No-fault Eviction Ordinance Passed In San Diego — Increasing Investor Risk?

The California legislature passed a statewide eviction moratorium extension on March 31, 2022 for certain tenants who have applied for rental assistance on or before that date. The moratorium is set to expire on June 30th. 

In late April, the San Diego City Council followed suit when it voted to enact an eviction moratorium that would halt some evictions through September 30. 2022 — or two months after the COVID-19 state of emergency ends, whichever comes first.

The San Diego moratorium, however, goes a step further than the state mandate, closing any loopholes by instituting “no fault” language in the legislation. Landlords would be prevented from evicting tenants in order to 1. Make upgrades that have not had prior city or tenant approval; or 2. Take their property off the market. 

City Council President Sean Elo-Rivera, the primary sponsor of the bill, pushed for the moratoriums passage not only to close loopholes, but to prevent families from facing 30-day evictions and increased moving costs, and to stave off an increase in homelessness in the city.

Elo-Rivera told the Council: “I’d like for us to picture a couple of scenarios. The first is a family with maybe three kids in school, barely getting by but completely up to date on their rent and now being told they have 30 days to find a new home. We can also picture a senior on a fixed income also just getting by, having carefully constructed their lives to afford to live and be able to get to and from their medical appointments attempting to navigate that same situation.”

Meanwhile, landlords and Realtor groups vehemently opposed the ordinance. Some challengers urged that the act was against the law, would damage property owners and may contribute to a worse rental climate in San Diego in the near future.

Frank Powell, a spokesman for the San Diego Association of Realtors, stated, “We want to cover the rights of the people who invested, who bought houses. This is their 401k. They don’t have a company paying them. They gathered all their money and bought investment properties so they can live.”

The moratorium ordinance was signed by the Mayor and will go into effect May 22, 2022. 

No fault or just cause eviction ordinances are gaining popularity across the nation, as evidenced by a recently proposed law in the state of Maryland. The state of New York is also considering a “good cause” eviction law with similar goals.

Freedom Financial Funds CEO Michael Klein observes, “The State of California, including several cities and counties, are becoming quite assertive in transferring the property rights of owners to renters. The question of when do these actions become a taking should be on every owner’s mind. To me, a non-lawyer, the Fifth Amendment of the Constitution of the United States seems fairly clear on this matter: “… nor shall private property be taken for public use without just compensation.” It is my understanding that getting compensated for eviction moratoriums has not been easy or straightforward. For owners and their lenders, this is a political risk that did not exist (or was not widely considered) prior to 2020.”

He poses the next logical question: “Will this risk get priced into transactions?”

Local and state governments have both played a role in how eviction moratoriums have rolled out from state to state, with notable differences in the ways that conservative-leaning states (such as Florida and Texas) handled moratoriums, as opposed to liberal-leaning states (like California and New York). Due to California’s tenant-friendly policy, some landlords have gone so far as to sell off their investments in the state. With a new state provision to cover 100 percent of rents owed, however, they should eventually be compensated. 

It remains to be seen how the state may address similar issues in the future, leaving some investors feeling that California is getting too risky. 

Freedom Financial Funds manages a private REIT and separate accounts through which it responds to the financing needs of real estate professionals seeking capital for construction, rehabilitation, repositioning, conversion or additions to commercial and residential properties in the Western United States. Freedom also offers build-to-suit financing nationally. In only five years, Freedom has executed more than $500 million in transactions and has remained steadfast throughout the CV-19 crisis. Freedom serves markets throughout the Western and Southwestern U.S. from its locations in California, Arizona, and Oregon.