☆ Perspective: To reach its housing needs, SJ needs to jettison ordinances like the Ellis Act, which constrain densification where we need it most

Local housing provider Dean Hotop cuts to the chase: If SJ wants to preserve its greenbelt (which it should), we need to find ways to build upwards within our Urban Growth Boundary. Outdated ordinances like the Ellis Act—which make it economically infeasible to densify older, low-density properties—stand in the way of an abundant housing supply and common sense, and have to go. An Opp Now exclusive.

San Jose’s Ellis Act Ordinance (EAO) was passed in 2017 in response to a private developer building 640 much-needed brand new housing units in San Jose. If this simple fact is confusing, in light of San Jose’s perpetual housing shortage, please keep reading.

This particular developer’s sin, prompting passage of the Ellis Act Ordinance, was building these new units on sacred ground. No, not an ancient burial site with cultural significance, nor was it any sort of protected species habitat.

This ‘sacred ground’ held 200 old, worn out, energy-inefficient, low-density rent-controlled apartments.

What is the Ellis Act Ordinance?

The EAO is a regulation that ‘controls’ how a property owner ‘exits’ the rental market. Tearing down old rental units and building new ones is considered a rental market ‘exit’ under the EAO regulations.

There are numerous elements to the regulation—some reasonably valid, while others are not.

For example, providing sufficient notice to tenants and extra time for special needs tenants is a reasonably valid requirement. However, the following elements of the EAO regulation are purely intended to foreclose on the economic viability of future redevelopment activity:

  • High per-unit fees paid upfront to the City.

  • High, fixed relocation benefits to tenants, regardless of whether or not they are already paying market rents, what their income is, what their actual moving expenses are, or how long they have lived in the unit.

  • 50% of newly built units required to go back under rent control.

  • All existing tenants must be offered a newly built unit at their old rents.

Why it matters

San Jose’s small market housing providers are investors, seeking profits and returns on their investments. Like it or not, without them and their profit motives, these housing units would not exist.

One potential way for these investors to profit in the long run is to redevelop their land and add more housing units, or sell to a developer who will. Adding more, new units is the prescription to fix San Jose’s perpetual housing shortage. Every legislative body prior has recognized that including new construction under rent control would stop new construction. That is why it's always been exempt.

It is no coincidence that re-control was included in the EAO; stopping new private construction of rental housing units WAS the goal. Now, it's time to reassess that goal and reconsider if discouraging new construction is really in San Jose’s best, long-term interest.

How the Ellis Act Ordinance ultimately hurts renters

Without the potential to redevelop new, additional rental housing units, property owners are left with two options to maximize their return: rehabilitate or redevelop for-sale housing units.

There is already evidence of a few smaller SJ properties being redeveloped as for-sale housing units in order to unlock the land value, which sits under a rent-controlled apartment building. This loss of much needed rental housing supply, even in small numbers, is a step in the WRONG direction.

By remodeling units on turnover, adding higher-end finishes, more amenities, etc. and making general property upgrades, property owners are able to achieve maximum market rents for their specific property, but this does not add one single new housing unit to San Jose’s supply. Improving the quality but not the quantity of housing units only makes matters worse.

From a housing supply crisis perspective, this is the worst case scenario for San Jose renters: No new supply is created, and rents for those existing units inevitably skyrocket after rehabilitation.

A huge opportunity

There are 149 rent-controlled properties in San Jose with 40+ units: prime properties for redevelopment. These 149 properties contain 17,195 housing units, which are 44+ years old, low-density, and energy-inefficient. Redeveloping just 30% of these properties, at a 3.5x density increase, would yield 13,000 net new housing units. This would be a 4% increase in San Jose’s total available housing supply—all at no cost to taxpayers. (Note: 340k total housing units in SJ as of the 2020 census.)

Redeveloping these properties would unleash over $9B of new economic activity in San Jose, create thousands of new jobs, bring in hundreds of millions of dollars in new tax revenue, and turn San Jose into an economically vibrant, housing-rich city. Redeveloping these properties would help San Jose achieve its state-mandate climate-change, energy-efficiency goals, half of the RHNA required market rate units—at no cost to taxpayers.

Many of these properties would sell to developers before they are redeveloped, bringing much new business and commissioned sales to the local Realtors and significant Measure E revenue as well. Post-development, it is not unusual for larger REITS to consolidate these properties, again bringing more transactional revenue to local coffers.

Its time to change course

San Jose cannot continue expecting different results from the same approach. There’s much reason to hope our current council understands this and changes course from punitive regulations to actually encouraging new construction.

With outward expansion limited due to wisely preserving our greenbelt, we must look inwards and upwards to add more housing supply. Increasing housing density where it already exists is the most logical approach. Abundant housing is affordable housing, and scarce housing is expensive housing.

San Jose can no longer afford to make the same mistakes if it wants to be an economically vibrant, housing-rich city. Repealing the Ellis Act Ordinance would be a game changer for San Jose and its residents who want abundant, affordable housing.

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