State of the States Rent Control Fight & Other Multifamily Concerns

Rent Control Update: There are some investor wins, if only temporary, in the fight against rent control. The Glendale City Clerk rejected nearly 40% of the signatures that were collected to place rent control on the November ballot. Those leading that campaign have vowed to continue to petition the city council to enact their legislation. In addition, rent control activists in Inglewood, Long Beach, Pasadena, Pomona and Santa Ana also failed to gather the necessary signatures to get their own rent control measures on the November ballot. Though positive for now, most will continue to work towards getting their legislation on the ballot for the 2020 election.

Costa-Hawkins: Where activists did succeed, unfortunately, is in placing Proposition 10 on the statewide ballot. The passing of Prop 10, the repeal of the 1995 Costa-Hawkins legislation, would open the floodgates that are currently holding back extensive and restrictive rent control throughout California. The 58 counties containing 482 municipalities in the state will all be free to impose any rent control regulations they see fit. It will vary from county to county and city to city. Nothing would be standardized and if Prop 10 passes, we expect builders to freeze any plans for new housing development. Currently there are 12 cities with some form of rent control including Beverly Hills, Los Angeles, Santa Monica and West Hollywood. Costa Hawkins prohibits vacancy control and imposing any control on post 1995 construction.

As a reminder, Costa-Hawkins ended vacancy control in Santa Monica and West Hollywood and prevented it statewide. Its repeal will allow Santa Monica and West Hollywood to begin enforcing vacancy control immediately and allow other cities to follow suit. This price fixing forces landlords to subsidize housing because these same municipalities failed to encourage more work force and low income housing construction. High rent levels are not the landlords fault nor should they be controlled by a failing bureaucracy. The increasing rent levels are a direct result of the burdensome overregulation of new housing projects which has limited new multifamily construction for decades. High rents are not due to landlord greed. High rents are due to government ineptitude. These municipalities are trying to control the price of housing and subsidize tenants who buy a new $1,000 iphone every year. Where are the price controls on other commodities?

Los Angeles Mayor Eric Garcetti said he would “absolutely” consider extending rent restrictions to newly built apartments if Costa-Hawkins is reversed. He said that it “seems to be unjust” if you are “lucky to win that lottery” and find a rent controlled property as opposed to a renter in a new building with “zero protections”. Garcetti does not seem to grasp the economics of multifamily development in Los Angeles. On the one hand he wants to approve 100,000 new apartment units by 2021. On the other, he will shut down development of those units by expanding rent control to new projects.

On the positive side, at the time of this publication proponents of Prop 10 raised $13.4 million while opponents have raised $36.7 million.

 Counties Implementing Rent Control: Rent control is now going beyond the cities into unincorporated areas of Southern California. The Los Angeles County Board of Supervisors approved a temporary 180 day, 3.0% rent increase limit on the 50,000+ apartment units in unincorporated Los Angeles County. This does not include properties built after 1995 (as per Costa-Hawkins) but that could change to include those units if Prop 10 is approved by the voters. The ordinance is expected to be drafted by mid-November and will require a second vote to finalize.

 Proposition 13 Split – Looking ahead: Currently under review by the California Secretary of State are the 850,000 signatures gathered by activists to place the split tax roll proposition on the 2020 ballot. This measure seeks to repeal Proposition 13 for certain commercial and industrial properties. Again, proponents of the bill are looking for landlords to bail out the bureaucrat’s failure to operate within its means by taxing investors to the tune of an estimated $6 to $10 billion annually. In all likelihood, this measure will make it to the ballot and has a very good chance of passing. The split roll Prop 13 repeal will increase the costs and the difficulty of doing business in California. Commercial rents will need to increase to compensate for the massive property tax increases. Those businesses will need to increase prices according or shutter their doors. Ultimately, the consumer will pay for the property tax increase through higher prices and less competition. In addition, new construction will certainly slow or halt altogether as projects barely pencil out as it is without the uncertainty of future annual property tax hikes. This split roll proposal would add property taxes to the list of already some of the highest tax rates in the nation in the form of gas, sales and income taxes. This will only fuel the continuing exodus of business from California.

 Interest Rates: The 12 –MTA is the Moving Treasury Average. It is commonly used as the baseline index for multifamily loans. Since November 2016 the 12 MTA has moved from 0.6% to 1.95%, an increase of 225%. We all anticipated that interest rates would not remain as low as they were forever. However, an average 10% increase per month over each of the last 22 months is significant and does impact investor decision making.

Overall, the news it not all bad for multifamily investors but there are dark clouds on our horizon. Vote No on Proposition 10 in November and continue to fight against the continuing push to over regulate our business.