permits a year. So instead many of the buildings emptied of their renters were converted into what’s called a tenancy-in-common, or TIC. TICs are an otherwise obscure and inconvenient form of real estate ownership, but it has become strangely common in San Francisco: such is the thirst to eliminate rentals and sell housing in a form that captures enormous profit through capital gains. In a TIC a buyer purchases a percentage interest of ownership in an entire building, concurrently with the other residents. Thus the property records of many buildings in San Francisco are now a tangle of deeds deeming small fractions of undivided ownership interests in whole parcels.

Because of their complexity and illiquidity, TICs are costlier and more difficult to finance than condos. The big banks and mortgage lenders don’t like them. In San Francisco a small group of banks have made financing TICs among their core business. Sterling Bank & Trust is among the top TIC lenders, and its executives and employees are a large source of campaign cash for San Francisco’s politicians. For Sterling Bank & Trust TICs are a multi-hundred million dollar market opportunity. Any restrictions would eat into profits, so the cash flows readily into political races.

In 2013 Stephen Adams of Sterling Bank & Trust dealt out the maximum allowable contributions to Supervisors Mark Farrell and Scott Weiner’s re-election committees, $500 a pop. He also gave $250 to Supervisor Jane Kim’s reelection committee, and another $250 to Supervisor Malia Cohen. In fact, look into almost any recent or upcoming San Francisco campaign and there will be money from Sterling Bank & Trust funding one, or both sides of the race. Since 2004 the Sterling Bank & Trust has spent at least $26,000 on San Francisco elections, according to campaign finance data. Mayor Ed Lee got $9,000 from Sterling Bank & Trust and its employees since 2011.

Just how much Sterling Bank & Trust has earned financing TIC mortgages is unknown. Sterling is a private bank, owned by Scott Seligman, the son of wealthy Detroit industrialist. One of Sterling’s main offices is in the ground floor of a San Francisco financial district boutique office mid-rise owned by the Hearst Corporation (Hearst owns the San Francisco Chronicle, and some very valuable real estate parcels in downtown San Francisco). Seligman is also a co-owner of the San Francisco Giants Baseball Club, as are other major San Francisco real estate entrepreneurs.

Supervisors Weiner and Farrell are widely seen as the most real estate industry-friendly elected officials. In 2013 they co-sponsored legislation that would have allowed thousands of TIC units to be converted to condos. Owners would have paid a one time fee, but from then on they’d own very lucrative slices of the urban market, carved into the more marketable unit than the undivided share: the lot.

Tenant advocates pushed the rest of the Board of Supervisor’s to intervene. “It was an extremely disastrous measure that would have furthered condo conversions,” says Sara Shortt of the Housing Rights Committee of San Francisco. “We pulled some amazing jiu-jitsu on that.”

The resulting legislation, modified by David Chiu and fellow Supervisor Norman Yee, allowed for some TIC conversions, but put in place serious restrictions, so serious that the real estate industry backed off, as did Weiner and Farrell who withdrew their support for the bill. It passed anyway. The conversions are allowed for units that were eligible in 2012, but the previous condo-conversion lottery will be suspended for ten years. The law effectively shut down the manufacturing line that banks like Sterling, and dozens of developers have been using to first turn apartment buildings into TICs, and then into condos. Still the TICs proliferate, as do other real estate deals that further erode the affordability and security of housing in San Francisco.

As the real estate market heats up, investors, developers, and landlords are sowing cash into local political races in hopes of gaining more influence over policy. One in every four dollars raised by Supervisor Scott Weiner last year for his reelection bid came directly from the real estate industry. Campaign finance disclosure forms filed by Weiner reveal that both small and large landlords, real estate developers, property managers, and dozens of brokers and agents put $37,000 in Weiner’s bank account in 2013. Many of these contributors have business pending before the city’s Planning Board, or awaiting decisions by the Board of Supervisors and various city departments. Some of the largest landlords in the city like Vanguard Properties and Herth Real Estate, Zephyr Real Estate, California Property Services, and Flynn Investments are backing Weiner.

Supervisor Mark Farrell raked in $29,000 from the real estate industry in 2013 according to campaign disclosure filings. One of Farrell’s backers is Thomas Coates, a millionaire who lives in a three-story mansion just a stone’s throw from the Marina Green, part of Farrell’s district which includes several of the wealthiest zip codes in the nation. Coates is infamous for spending $950,000 in 2008 to promote Proposition 98, a ballot initiative that would have phased rent control out across California. (Shortly after receiving unfavorable press about his role in bankrolling Proposition 98, Coates wrote in an open letter that his motivation had more to do with restricting cities’ power to use eminent domain, something the law would have also accomplished. He added that while he does own a lot of real estate, none of it is in the form of San Francisco apartments.)

Coates is also a recent contributor to Weiner, having given the Castro District Supervisor $500 last October. It’s all chump change so far compared to what Coates expended in San Francisco’s 2010 elections, $200,000 funneled through independent committees to supported Farrell, Weiner, and another candidate who was not elected. It’s likely, however, that as the November 2014 election nears, real estate industry partisans like Coates will intensify their efforts to shape the outcome.

About 15 percent, or $19,000, of Supervisor Jane Kim’s campaign cash raised in 2013 came directly from real estate interests, according to an analysis of her recent campaign disclosure filings. Among the single biggest sources was the Emerald Fund, a development company run by Marc Babsin. Emerald Fund builds giant apartment buildings. Babsin and his team control some of the most valuable property in the city. The city Planning Commission has green-lighted Emerald Fund to build a 13 story, 162 unit apartment high rise at 101 Polk Street, tucked between the Civic Center and Market Street in what is said to be the hottest spot for development in the whole city. Emerald Fund also controls parcels directly across Hayes Street, and nearby on Van Ness, and has sketched out plans to build upwards of 900 units. The area is considered choice because of its proximity to Twitter’s headquarters and several high-rise luxury apartment buildings already under construction that are being marketed to the industry’s affluent employees. Emerald Fund staff gave Jane Kim’s re-election committee $2,000 last year, and the wife of the company’s president Alastair MacTaggart put in $500 more. Emerald Fund gave another $2,000 to Weiner, and $1,500 to Malia Cohen.

Other big developers giving cash to San Francisco’s politicians include Forest City, AGI Capital, TMG Partners, and Group I. AGI Capital employees have given Supervisor Cohen $2,000 over the past year. Jack Sylvan, Forest City’s vice president who is leading up the company’s massive Pier 70 project, 1,000 condos and apartments and over 2 million square feet of office space designed to attract large tech companies, has written $500 checks to Supervisors Weiner, Farrell and Cohen. Employees of Group I, a developer and landlord with office space in the Mid-Market Twitter-zone that it fills with “start-ups” and “venture capitalist” firms, according to the company’s web site, have given $2,000 to Supervisor Jane Kim, and $500 to Scott Weiner over the past year.

Landlords who have recently used the Ellis Act, and who have even been targeted by tenants and protesters, haven’t been shy about putting their money into San Francisco’s political races. For example, Ashok Gurjal, a very active San Francisco property speculator, wrote a $250 check to Supervisor Scott Weiner in October of 2013. Gurjal recently moved to evict residents of a ten unit apartment building in the Mission District, according to the Anti-Eviction Mapping Project, an activist group that tracks investor activity.

Dennis and Russell Flynn of Flynn Investments have already written checks to Weiner and Cohen for $1,000 for their 2014 re-election committees. In 2013 employees of Flynn Investments gave $9,000 to San Franisco politicians, including $1,500 to City Attorney Dennis Herrera, $1,500 to Supervisor London Breed, $1,000 to Assessor Carmen Chu, and $3,000 to Supervisor Katy Tang. Flynn Investments is one of the largest landlords in San Francisco, with a portfolio of apartments estimated around 3,500. The Flynns have the distinction of pursuing the most grandiose eviction and TIC conversion in San Francisco history, turning the Park Lane building, a ritzy 1925 address atop Nob Hill into pads that are selling for $3 million.

While the real estate industry has the money, San Francisco’s tenants still have quite a bit of power. Tenants have their allies on the Board of Supervisors, especially John Avalos, David Campos, Eric Mar, and David Chiu. Last Saturday over one thousand San Franciscans gathered in the Tenderloin Elementary School’s gymnasium for a city-wide tenants convention. To ring in the gathering they chanted, “when landlords use the Ellis Act, what do we do? Stand up, fight back!” Attendees brainstormed over proposals to reign in real estate speculation, including a moratorium on no-fault evictions, and even an anti-speculation tax that would dramatically reduce profits, creating a disincentive for landlords to carve up apartment buildings into TICs and condos.

“There’s this myth that it’s really difficult to evict tenants in San Francisco,” said Tyler Macmillan of the Eviction Defense Collaborate, a legal office that helps tenants in distress. “We need to write better laws that keep people in their homes. Those policies that we can’t get through the Board of Supervisors, we’re gonna put on the ballot for the people to vote on.” Others at the convention spoke in more direct and forceful tones about taking direct action to stop evictions.

The room listened somberly as Gum Gee Lee, a 74 year-old elder of San Francisco’s Chinatown community recounted her family’s eviction from their home of 30 years, an apartment on Jackson Street where converted TICs now sell for $1 million and up. “It was a time of pain, I couldn’t sleep,” said Lee. “I though to myself, is this how I’m going to live my last days?”

Cheers erupted when Lee shook off the sense of defeat saying resolutely, “for all those being evicted, friends, you need to stick together and fight!”

Darwin Bond-Graham, a contributing editor to CounterPunch, is a sociologist and author who lives and works in Oakland, CA. His essay on economic inequality in the “new” California economy appears in theJuly issue of CounterPunch magazine. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion