The state of California is on the verge of joining Oregon as the only two states in the country to implement statewide rent control. Recently approved by the California Senate, Assembly Bill (AB) 1482 is slated to become law on Jan. 1, 2020. AB 1482 legalizes statewide rent control and allows most property owners to only raise rents by 5% annually. But there are some exceptions. Does this newly-passed law impact your property as a single-family rental (SFR) investor?
Legal Expert Giles Imrie Discusses Rent Control’s Impact on SFR Market
Today we’re discussing the implications of the recent passing of statewide rent control, known as AB 1482. You’re going to hear that number, as a landlord quite a bit, and so what we want to do is talk through some of the potential implications and how you can make sure that you can protect yourself and your rental property from issues that may arise if you don’t follow the law. My guest today is the vice president of corporate counsel at Mynd Property Management, Giles Imrie.
Alex Osenenko: So, Giles has14 years of legal experience in real estate and the question we’re going to tackle today is this: Is my single-family rental in California impacted by AB 1482?
Giles Emery: The short answer is yes, Alex. Previously, single-family homes were carved out of rent control ordinances, but this Assembly Bill does impact your single-family homes in one way or another. It may be a minor impact or not. I’ll explain what I mean by minor but assuming you don’t qualify for one of the stated exemptions that are laid out in this bill, then your single-family home is now subject to both the rental cap that’s imposed under this ordinance and the just cause aspect of it as well.
There are some nuances that still allow you to maintain your protections as a single-family homeowner. Assuming you do qualify for those, and I’ll go into those in a little bit, then you still need to provide notice to your residents. Going forward, you will need to add a provision to your lease that notifies your resident that the property is exempt. This specifically references the civil code and explains to them that your property is exempt from the rent cap and the just cause ordinance, assuming you do qualify for one of those exemptions.
Alex: So Giles, are you saying that in AB 1482 impacts all single-family homes or there’s a specific subset.
Giles: Well, it does impact in that even if you qualify for an exemption, in order to maintain and get the benefit of that exemption, you now need to actually give the statutory reference in your lease and failure to do so could mean that you are subject to the rent cap when you otherwise would not be. So, yes.
Alex: To finish my point, you can bypass this by having a specific provision with a release but then exempt you?
Giles: Assuming you qualify for extra threshold.
Alex: Which we’re going to talk about in this next episode. So, but for now, let’s get to the basics.
Giles: The basics. Yes, I just wanted to carve out that there are some little gotchas in here that even though you do qualify for one of the exemptions, you’ve got to add statutory language that you previously didn’t have to your lease in order to maintain the benefit of that exemption.
Alex: Gotcha. And the rent cap, some of the key takeaways from this law. So the rent cap is what?
Giles: So, you are now limited on your annual rent increases to 5%, plus the price of inflation for the prior year. And that’s measured by the consumer price index (CPI). There is a look back to March 15, which is basically intended to prevent landlords from spiking rents before it goes into effect. But the go-forward rent increase cap, they call the rent cap would be 5% plus the CPI.
Alex: Which is about 2 to 2.5% now as we speak today?
Giles: 2 to 3%.
Alex: All right, so I think this is the takeaway: Your single-family rental may be allowed for exemption, but you have to understand how to properly document this, and have a specific provision in the lease. Is that correct?
Alex: So, can you give us a little more color on like how do you do that?
Giles: Single-family homeowners are exempt from this ordinance. This bill applies to any corporation or real estate investment trust. My background in real estate is with REITs, so this is geared towards the REIT industry, which only constitutes about 3% of the single-family rental market in the U.S.
Nonetheless, (the law applies to) corporations, REITs and limited liability companies. But if you’re an individual that owns a limited liability company, then this does not apply and you’re treated just like any other individual owner. You are not subject to the bill provided you include that newly required written disclosure in your lease, specifically advising your tenant that you are not subject to this ordinance or this bill.
Alex: Gotcha. So they need to know upfront that this property would not comply with the rent increase?
Alex: All right, Giles. That was good. On the next episode, we’ll dive into the specific rental ownership entity type, individual versus entity and how that gets applied based on AB 1482. Thank you very much for watching. If you want to go to mynd.co, type in: AB 1482 mynd.co. That’s our company. You’ll see a series of interviews that Giles and I are doing on this subject. We hope this helped you out. Until next time, and thank you for watching.