Introduction:
California Governor Gavin Newsom recently signed a statewide rent control law that not only limits rent increases but is also creating a lot of buzz from strong proponents to die-hard detractors and everyone in between. There are plenty of opinions on both sides of the issue and questions swirling about as to what the law really means and who it will ultimately serve. For instance;
This new law is the latest in a surge of initiatives springing up nationwide that are supposed to address the affordable-housing crunch. It was pitched, not so much as the end-all solution, but as a step in the right direction. Advocates hope it will stop sudden and steep rent increases, as well as no-fault evictions that, in some cases, were being used to empty entire buildings so that owners / landlords could re-rent to higher-income households.
To get some perspective on this new law, I’ve peeled back the layers to answer some of the most pertinent questions, particularly what this means for multifamily investors/owner.
If you take rent control at its core, investors /owners of multifamily as well as many economists oppose it at face value. Investors / owners see rent control as having the ability to diminish the value of their properties, particularly when the market conditions support rising rental prices. Economists argue that the message of rising rental prices is to build more housing rather than control rent increases. In fact, rent control can have a negative impact on renters.
The new law might serve as a call to action. It could serve as a catalyst for owners / landlords to take some overdue actions as it relates to problem tenants or below market rental prices.
Additionally, the new law has some limitations that may be viewed as positive for investors / owners.
On the negative side;
Conclusion: There are plenty of stories of unscrupulous landlords raising rents and evicting without cause just as there are stories of deadbeat tenants. Like most things in life, we should seek to strike a balance between tenant rights and owner/investor opportunity. If the rental market is going up, investors and landlords should not have their hands tied when it comes to maximizing the value of their property or their profits. The scariest part of this whole thing is that it was passed into.
If you are one of real estate investors, you know that there is a housing shortage not only in California but across the nation. In many cities it has reached a critical level.
Some experts are even saying it has reached crisis proportions. While this has created opportunities for real estate investors, rents have been steadily rising, it has also created challenges for communities, home buyers and renters. The challenges have gotten so big that we are now starting to see a newly energized pro-tenant movement among tenant advocates and local governments.
If you are already an owner / real estate investor in long-term rental property or multifamily properties, it is becoming increasingly important to understand current and planned tenant protections in your local area. Rent control and tenant protections are nothing new and most agree that solutions to the affordable housing crisis are needed. However, some of the approaches being taken, while potentially helping renters in the short-term, will have a negative long-term impact on the value of properties and may even end up hurting renters and communities in the long run.
To illustrate the extent of this newly energized pro-tenant movement, we need look no further than Glendale, California. A Right to Lease ordinance was adopted by the Glendale City Council in February 2019. The ordinance spells out the amount a landlord must pay a tenant who opts to leave after receiving notice of a rent increase of 7% or more. The amount the landlord is on the hook for depends on the number of units owned, how long the tenant has lived in the unit and how much money the tenant makes. The ordinance is a bit complicated but generally mandates the following when a tenant decides to move after receiving notification of the rent increase.
An exception to the above is made when tenants’ income exceeds Los Angeles County’s median income. For these higher earning tenants, landlords will be required to pay three months of the proposed rent no matter how long the tenant has lived in the unit.
The way in which this ordinance is structured seems to hurt the “good-guy” landlord the most; the property owners that kept their rents below market rate. When these “good-guy” landlords are ready to refinance or sell, they will not get the fair market value for their property.
There are examples of the pro-tenant movement elsewhere in California and across the nation. Menlo Park and Mountain View also instituted similar ordinances although Mountain View has since cancelled their Right to Lease ordinance.
After New York state instituted a new rent reform law community banks that lend to apartment companies suffered declines in their stock prices as real estate investors worried about increased risk on those loans.
Conclusion
The affordable housing shortage is a big and growing problem that isn’t likely to go away anytime soon. Most of us want to find smart solutions to this problem. Solutions that will help those in need of housing without hurting those who are in the business of providing housing.
As an owner or real estate investor, a good first step is to make sure you stay up to date on pro-tenant movements and ordinances wherever you have property or investments.
If you have been a good-guy landlord, it may be a better strategic move to keep rents closer to the market rate. If you are worried about tenants leaving, you may be able to keep them by offering other incentives.
An increasing number of cities throughout Southern California are adopting mandatory seismic (also known as earthquake retrofit) ordinances.
The latest city to do so was Pasadena, which passed its ordinance in June. These ordinances are not new, but there does seem to be an uptick in the number of cities moving forward to put mandatory ordinances in place. Cities first started discussing and then enacting these ordinances in response to the poor performance of certain classes of structures during the big earthquakes to hit California; the 1989 Loma Prieta and 1994 Northridge earthquakes.
A seismic ordinance is a law passed by local authorities requiring the evaluation and retrofit of specific building types proven to be vulnerable to seismic events. The intent of these ordinances is to improve the safety of occupants and reduce the damage that will occur when the next big earthquake hits. These ordinances outline minimum requirements to improve the safety of “vulnerable” buildings. The focus is on improving the safety of occupants by increasing the likelihood that they will be able to exit the building safely during an earthquake. These ordinances are generally not intended to meet current building code requirements.
Of course, all stakeholders; owners, landlords, investors, lenders, occupants and cities, want their buildings to be safe in the event of an earthquake or any other natural disaster. But safety comes with a price. If you own / invest in a property subject to a retrofit ordinance, there are several costs to consider. There is the expense of conducting the evaluation and then the cost to complete the work necessary to make the improvements. Most of the ordinances have a schedule for getting the evaluation and improvements completed and a building owner could be assessed penalties if the deadlines are missed. Add to that the loss of rental income while the improvements are being made.
The ability to obtain financing for a property that will require a retrofit will also become more difficult. Most lenders will check the records to see if the property is on the retrofit list. Many of these lenders will require a written plan of action by the borrower. Some lenders will even require a copy of the engineering report and proposal and may not release funds until the work is completed.
Stay informed. Contact your local government officials for more information on current and future earthquake retrofit ordinances.
Los Angeles – A seismic ordinance was passed in October of 2015. This ordinance requires retrofit of over 15,000 soft story and non-ductile concrete buildings. Buildings deemed most vulnerable have been identified with the following criteria:
Costs
Pasadena – A seismic retrofit law went into effect last month; June 2019.
Schedule: Owners have 3 years to submit plans and obtain retrofit permits; 7 years to complete the retrofit.
Buildings not brought into compliance according to the schedule will be declared unsafe. Violation of any provisions may result in fines and / or imprisonment.
West Hollywood – The city of West Hollywood has two ordinances that became effective in 2018. Ordinance 17-1004 establishes the mandatory provisions for strengthening existing wood-frame buildings with soft, weak, or open-front walls. The ordinance also contains provisions for cripple walls and sill plate anchorage in existing wood-frame buildings. Ordinance 17-1011 establishes the mandatory provisions for strengthening non-ductile concrete structures. The ordinance also contains provisions for buildings constructed with pre-Northridge steel moment frames.
Santa Monica – The city of Santa Monica passed a comprehensive seismic retrofit program on March 28, 2017. In addition to wood-frame soft-story structures, the program also addresses unreinforced masonry, concrete tilt-up, steel moment frame, and non-ductile concrete buildings.
Burbank – The city of Burbank has established three mandatory programs that affect commercial construction only. Currently, the ordinance affecting light wood-framed residential construction is voluntary. The requirements can be found in Burbank Municipal Code Title 9, Chapter 1, Article 7. The mandatory sections included retrofit requirements for unreinforced masonry buildings, reinforced concrete & masonry buildings and welded steel moment frame buildings.
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