What Exemptions Apply to AB 1482, California’s Statewide Rent-Control Law?
On January 1st, 2020, Governor Newsom approved California Assembly Bill 1482 (AV1482), a statewide rent control law that allowed most residential property owners to only have a 5% annual rent increase, plus the price of inflation, as determined by the Consumer Price Index (CPI). There are notable exemptions, which is what we will review in this video. Keep in mind that if a local rent control law has stricter requirements, then the local ordinance takes precedence.
First, we’re going to address some concerns a California landlord may have about the new law’s impact on their ability to generate rental income, and whether or not AB 1482 was affected by AB 3088 or SB 91, the two laws that granted protections to tenants and landlords during the coronavirus pandemic.
Will AB 1482 impact my ability to generate rental income?
There may be some concern that because AB 1482's rent control laws cap annual rental cash flow, that it will impact two important measures of a real estate investment’s success: cash-on-cash return (CCR) and cap rate.
- Cash-on-Cash Return: The measure of how much money your investment is making you every year expressed as a percentage.
- Cap Rate: The measure of a rental property's potential to make back its initial investment and start making a profit expressed as a percentage.
However, this would only be true if the only consideration for setting the rent for your properties was simply increasing the price of a month's rent. Rent increases are contingent upon the quality of the property you’re renting and what comparable properties in your area are charging for rent. You can’t just impose rent hikes that are significantly greater than what comparable properties in your area are charging because your tenant will simply go elsewhere for more affordable housing
As a result, rent limits are only one factor in determining what your rent can be. And, as Mynd has discussed elsewhere, there can be significant advantages to rent stabilization. For example, the statewide rent cap and the eviction requirement part of AB 1482 decrease turnovers and vacancies, which saves you from the time, money, and stress associated with turnovers. And since the rental cap and the ability to extend their tenancy has to be included in the rental agreement, tenants may be more invested in staying for many years.
Given the number of exemptions to AB 1482, however, there’s a good chance that the California law won’t even apply to you (although a local rent control ordinance still will).
Does SB 91 Affect AB 1492?
On August 31, 2020, California’s COVID-19 Tenant Relief Act (AB 3088) was signed into law, providing state-wide protections for tenants and landlords in the face of the ongoing coronavirus pandemic. On January 29th, 2021, Senate Bill 91 (SB 91) was signed into law, extending AB 3088’s protections until June 30th, 2021. ASB 91 also extends the protections afforded by AB 1482's Just Cause Eviction Ordinance to all new constructions and all single family homes, regardless of who owns them, until June 30th, 2021. That means that a tenant has the option of renewing their lease at the end of their tenancy so long as they haven’t violated any of the lease agreement’s provisions and so long as the owner or one of their relatives doesn’t plan to move into the property themselves. Neither SB 91 nor AB 3088, however, prevent rental increases per the rules established by 1482.
To find out more about what form AB 1482’s exemptions will take after June 30th, 2021, listen to our discussion or read the transcript below.
Exemptions to AB 1482
Alex Osenenko: Boys and girls, Alex here with My Property Management. I'm here with Giles Imrie. Giles, how are you?
Giles Imrie: I'm doing great, thanks, Alex.
Alex: Awesome. Giles and I are having a lot of fun talking about AB 1482, the (statewide) rent-control law that recently passed in California. Now what we're trying to do is discuss all the details and implications. Giles has 14 years of legal experience in real estate, and he's the corporate counsel at Mynd. We are very lucky to have him, and because we have him, we want to ask him a few questions.
Who Qualifies for Exemptions
Giles: Sure. The assembly bill itself has two components, as you know: the rent cap and then the just cause ordinance, which we've covered in another video.
But the rent cap piece of it, the legislators don't like to call it "rent control." They call it a rent cap, but in essence, it's a statewide initiative. So unless you're covered by a more stringent rent-control ordinance in your local jurisdiction, this bill now caps your residential home rental units to 5%, plus the cost of living, which is measured as the consumer price index (CPI) for the region that your home is located, should say.
So unless you qualify for one of the stated exemptions that's spelled out in this bill, then you are now capped at the 5% plus the CPI.
Alex: Effective when? January 1, right?
Giles: Yes. The bill itself goes into effect on January 1, 2020. There is a look back provision for rent increases. That goes back to March 15 of 2019. So, when the bill goes into effect on January 1, there's a look back and your rental rate would level set to the maximum that would have been allowed back on March 15. Therefore, you can't take it as an opportunity to maximize your rents before it goes into effect. It's already got to look back.
Alex: They already have it, sort of locked So it's March 2019, right?
Giles: March of 2019.
Alex: Got it. Okay. And so what are some of the exemptions?. You talked about the exemptions.
Giles: Sure. So there are a number of exemptions...including hotels and transient housing. The ones our owners are going to care about are, there's also new construction.
So if it's new construction, it is exempt for 15 years after the certificate of occupancy. And so that's basically how this bill passed.
Giles: The 15 years is designed to allow developers to get their money back from their investment. But once the 15 years expires, we are subject to this bill unless you qualify for one of the other exemptions, which would be owner-occupied housing. So, if you have a duplex and you as an owner live in one unit, your entire duplex would be exempt from this. If you have a single-family home that you occupy as well and you're just renting out rooms, you'd be exempt from this. And if you're sharing facilities, such as a rental unit where you're sharing a kitchen or facilities within that, you'd be exempt, even if it's not a single-family home.
Alex: Like student housing?
Giles: Student housing itself has its own exemption.
Alex: Got it.
Giles: Official student housing that's being provided by the university would be exempt, regardless of those. And then the big one's single-family homes, which we touched on in a prior interview.
Giles: So, single-family homes are exempt unless the property is owned by a real estate investment trust (REIT), a corporation, or a limited liability company where one of the members is a corporation. But if you are an individual that owns a single-family home, the rent cap and the just cause ordinance do not apply.
Alex: Got you. So on the surface, the bill seems fairly simple. I mean given the complexity of ordinances that came out in the past and nationwide, this is fairly simple, but as you point out, there are lots of little gotchas in there. There are lots of ways that you can get...exempt from this particular bill. And you can be exempted sometime and not exempt the other time depending on the situation.
So our recommendation is to get a quality property management company who will help you navigate this and, obviously that's what we do. But if you want to see more of our interviews on the subject, we dive a little deeper into these specific topics. Go to Mynd.co and type in AB 1482 and search up on top. Out come the videos Giles and I have done. We'll also be on YouTube.
Giles: There are some gotchas in there, as I mentioned in the earlier videos. So even if you do qualify for one of these exemptions, you've got to make sure you've got the right disclosure language in there that notifies your tenants that you're exempt or else you don't get the benefit of them. So that's really important.
Alex: Absolutely. Thank you guys for watching. Hopefully, this helped you out.
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