California has some of the highest housing prices in the country. There’s no silver bullet approach that will make housing suddenly more affordable. State legislators seem to have recognized this, which is why more than 100 bills aimed at addressing affordability and homelessness have already been introduced this legislative session.Assembly Bill () 1506 is one of those proposed pieces of legislation, and it has California landlords on edge. 1506 would effectively repeal the Costa-Hawkins Rental Housing Act of 1995 that regulates rent control policy statewide.
A Brief History
Before Costa-Hawkins, municipalities could adopt either “moderate” or “strict” rent control policies. Moderate rent control limited a landlord’s ability to increase rents on existing, ongoing tenancies. Municipalities with strict rent control also limited the rent that a landlord could charge on the open market, even after the apartment had been vacated by the outgoing tenant. Berkeley, Santa Monica and East Palo Alto were just a few of the cities with strict rent control policies prior to Costa-Hawkins.Costa-Hawkins created a set of uniform rent control regulations that municipalities across the state were required to abide by. Notably, under Costa-Hawkins, certain types of dwelling units became exempt from rent control regulations; “vacancy control” was prohibited – i.e., municipalities could not regulate rental rates on units that were voluntarily vacated by the previous renters at an amount other than what the open market could bear; and allowed landlords to increase rents on subtenants if the master tenant no longer vacates a rent-controlled unit.Newly-constructed units () became exempt from rent control regulations under Costa-Hawkins. The state law also exempted single family homes and condos if the tenancy began after January 1, 1996. 1506 Would Repeal Costa-Hawkins Altogether 1506 would scrap all of these regulations. Currently, Costa-Hawkins creates a baseline that municipalities must abide by and then municipalities can layer in additional rent control provisions as long as those provisions do not contradict what’s spelled out in Costa-Hawkins. Repealing Costa-Hawkins eliminates that baseline and would allow municipalities to adopt rent control policies that vary drastically by jurisdiction.Cities could once again introduce “strict” rent control, allowing local lawmakers to regulate the rental rates on housing units that were voluntarily vacated. 1506 would also reintroduce rent control for newly-constructed units. It would open the door for new regulations regarding single family homes, condos and owner-occupied multifamily properties.The legislation was proposed by Assembly Member Richard Bloom () and co-authored by Assembly Members David Chiu () and Bob Bonta ().Proponents of the legislation say 1506 will help to stabilize communities. They argue Costa-Hawkins unfairly ties the hands of cities that are attempting to deal with runaway housing costs at the local level. Advocacy Group Tenants Together calls Costa-Hawkins a “major barrier to strong rent control and universal displacement protections.”Opponents say the legislation is misguided. They worry that stricter rent-control laws will deter investors and limit new construction – the exact opposite of what is needed if California is trying to increase its housing supply and address affordable housing. Opponents point to a report released by the California Legislative Analyst’s Office in 2015, titled “California’s High Housing Costs: Causes and Consequences.” The nonpartisan LAO noted “the key remedy to California’s housing challenges is a substantial increase in private home building in the state’s coastal urban communities,” and 1506 would be a major impediment to new construction.
Many of our rental property owners have already contacted us here at Mynd to express their fears over 1506. Specifically, rental property owners are worried that 1506 will eliminate their ability to bring their rental units to market rent when a resident voluntarily moves out. The 1506 could significantly hurt a landlord’s cash flow and ability to earn a decent return on their investmentOther potential ramifications include:
- Investment in new construction could grind to a halt. New apartments will be subject to rent control, and taking away a landlord’s ability to set rental rates could mean that projects no longer pencil out. Project margins are already narrow here in California due to high costs of land, labor and other regulatory obligations.Susan Shelley, writing for the LA Daily News, puts it succinctly: “No one with any sense is going to buy or build rental property in California while state lawmakers are proposing to unleash rent control. The conversation alone could reduce the supply of housing.”
- The resulting lack of new construction will exacerbate California’s affordable housing crisis. As noted in the LAO report above, the best way to mitigate high housing costs is to add more housing to the market. It’s Supply and Demand 101.
- Property values could drop significantly overnight and some landlords may opt out of the real estate industry altogether. It is possible that some will look to cash out quickly by evicting tenants and converting their rental units to condos to avoid new rent control regulations. Others may sell their property to developers in search of value-add opportunities. Either way, the end result will be to reduce the overall supply of affordable rental housing.
- Building owners may not have the cash flow to reinvest in their properties, which could lead to delayed repairs and maintenance. California’s housing inventory will start to deteriorate.At an Assembly Housing and Community Development meeting on Friday, March 3rd, a group of San Francisco and San Jose landlords confirmed this sentiment, saying the bill could put them out of business altogether. “This is the same sort of law that caused thousands of units to be abandoned across New York City, the owners just couldn’t maintain their buildings,” said Noni Richen, president of the Small Property Owners of San Francisco.
- Repealing Costa-Hawkins opens the floodgate to a new set of rent control regulations that add to other costly regulations that landlords now have to abide by. For instance, as of January all new apartment buildings must be 30% more energy efficient than the last generation of buildings. Another regulation requires all water runoff to be kept on the property; the cisterns needed to comply with this regulation can increase construction costs by an estimated 7%. Layering in regulation after regulation – even as well intentioned as many of these regulations are – drives up the cost of housing even further.
CONCERNED? HERE’S WHAT YOU CAN DO
If you’re an East Bay landlord worried about the repeal of Costa-Hawkins, here’s what you can do:
- Call all legislators listed below by March 14, 2017!
- Identify yourself and state the city that you live, work, own or manage residential rental property in.
- Ask the legislator to VOTE NO on 1506 and thank the staff for their time.
Please call all of the following Assembly Members:
Asm. Catharine Baker Walnut Creek, San Ramon, Dublin, Livermore, Pleasanton
Asm. Jim Frazier Antioch, Bethel Island, Birds Landing, Brentwood, Byron, Collinsville, Discovery Bay, Fairfield, Isleton, Knightsen, Locke, Oakley, Pittsburg, Rio Vista, Suisun City, Travis AFB, Vacaville, Walnut Grove (916) 319-2011