Welcome to rent control

In 2018 these one-bedroom apartments on 15th Street in Hermosa Beach, one block from the beach, rented for under $2,0000. Photos

Rent control retroactive to March 15 is in effect statewide. The winners and losers are not always whom you might expect

 

Broker, Manhattan Pacific Realty 

Rent control is now a reality in California. On Oct. 8, Governor Gavin Newson signed Assembly Bill 1482. Among the bill’s provisions are limits on rent increases and restrictions on evictions.

For landlords hoping to quickly increase rents to avoid complying with the new law, it’s too late. The law is retroactive to March 15, 2019.

How will statewide rent control affect the South Bay?

Very little.

In terms of affecting property owners, tenants, and the value of income property investments, I do not think there will be a meaningful impact.

In comparison to the tenant-friendly Rent Stabilization Ordinance (RSO) laws in the City of Los Angeles, the new state law is a piece of cake for landlords, but a step in the right direction for tenants.

There are three factors that landlords and tenants need to focus on with this new law:

  1. Rent caps
  2. No-fault evictions and no-fault just cause evictions
  3. Relocation assistance

Rent Caps

Rent increases can be no greater than 5 percent plus inflation. Roughly speaking, rents will be capped at about 7.5 percent annually.

You rarely ever see rent increases greater than 7.5 percent from landlords who plan to keep their tenants.

The city of Los Angeles has allowed only 3 percent rent increases for years and just this year approved 4 percent.

State lawmakers are allowing landlords much higher rent increases than rent control laws in most bigger cities, while protecting tenants from egregiously high increases.

The swimming pool that served this 1959-built apartment house on 15th Street, Hermosa Beach has been replaced by a well-appointed outdoor patio.

No-fault evictions, no-fault just cause evictions

The no-fault evictions and no-fault just cause evictions are the biggest item in this new bill.

No-fault evictions mean a tenant cannot be asked to move unless they are at fault. Obvious reasons for an eviction are non-payment of rent or violating the terms of a lease.

No-fault, just cause evictions to allow a landlord to remove a tenant from a unit legally, even if the tenant is not at fault. 

The State standards for no-fault, just cause evictions are very very weak when compared to the city of Los Angeles’ laws.

In Los Angeles, there are only 12 legal reasons for no-fault, just cause evictions. As an example, in the City of Los Angeles, you could have an underpriced unit that has a market rate of $2,000 a month that a tenant has lived in for the past 30 years at $500 a month. If you were to invest $75,000 to remodel the unit, the tenant could move back into the newly remodeled unit and continue to pay $500 a month.

That is not the case under the new State rent control law. 

The State law allows just cause no-fault eviction for “Intent to demolish or substantially remodel.” This includes improvements that require a permit and abatement of hazardous materials, 

This is a massive loophole for landlords. Landlords and apartment flippers who have outrageously low rental rate (which is normally a long-term tenant in an old building), can make plans to “substantially remodel” a unit, with a very low hurdle, by pulling permits and doing work that takes longer than a month.

With the new law, you will likely see landlords and flippers pulling more permits for remodels that would have previously been done without permits.

Relocation Assistance

If a landlord wishes to complete a no-fault just cause eviction, they must pay tenants’ relocation assistance.

In the City of Los Angeles, relocation assistance runs between $8,500 and $21,200 per tenant.

The new State law requires landlords to pay one month’s rent for relocation assistance. Tenants paying $500 a month will receive $500.

Like the just cause, no-fault evictions, this part of the law is fairly weak, compared to other rent control laws like those in the City of Los Angeles.

In my opinion, State lawmakers botched this part of the rent control bill.The lowest rent tenants, the ones at greatest risk, get the least  assistance. Lawmakers should have required a rent survey or medium area income requirement to come up with a reasonable payment for all tenants, regardless of their rent.

Winners and Losers

Who are the winners and losers from this new rent control legislation?

The Winners:

Landlords: Rent control is never a good thing for landlords, but this law is nowhere near as onerous as the City of Los Angeles rent control, and offers plenty of loopholes to continue business as usual.

Subcontractors: landlords who want top of the market rents will be hiring electricians, plumbers, and other subcontractors to pull permits and improve their units. Visit sites like https://a-lumination.com/electrical-services/electrical-panel-upgrade/ to know more.

Lawyers: Since this is new legislation, there will be plenty of lawsuits to clarify language in the new bill and set precedents for what is legal and not legal.

Professional investors: This law further complicates residential income property ownership and management, which is favorable to professionals. 

Problem tenants: Whenever you add more restrictive rules and laws, problem tenants will take advantage of them. Bad tenants who would normally get a 60-day notice to vacate will now have more tools to extend their stay.

Developers: Since property newer than 15 years old is not subject to rent control, there will be an  incentive to build. If the state of California does not solve its housing supply problem, new buildings that can charge top of the market rents will be gold.

The Losers:

Under-market tenants: The severely under market tenants whom legislators are trying to protect, are the biggest losers. The lower the rent, the lower the relocation fee, and the bigger the upside for a landlord or investor. Rather than getting rent gouged with huge rent increases, tenants will be given notice and will have to find a market-rate unit with very little assistance, which might be worse than getting a large rent hike for some. 

City building departments: Now that landlords will be pulling more permits to remodel property and achieve market rents, city building departments will see their workload increase. This will be a challenge for understaffed and underfunded building departments and slow down construction for everyone.

Anyone who purchased property between March and September of 2019: On the MLS alone, there were close to 3,000 income properties sold in Los Angeles County during this seven month period. Many of these buyers expected to be able to raise rents without a substantial remodel budget. With the retroactive rent control date of March 15, 2019, many new owners will be stuck with property that does not earn the return they expected or properly budgeted for at the time.

Mom and Pop landlords: The little guys who may have spent a lifetime saving up for a triplex for retirement or who want to live in one unit and rent out the others will be punished. Without deep pockets, most will likely get financially hurt due to legal and remodeling costs, or just not earning as much income as they expected due to lax management.

Conclusion

Both landlords and tenants can claim victory with the new law.

Landlords can celebrate the low relocation assistance fees and the weak just cause, no-fault rules that act as a major loophole for them to get units up to market rate.

Tenants can celebrate because the biggest hurdle to rent control was making this first step. As the pendulum swings one way, its momentum tends to continue. Tenants will call it “progress” while landlords will call it a “slippery slope.” The benefits of the new law is huge for tenants in the future.

But for now, this new law is not a game-changer for residential income property. It will barely move the needle for values of what were once non-rent-controlled buildings.

It is hard to see how this new law will significantly change the day-to-day business between landlords and tenants.

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