California has just passed a statewide rent control bill which is expected to be signed by governor Gavin Newsom shortly taking effect January 1, 2020. The bill sets annual limits on rent hikes and creates stipulations to the just cause eviction law.
Rent Hikes – Over the course of any 12-month period, property owners are prohibited from raising the gross rental rate for a unit by more than 5% plus the percentage change in the cost of living in the region the property is located. In the LA basin area this is 3.33% + 5% cap = 8.33% permissible increase annually. Percentage change in the cost of living will be the percentage change from April 1 of the prior year to April 1 of the current year in the regional Consumer Price Index for the region where the property is located, according to the US Bureau of Labor Statistics. These limitations apply to all rent increases occurring on or after March 15, 2019. In the event that an owner increased the rent by more than the allowable amount between March 15, 2019, and January 1, 2020, the applicable rent on January 1, 2020, shall be the rent as of March 15, 2019, plus the maximum permissible increase.
Just Cause Eviction – Owners will be prohibited from terminated any tenancy without just cause, as defined by a list of specific reasons, that are either “At-fault” or “No-fault”. At-fault just causes include non-payment of rent, breach of a lease, causing a nuisance, committing waste, refusing to extend or renew a lease, criminal activity, subletting without permission, refusal to allow an owner to enter per state law, or using the premises for an unlawful purpose. No-fault just causes include an owner’s intent to occupy a unit as their primary residence, withdrawal of the unit from the rental market, the owner complying with a government order, or the intent to demolish or “substantially remodel” a property. “Substantially remodel” is defined as “The replacement or substantial modification of any structural, electrical, plumbing, or mechanical system that requires a permit from a governmental agency, or the abatement of hazardous materials, including lead-based paint, mold, or asbestos, in accordance with applicable federal, state, and local laws, that cannot be reasonably accomplished in a safe manner with the tenant in place and that requires the tenant to vacate the residential real property for at least 30 days.” For tenancies that are terminated for no-fault just causes, the owner is responsible to pay the tenant relocation assistance equal to one month of the tenant’s rent. This relocation assistance will be credited against any other relocation assistance required by any other law.
Implications – The passing of this statewide rent control ordinance will make major value add renovations more expensive as it requires a one month’s vacancy period for the units being remodeled, whereas previously investors would remodel as fast as possible to reduce the total vacancy period. This will subsequently slow the time it takes to raise rents to market. Another interesting implication is that rent control has historically caused cap rates to increase in the short term and cause long term increases in value above the non-rent controlled comparable neighborhoods, this concept will be explored more in the next blog post titled: “Cap rates to increase short term due to statewide rent control”. You can find the official statement on these issues from Buckingham Investments CEO Anthony Walker and more here- https://www.buckinghaminvestments.com/statewiderentcontrol/