Protected Tenants and the Unforeseen Curveball November 21, 2017
Protected Tenants and the Unforeseen Curveball
When selling a property in Trust or Probate in San Francisco, the properties often come with tenants and sometimes protected tenants. As most know, San Francisco has some of the strongest tenant’s rights in the nation and probably the world. When approaching a sale with tenants in place there are many factors that effect the sale and many more issues that can land a trustee, beneficiary, executor or administrator in hot water if things are not handled with great care when communicating with these tenants. Preparing, marketing and selling a tenant occupied property in San Francisco needs to be handled by Realtors who are experienced with the nuances and difficulties tenants can bring to a sale.
Recently we were handed a challenging situation where the sole beneficiary lived in the upper unit of a two unit building in San Francisco’s Richmond District. The trustee’s mother had passed away a year prior leaving a family friend as successor trustee to handle the estate. There were tenants in the lower unit who had been there since 1996 and who were over the age of sixty and paying next to nothing in rent. The beneficiary was close to these people as they had lived there since she was 12 years of age. She viewed them almost as family, or so she thought.
To make a long story shorter, over the course of a year prior to the sale the beneficiary started to engage in conversations that where creating animosity and liability to herself. She made promises to the tenants regarding improvements to their unit unaware of the laws and necessary requirements that should be considered prior to trying to improve their unit. The cost became prohibitive and then she made a very big mistake; she started to discuss buyouts without the help of a landlord-tenant attorney. Needless to say, the tenants had acquired an attorney and things started to get sticky, and simply, the relationship that the beneficiary and the tenants had enjoyed for so many years had been destroyed. She very much so was in some hot water. Due to the challenges that were now presenting themselves, the beneficiary stared to speak to a local contractor who was willing to take the property off her hands for $1.425 million. Of course the price has to be right if the contractor is going to make money, but the value of the building was far greater than this contractor was offering. The upside: the headache would go away and the beneficiary would have her money quickly.
The trustee had engaged a very good estate planning attorney to help advise him as things progressed. The estate planning attorney knew us and suggested that the trustee and the beneficiary meet with us to discuss everything and to gain a better idea of the value of the property. We met with them, explored the property and provided a valuation that was between $1.6 – $1.7 million. Mind you, if the property was in better shape and had no tenant issues it would be worth $2 million and some change. The property was in rough cosmetic shape, smelled badly of pet odor; and to top it all off, the beneficiary smoked in the building. It was bad! After consulting with us they got a really good overview of the challenges we would face moving forward, but we convinced them that should they hire us, we would acquire a much higher sales price through a sale on the open market than if they sold to the contractor.
We knew that we would get nowhere unless we got to know the tenants and learned how to engage with them so that showing the property would not be a problem. We set up a meeting, established a game plan and developed good rapport with the tenants. Because of the relationship we developed with the tenants we were able to sufficiently show the property so that we could gather momentum and leverage the market despite the low rent and the protected status of the tenants. However, we were thrown a well placed curveball by the tenants with the help of their attorney and then the real work ensued.
The tenants do not have to fill out the tenant information questionnaire (estoppel). They had promised that they would fill it out on many occasions and leave it at the property for us, but never followed through. Nearing our offer date we had a somewhat complete disclosure package though it did lack the estoppel. After showing the property for 2 weeks with the cooperation of the tenants, we had garnered an interest of no less then six solid buyers by the offer date. We could not have managed such incredible interest (considering the protected tenants) without the tenants allowing us to show it on the weekends and essentially whenever we wanted with appropriate notice.
Here’s where things really went sideways: on the offer date we received the estoppels from the tenants via certified mail, along with a three page handwritten addendum of their account of the condition of the property and many falsities regarding their understanding of the trust and even insinuating that they had a potential Life Estate. They made many claims that were not true, and now it was all in writing and had to be disclosed to all potential buyers. Needless to say, all interested parties bailed. The complications that a late disclosure like this can cause can feel insurmountable, frustrating and very trying of one’s patience. We wanted to quit, or at a minimum question what the tenants were trying to pull, but we could not communicate with them over the details of their estoppel. That’s not our place and we could get ourselves and everyone else involved in the deal dragged into a lawsuit. Now we had to find a buyer that was willing to take on a property with protected tenants and all of the challenges laid out in their claims against the current owner and against the property itself. We had a pile of new e-mails, text messages and communications of he said-she-said to disclose in order to paint an accurate picture of what was really happening there. The tenant was even trying to sweeten their current deal by stating they had free water and garbage. They were already only paying $1,025 dollars a month for a 1400 square foot flat and now they wanted free water and garbage too! The original owner and trustee had passed away so who was there to argue with their claims?
Thankfully we were able to prove that most of the tenants claims were false and paint a picture of the truth as we hunted for the ‘right’ buyer who was willing to pay a fair price for a fixer property with some tenants that weren’t so honest or nice.
Speed forward one month: We were in and out of contract with an investor that tried to work us over through escrow. That failed and we cancelled escrow with them leaving us back on the market. We raised the price and continued to show the property regularly until we secured the absolute best buyer for the property. We managed to get the property SOLD for above the new asking price and within the boundaries of my initial projected value between 1.6-1.7 million.
This is only one scenario of the many complications a tenant occupied property can present. Working with The Wiley Team you are guaranteed to have agents who have the experience, patience, demeanor and a plan to deal with the most complicated and challenging situations that only exist in the Bay Area, or rather, The People’s Republic of San Francisco, Berkeley and Oakland. It’s a difficult terrain to navigate but we never lose sight of our client’s needs and always strive to attain their goals while dealing with challenges and elements outside of our control and we always handle tenant and protected tenants with the utmost care.
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