By Jonathan Woloshin, CFA, Real Estate & Lodging Analyst Americas, UBS Financial Services Inc.
WOLOSHIN
On 11 September 2019, the California state legislature officially passed statewide rent control. AB 1482, known as the Tenant Protection Act of 2019, passed with significant majorities in the Assembly (46-22) and the Senate (25-10) and currently awaits Governor Newsom’s signature.
Assuming the governor signs the bill – as is widely anticipated – California will join Oregon and New York in instituting wide reaching rent control measures.
Key provisions of AB 1482 include the following.
• Renewal rent increases will be limited to the lesser of 5% plus CPI or 10%. Inflation will be determined on an intra-state regional basis. A tenant must occupy a unit for at least 12 months before the rent can be increased. In addition, the owner of a rental property is prohibited from increasing the rental rate in more than two increments over a 12 month period.
• Upon a tenant vacating a unit, rent can be increased to current market rates. This is what is known as vacancy decontrol.
• Major capital improvements cannot for the basis for rent increases beyond the limits outlined in the bill.
• The rent caps apply to buildings that are more than 15 years old on a rolling basis. Single-family rentals will be exempt unless they are owned by a corporation or a REIT. Additionally on-campus dorms and other building currently governed by more stringent local/municipal rent control laws will be exempt. Further exemptions exist for duplexes where the owner lives in one unit.
• Tenants that are evicted pursuant to an impending condo conversion are entitled to relocation assistance equivalent to one month’s rent. For evictions related to other issues, the documentation burden for landlords outlining the lease violations has been expanded. These are referred to as ‘just cause’ eviction policies.
• The law is to take effect 1 January 2020 and is currently expected to expire until 1 January 2030.
The passage of AB 1482 has elicited a range of reactions from various industry groups. The California Association of Realtors and the National Multi Housing Council has spoken out in opposition to the bill. However, the California Building Industry Association and the California Apartment Association removed their objections pursuant changes to the original proposals.
We have been very consistent in our view that rent control is a sub-optimal solution to addressing shelter affordability. In addition, rent control measures often have unintended consequences that ultimately lead to outcomes diametrically opposed to their intended goals.
Although we continue to believe rent control is a less than optimal solution, the combined forces of substantial new capacity additions and the duration of the economic cycle could keep rent growth below the statutory rent caps of AB 1482 in many submarkets.
In our view a significant percentage of the REIT/institutional quality apartments will be exempt from AB 1482 as a result of the 15-year umbrella.
Older, lower quality units could be more at risk and could see adverse value transaction volume activity and/or value impacts.
That said we continue to believe that, unlike the very restrictive, landlord-unfriendly rent control laws recently enacted in New York that may very likely lead to significant negative outcomes for asset values, AB 1482 could prove less damaging than originally feared.
The aforementioned notwithstanding, the possibility of “the slippery slope” of incremental rent growth restrictions and/or a revisiting of the ballot initiative to repeal Costa-Hawkins in 2020 must be considered. Given the significant shelter affordability challenges and housing shortages California has been experiencing for quite some time, we are hopeful cooler heads will ultimately prevail.
