September 12th, 2019
On Wednesday, September 11th, 2019, the California State Assembly approved the passage of AB 1482, the Tenant Protection Act of 2019. The bill establishes annual limits on rent increases throughout the state as well as just cause for eviction rules that allow a tenancy to be terminated only under a set of pre-defined rules. We would like to take this opportunity to communicate the details of the bill as we see them, as well as point out some possible implications for investors and real estate professionals doing business in our market.
The bill takes full effect on January 1st, 2020 and expires on January 1st, 2030. It applies to all residential rental units in the state on parcels of at least 2 dwelling units that were issued their original certificate of occupancy more than 15 years ago, with a few other exceptions.
Investors will no doubt be bombarded in the coming days with sensational news headlines, predictions of doom, and general fear-mongering from a variety of sources. We recommend a calm, measured consideration of the law’s likely consequences before making any decision to act.
Let’s first consider how we got to this place. The bill is a clear response to the state’s severe housing shortage. Homelessness and displacement have become major issues affecting our communities. Rapidly rising rents and a housing shortage are really just symptoms of an extreme imbalance between the supply of and demand for rental housing.
Although rent control will not solve our housing issues, it is indicative of this imbalance and further proof that conducting business in the supply side of our housing market offers some extremely favorable long term economics. It will be a challenge to manage through more onerous regulations as a housing provider, but the fact is this shortage of supply can only continue to cause property values and rents to rise over the long run.
Patient and savvy investors are likely to reap huge rewards in learning to navigate the new landscape. We may very well see a short term decline in property values, particularly in assets with significantly under market rents. We may see demand for multi-family properties ebb as some capital is drawn out of state. Properties with strong rents are likely to maintain their values and probably increase as rent control tends to cause more scarcity over time.
Here at Buckingham, we’ve been helping investors in the LA area since the 1960’s. We are fortunate to have been collecting local market data since that time. In the interest of predicting what might happen to values in the aftermath of AB 1482’s passage, it makes sense to examine what transpired in our local markets the last time new rent control laws were enacted. In 1978, the city of Los Angeles became a rent-controlled city. Since that year, annual rent caps have been limited to 3% per year and stringent just cause for eviction standards have been enforced. In fact, LA’s rent control law is much more restrictive than the current state measure.
Working in the South Bay since that time, we saw San Pedro (which is in Los Angeles) become a rent controlled area while the rest of its neighbors remained rent control-free. We’ve dug up some old research from that era. Here is a value study of San Pedro compared to a few other South Bay cities that had very similar economics. Starting in 1978, the year rent control became law, and going through 1984:
You’ll immediately notice that value in San Pedro not only matched those in neighboring cities, they actually increased at a faster rate than any of these other markets immediately following the introduction of rent control.
What about rents? Take a moment to look up average rents in some major rent controlled markets: Los Angeles, Santa Monica, San Francisco, New York City. Compare those with rents in your nearest non-rent controlled city. We don’t even need to provide data to show how much higher rents are in these cities, it’s common knowledge.
Of course, as property owners we’d rather not deal with the complications of this new policy. Understanding the details of the new law will allow us to make prudent decisions regarding our individual assets. We’re confident that investors will still see strong returns from owning residential real estate in California. Let’s take some time to familiarize ourselves with the new law and manage accordingly.
Here is a summary of the bill’s key provisions:
- Over the course of any 12-month period, property owners are prohibited from raising the gross rental rate for a unit by more than 5% plus the percentage change in the cost of living in the region the property is located.
- Percentage change in the cost of living will be the percentage change from April 1 of the prior year to April 1 of the current year in the regional Consumer Price Index for the region where the property is located, according the US Bureau of Labor Statistics.
- These limitations apply to all rent increases occurring on or after March 15, 2019. In the event that an owner increased the rent by more than the allowable amount between March 15, 2019 and January 1, 2020, the applicable rent on January 1, 2020 shall be the rent as of March 15, 2019, plus the maximum permissible increase.
- Owners will be prohibited from terminating any tenancy without just cause, as defined by a list of specific reasons, that are either “At-fault” or “No-fault”.
- At-fault just causes include non-payment of rent, breach of a lease, causing a nuisance, committing waste, refusing to extend or renew a lease, criminal activity, subletting without permission, refusal to allow an owner to enter per state law, or using the premises for an unlawful purpose.
- No-fault just causes include an owner’s intent to occupy a unit as their primary residence, withdrawal of the unit from the rental market, the owner complying with a government order, or the intent to demolish or “substantially remodel” a property.
- “Substantially remodel” is defined as “The replacement or substantial modification of any structural, electrical, plumbing, or mechanical system that requires a permit from a governmental agency, or the abatement of hazardous materials, including lead-based paint, mold, or asbestos, in accordance with applicable federal, state, and local laws, that cannot be reasonably accomplished in a safe manner with the tenant in place and that requires the tenant to vacate the residential real property for at least 30 days.”
- For tenancies that are terminated for no-fault just causes, the owner is responsible to pay the tenant relocation assistance equal to one month of the tenant’s rent.
- This relocation assistance will be credited against any other relocation assistance required by any other law
- There are some exemptions from the bill. They include, but are not limited to:
- Single family owner-occupied residences, including homes in which the owner-occupant rents or leases no more than 2 units or bedrooms including an accessory dwelling unit
- Duplexes in which the owner occupied one of the units as the owner’s principal residence at the beginning of the tenancy, so long as the owner continues in occupancy
- Housing that has been issued a certificate of occupancy within the previous 15 years
- All single family residences that are not owned by corporations
- Housing restricted by deed or subject to an agreement that provides housing subsidies for affordable housing for persons and families of low income
The text of the bill can be found here:
CEO, Managing Broker, Buckingham Investments