Real Estate

Real Estate – John M. Lee

Impact of State Rent Control

By John M. Lee

In an attempt to battle the rising rent and the housing crisis, the California legislature passed AB-1482 in September which will put a rent cap on properties statewide and make it harder to evict a tenant after 12 months of occupancy. California Gov. Gavin Newsom is expected to sign it in October. While changes and amendments can be made until it becomes law, we have a good idea what to expect. 

 The bill will apply to all residential properties except for the following:

• Single-family homes and condos that are owned by individuals and not by corporations or LLCs;

• Duplexes where one unit is occupied by an owner;

• Homes built within the last 15 years;

• Government assisted housing;

• Owner-occupied homes where two or fewer rooms are rented out.

 The rent will be capped annually at 5 percent plus the consumer price index (CPI), but not to exceed 10 percent total. The bill also prohibits owners from terminating a tenancy without “just cause” after the tenant has lived there lawfully for 12 months. Just causes would include scenarios where the tenant breaches the rental agreement, such as non-payment of rent, becoming a nuisance and violating other terms in the lease. 

 In addition, the owners also may evict tenants if the owners plan to move into the property, sell the property to someone who intends to live there or substantially remodel the property so that tenancy during the renovation is impossible. For these cases, the owner will be required to pay the tenant’s relocation expense by providing one month’s rent directly to the tenant or waiving the last month’s rent for the final month of the tenancy. 

 And lastly, in areas currently with rent control that provides a higher level of protection to tenants than this statewide law does, the local ordinance would apply. 

 In San Francisco, our rent control laws are stricter than this state version. Our rent increases are limited to 60 percent of CPI and our tenant relocation fees are higher than one month’s rent, so this new state law will not have much impact on our properties, except for properties built between 1979-2004. These will now fall under statewide rent control because they are exempted from San Francisco’s rent control laws.

 Our state legislators have good intentions in keeping housing more affordable for tenants. But capping rents and not letting the market work may have unintended consequences in the long-term that will lead to higher rents and other problems.

Our experience with rent control in San Francisco include many tenants who have lived in a unit for a long time who might never move because the rent falls below market rate. This limits the rental supply on the market, resulting in skyrocketing rents in the vacant units, as we are experiencing now. There are even tenants who have purchased properties but who have decided to stay in their existing unit while renting out the property they own because it makes more economic sense.

 Will this happen to rentals statewide also? Legislators are saying that because the rent increases are capped at rates higher than inflation, this will not happen. But, by limiting supply, rents will eventually increase more due to the same demand and less supply. The only question is how much more?  We will not know the answer until 10-20 years from now when we see the results. My guess is that rent levels will be higher than it would have been without statewide rent control.

 Our current housing crisis did not happen overnight, but it is because California has a good diverse economy, moderate climate, job opportunities and desirable places to live, and thus people want to live here. Our legislators have good intentions but fell short of solving a complex problem with statewide rent control. It will take a lot more brainstorming and tough decisions to correct this situation and solve our housing crisis.

John M. Lee is a broker at Compass specializing in the Richmond and Sunset districts. For real estate questions, call him at (415) 465-0505 or email john.lee@compass.com.

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