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  • The debate over whether rent control is the solution to California’s affordable housing crisis is now at an all-time high as Governor Gavin Newsom has signed Assembly Bill 1482 (“AB 1482”) into law. Newsom has said that with AB 1482 California will boast the “nation’s strongest statewide renter protections.”  California is following in the footsteps of New York and Oregon in implementing state-wide rent control to preserve affordable housing as the state’s housing crisis continues to grow.

     

    What does AB 1482 Entail?

    AB 1482 has two central components: a limitation on rental increases and the implementation of “just cause” evictions.  AB 1482 prohibits rent increases beyond 5% plus inflation or 10%, whichever is lower, over any 12-month period.  However, this limitation on rental increases only applies to tenants who have continuously occupied a property for 12 months or longer. The bill also includes a variety of exemptions:

    • Housing that is designated as affordable housing or subject to agreement to provide housing subsidies for those of very low, low, or moderate income.
    • University (public and private) dormitories.
    • Property subject to local rent control laws.
    • Housing issued a certification of occupancy within the previous 15 years. That’s a rolling date, meaning units built in 2006 will be covered in 2021, units built in 2007 will be covered in 2022, and so on.
    • All property separately alienable (i.e. single-family homes) whose owner is not a REIT, a corporation, or LLC.
    • A duplex if the owner occupies one of the units. Second, the bill limits landlords’ and owners’ ability to evict tenants.

     

    For tenants who have occupied a property for 12 months or longer, AB 1482 also requires a landlord to have “just cause” to evict, which includes missing rent payments, a material breach of the lease, damaging the property, or engaging in criminal activity. If a landlord wants to evict a tenant when the tenant was not at fault, such as the landlord moving onto the property themselves, going out of business, renovating or demolishing the property, or a public entity forcing the tenant to vacate the property, then the landlord must pay the tenant one month’s worth of rent or waive the tenant’s responsibility to pay one month’s rent.

     

    How will AB 1482 Impact Residential Real Estate?

     

    Whether AB 1482 is a step in the right or wrong direction depends on who you ask. Many tenants’ rights advocates applaud the bill’s protection against large price hikes and no-fault evictions. “Millions of California renters are just one rent increase or eviction away from experiencing homelessness,” said the bill’s author, Assembly member David Chiu (D-San Francisco). “Just because someone rents doesn’t make them any less worthy of having a stable home.”

     

    In fact, Stanford researchers recently published a study showing that rent control provisions can provide tenants with more stability and on average tenants will remain at the same property for a longer period of time absent rent control. In addition, an Economic Roundtable study of Los Angeles’ Rent Stabilization Ordinance showed that tenants renting property subject rent control were subject to a smaller cumulative rent increases than tenants renting property without rent control.[1]

     

    Despite the smaller cumulative rent increases for rent-controlled property, there is major concern that the rent cap will not protect very low, low, or middle-income individuals and families since a 5% to 8% annual rent increase still imposes a substantial burden for those with stagnant incomes. The concern is that many owners, particularly investment firms and large mom-and-pop investors, will now increase rent annually when absent AB 1482 such owners may have foregone annual increases since forewent profits could be reclaimed in future years.  However, there is evidence that the concern about annual rent hikes may be overblown. A survey completed as a part of Economic Roundtable study revealed that only 39% of landlords managing rent-controlled units increased rent to the maximum allowable amount and 22% said whether they max out rent increases depends on the tenant.[2]

     

    Another concern is that AB 1482 and rent control generally do not incentivize developers to build and therefore increase supply.[3] To many, the root cause of California’s housing crisis is a supply shortage unable to meet demand. In fact, research has shown that rent caps encourage landlords to turn rental units into condominiums for purchase thereby further decreasing supply.[4] If this is accompanied by continued decreases in ground-up developments, the decrease in supply will put substantial pressure on the rental market. As researchers at UC Berkeley’s Terner Center for Housing Innovation cautioned in a July report, “guarding against excessive rent increases alone is not enough to address California’s housing crisis.” The same Stanford study found that San Francisco’s 1994 rent control expansion “reduced the supply of available rental housing by 15%” due to landlords converting properties into condominiums or by making renovations that lead to the property becoming exempt.[5]

     

    Lastly, there is a concern that AB 1482 could cause an immediate surge in evictions. Because the just cause provision within AB 1482 does not apply retroactively, landlords can give eviction notices before January 1, 2020 for no reason at all and increase rent to market value before AB 1482 goes into effect.

     

    What About Local Rent Control Ordinances?

     

    In Los Angeles County, the cities of Santa Monica, West Hollywood, Beverly Hills, Culver City, Inglewood, the city of Los Angeles, and unincorporated neighborhoods of Los Angeles County have local rent control laws. For the most part, the rules will not change. AB 1482 will not override local rent control laws. However, it will cover units that are not already covered by local rent control laws.

    [1] Andrew Khouri, Landlords Say State Rent Caps may Force them to Raise Rents more Frequently, L.A. Times (Oct. 7, 2019 6:00 AM), https://www.latimes.com/business/story/2019-10-07/california-landlords-respond-to-rent-caps.

     

    [2] Andrew Khouri, Landlords Say State Rent Caps may Force them to Raise Rents more Frequently, L.A. Times (Oct. 7, 2019 6:00 AM), https://www.latimes.com/business/story/2019-10-07/california-landlords-respond-to-rent-caps.

     

    [3] Azzi Advisors California Rent Control live webcast, Oct. 10, 2019.

     

    [4] Rebecca Diamond et al., The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, Stanford University (Mar. 4, 2019) at 25, https://web.stanford.edu/~diamondr/DMQ.pdf; Liam Dillon, California Tenants will see Cap on Rent Increases Under Bill sent to Newsom, L.A. Times (Sept. 11, 2019), https://www.latimes.com/california/story/2019-09-11/california-renters-relief-legislation-gavin-newsom-rent-cap.

     

    [5] Rebecca Diamond et al., The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, Stanford University (Mar. 4, 2019) at 25, https://web.stanford.edu/~diamondr/DMQ.pdf.

    For more information contact:

    Jeffrey B. Love, Esq.

    Gibbs Giden Locher Turner Senet & Wittbrodt LLP

    1880 Century Park East 12th Floor

    Los Angeles, CA 90067

    310-552-3400

    email: jlove@gibbsgiden.com

    Jeff Love is a partner with the firm. His practice encompasses all facets of real estate transactions, including drafting and negotiating purchase, sale, syndication, and financing transactions in connection with commercial, industrial, and residential assets. He also regularly drafts and negotiates office, retail, and industrial leases for regional landlords and tenants throughout the West Coast. Mr. Love has extensive experience drafting, negotiating, and reviewing real estate loan documents, including originations, modifications, note purchase agreements and other finance-related transactions from structuring through loan closing. He is a licensed real estate broker in the State of California.

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