Costa-Hawkins Repeal Hurdles One Step Further
Written by Peter Strauss of Iconic Investments
It's happening! The repeal of the Costa-Hawkins Rental Act will be on the November 2018 ballot. On the steps of Los Angeles City Hall this week, the AIDS Healthcare Foundation, alongside Mayor Eric Garcetti, announced that they successfully collected over 565,000 signatures, exceeding the required 365,880.
In case any of you are not familiar with the ballot initiative, it would give cities in California the right to revisit their rent control laws, and stronger rent control laws will limit landlords' ability to increase rents. Worst case scenario for landlords would be the removal of vacancy decontrol, which would strip them of their right to raise rents to market when units become vacant. Rent increases on vacant units would be kept to a marginal increase above what the previous tenant was paying. For non-rent controlled properties, “no cause evictions” will most likely be eliminated. Limits on the number and amount of rent increases per year are also expected.
“Our hands right now are tied,” said Mayor Eric Garcetti. “For 15 years, people have asked me, ‘would you like that control?’ and I said ‘absolutely’, because we know better on the streets we live and the communities we call home. I know we can get this done in November.”
Having the Mayor give his “full support” for the ballot initiative, and the overhaul of rent control laws, is going to make it that much harder for groups like the Apartment Owners Association and AGLA to fight the repeal effort. I’ve written a number of article about Costa-Hawkins. I even interviewed Michael Weinstein of the AIDS Healthcare Foundation. So I’m frequently asked how apartment owners can hedge themselves against the ballot initiative. Here is what I suggest:
Tenant Buyouts “Cash for Keys”: This has become the most commonly used method by landlords to create vacancy and unit turnover. Landlords have the legal right to approach tenants and offer them a sum of money – whatever the landlord decides to offer. Assuming the tenant accepts, the tenant will relocate and vacancy will be created. Keep in mind: The tenant is not obligated to move, nor is there a statutory amount you have to pay. It is purely a mutual agreement between you and the tenant. The agreement needs to be registered with the City, and tenants have a 30-day recession period after the agreement is signed.
I recommend landlords use this to their advantage as a safeguard against the rollback of Costa-Hawkins. It will allow landlords to greatly increase their existing rents (rent rolls) and mitigate the impact of the City taking away vacancy decontrol and/or limiting rent increases. Assuming the tenant agrees to a $25,000 relocation fee, plus an additional $20,000 to renovate the unit to achieve market rents, an increase in rent of $400 per month/$4,800 per year at a 5.5% Cap Rate increases the value of the building by $87,000. This will add value to the property and alleviate the downside risk of the rollback.
Rent Increases: I know many owners who are fearful to give rent increases if their rents are close to market, or they feel bad for their tenants and don’t want to raise rents — which I can respect. This could be a very costly mistake, however, if Costa-Hawkins is repealed. Make sure to stay current with all rent increases, even if the amounts are small.
Support Apartment Associations: One thing I’ve noticed is that most landlords have good intentions, but collectively as a group, they have trouble forming a powerful pack to fight against issues like the Trash Monopoly and other ballot initiatives. So, make sure you donate to organizations like AOA or AGLA — specifically to their political action funds. They will be fighting the fight for you.
Sell/Exchange: If you’re on the fence about selling any of your properties, you might want to seriously consider it. If the ballot initiative is successful, the benefit of apartment buildings having “upside in rents” will quickly vanish, causing property values to drop. Also consider exchanging into other rental markets outside Los Angeles.
Many apartment building owners have taken this ballot initiative lightly. But it’s time to wake up and smell the coffee — do what you can to protect yourself against the Costa-Hawkins repeal as the threat is now real. Groups like the AIDS Healthcare Foundation have made it their mission to protect tenants and will not stop until further rent control laws are adopted.
Iconic welcomes the opportunity to provide you with professional opinions of value for your properties. All information will be held confidential.
