Peaking interest
Lawsuit by small-property landlords moves forward and could cost the city millions of dollars.

By A.C. Thompson

AT A MOMENT when San Francisco city officials are grappling with nose-diving tax revenues and an apocalyptic $347 million budget deficit, a group of landlords is squeezing the city with a multimillion-dollar lawsuit, which last week got the green light to move to trial.

The suit, brought by the Small Property Owners of San Francisco, an advocacy group representing some 2,300 landlords, charges the city with an unconstitutional "taking" of rental profits. At issue: a since-revised city ordinance requiring landlords to pay tenants 5 percent annual interest on their security deposits.

The suit claims the law cost the city's roughly 62,000 small-property owners a total of $7.8 million during a 16-month span.

We asked one of the plaintiffs, John Lockley, who owns four units of a seven-unit apartment building as well as a single-family house, exactly how much money the ordinance had cost him. "Frankly, I haven't computed it," Lockley said. (Court documents suggest he's upset about losing $320 from annual rental income of more than $30,000; another plaintiff is suing over $60.) "But it's the principle of the thing. The city is picking landlords apart."

The intent of the ordinance was to give tenants what they would otherwise have made by investing it, but landlords who put their tenants' cash in money market accounts say they weren't earning 5 percent interest after the markets went south.

The city "faces a massive monetary judgment" if the case proceeds to trial, Lockley's lawyer Andrew Zacks, who often litigates on behalf of the propertied class, said. "The key issues involve the city's willingness to recognize and protect the constitutional rights of small-property owners and to accept a more balanced legislative approach to landlord-tenant issues."

On April 15 Superior Court Judge Richard Kramer gave Lockley and his pals a boost, rejecting the city's motion to toss out the case and offering owners of rental properties with one to six units a chance to join the suit. In a certain regard, however, the landlord lobby has already won: after they filed suit last spring, the San Francisco Board of Supervisors voted to make the rules around security deposits more favorable to landlords.

Deputy city attorney Andrew Schwartz, the city's top lawyer on the case – and a frequent courtroom opponent of Zacks – is clearly not amused. Noting that most property owners aren't exactly hurting for cash, Schwartz labeled the suit "unconscionable" and added that Kramer "didn't rule on the merits of the case." No trial date has been set.

"This lawsuit makes no sense – the city already went ahead and changed the ordinance to make the apartment owners happy," said veteran tenant activist Randy Shaw. Besides, Shaw pointed out, landlords "were making money hand over foot" during the boom years.

And Lockley is hoping to make a little more: "I don't feel guilty at all asking the city for a few million dollars."

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