Rent control is a well-known fact of life for California landlords. What people might not realize, however, is that local rent control policies are guided by a state law known as the Costa-Hawkins Rental Housing Act of 1995. Municipalities can layer in their own rent control restrictions; but at a minimum, local policies must abide by the baseline standards set forth in Costa-Hawkins.
Costa-Hawkins has been around for more than two decades, so why are we talking about it now? Well, late last month, the state introduced a new piece of legislation—Assembly Bill (AB-1506)—that would scrap Costa-Hawkins altogether.
You might be thinking, “No more rent control?! Yippee!”
Not so fast: If AB-1506 passes and Costa-Hawkins is repealed, it could have major ramifications for California landlords and property owners. Here’s what you need to know.
Rent Control in California
Before Costa-Hawkins, municipalities could adopt either “moderate” or “strict” rent control policies. Moderate rent control limited a landlord’s ability to increase rents on existing, ongoing tenancies. Municipalities with strict rent control also limited the rent that a landlord could charge on the open market, even after the apartment had been vacated by the outgoing tenant.
Costa-Hawkins created a set of uniform rent control regulations that municipalities across the state were required to abide by. Notably, Costa-Hawkins has prevented cities and towns from adopting extremely restrictive rent control policies, which include:
- Regulating initial rental rates and rates established after a voluntary change in tenancy;
- Rent controls on newly constructed housing (built after February 1, 1995); and
- Rent controls on single family homes and condos if the tenancy began after January 1, 1996.
AB-1506 & the Push to Repeal Costa-Hawkins
Proponents of AB-1506, which was authored by Assembly Member Richard Bloom (D-Santa Monica), contend that Costa-Hawkins unfairly ties the hands of municipalities trying to deal with runaway housing costs at the local level. Advocacy Group Tenants Together calls Costa-Hawkins a “major barrier to strong rent control and universal displacement protections.” AB-1506 will help to stabilize communities, they say.
Opponents disagree, calling the legislation misguided. They worry that stricter rent control laws will deter investors and limit new construction—the exact opposite of what is needed if California is trying to increase its housing supply and create affordable housing.Will California scrap rent control regulations? Find out on the #BuildiumBlog! Click To Tweet
AB-1506: The Potential Ramifications
AB-1506 has California landlords on edge. Specifically, they’re worried that repealing Costa-Hawkins will eliminate their ability to bring rental units up to market rent when a resident voluntarily moves out. If AB-1506 passes, it could significantly impact landlords’ cash flow.
Other potential ramifications include the following:
- Investment in new construction could grind to a halt. New apartments will be subject to rent control, and taking away a landlord’s ability to set rental rates could halt new projects in their tracks. Project margins are already narrow in California due to high costs of land, labor, and other regulatory obligations. “No one with any sense is going to buy or build rental property in California while state lawmakers are proposing to unleash rent control. The conversation alone could reduce the supply of housing,” writes Susan Shelley in an op-ed for the LA Daily News.
- The resulting lack of new construction will further exacerbate California’s affordable housing crisis. A report released by the nonpartisan California Legislative Analyst’s Office in 2015 stated that “the key remedy to California’s housing challenges is a substantial increase in private home building in the state’s coastal urban communities.”
- Some landlords might try to cash out quickly before new rent control regulations can be adopted. This could mean evicting tenants and converting rental units to condos as a way to maximize profit before exiting the industry (or at least the California market) altogether.
- Reduced cash flow could make it harder for landlords to reinvest in their properties, leading to delayed maintenance and repairs. Local housing inventory will start to deteriorate. At a public meeting on March 3rd, a group of landlords confirmed this sentiment, saying that AB-1506 threatens to put them out of business altogether.“This is the same sort of law that caused thousands of units to be abandoned across New York City, the owners just couldn’t maintain their buildings,” said Noni Richen, president of the Small Property Owners of San Francisco.
- Without the baseline that Costa-Hawkins created, municipalities will be free to adopt new rent control regulations on an ad hoc basis. Policies could vary drastically from city to city, and this increases the cost of compliance for landlords who do business across jurisdictions. These costs are inevitably passed on to renters, further driving up housing costs.