- Californian’s will get to decide in the November ballots the fate of the Proposition 10, the so-called “Affordable Housing Act (AHA), which would allow for cities to adopt rent control. The AHA seeks to revoke the Costa-Hawkins Rental Housing Act, which prohibits rent control on buildings built after February 1995.
- Many San Diegan’s believe this would provide an answer to our housing crisis, however, many professionals and economists disagree. This initiative is bad for homeowners and renters and will make California’s housing crisis worse.
- It is estimated that if Proposition 10 is passed, property values will fall 20-25% across the state of California.
- Experts believe rent control would be detrimental to the San Diego economy and would discourage new housing development, further exacerbating the housing crisis.
- Experts also argue that rent control would eliminate many incentives to own rental properties. This could cause harm to both owners and tenants.
- Rent control has already been adopted in several cities around the United States, and the results have proved to be harmful to the overall economy by shrinking supply of affordable housing and driving up rental market prices.
- National City is the first city in San Diego County to try and pass a rent control ordinance (Proposition W). If passed, this could be a watershed moment for other cities in the county to pass such ordinances, further inhibiting our housing supply and placing both renters and owners at greater risk.
Continue reading below to learn more about rent control and the effect it would have on the San Diego economy.
San Diego Rent Control
San Diego is facing a profound housing crisis. Rents keep climbing and supply keeps falling desperately behind demand. According to the San Diego Union Tribune, in March of 2018, the average rent in San Diego County hit an astonishing record of $1,887.
San Diego now ranks as the ninth most expensive market in the United States. Many San Diegan’s are finding it increasingly hard to afford rent and are turning to the government for answers. Their solution? Adopt the Proposition 10 (Affordable Housing Act) and repeal the Costa-Hawkins Rental Housing Act which would allow cities like San Diego to decide on their own rent control measures. The initiative received more than 650,000 signatures and will be placed on the November 6th ballot, giving Californian’s the option to decide on this issue.
Many economists and experts agree that rent control offers no benefits for all parties involved and would be disastrous for our local economy. How would rent control affect San Diego? Let’s take a closer look at the various players in this debate.
Costa-Hawkins is a California state law that was adopted to counter vacancy control ordinances and spur new construction of single-family homes.
It limits how cities set rent control in two ways
- It prohibits cities from putting a rent cap on single-family homes or apartment buildings built after February 1995.
- It gives landlords the right to raise rent prices to market value when a tenant moves out, otherwise known as a vacancy control.
Costa-Hawkins does NOT outlaw rent control. Cities like Los Angeles and San Francisco have been able to adopt some forms of rent control but within the state law.
Source: Union Tribune
What Is Proposition 10 (Affordable Housing Act)?
The affordable housing act has three main objectives
- It aims to restore California’s cities and counties to develop and implement local policies that ensure renters can find and afford decent housing in their areas.
- Improve the quality of life for millions of California renters and reduce the number of people who face critical housing challenges and homelessness.
- Repeal the Costa-Hawkins Rental Housing Act
Supporters of this bill hope that if passed, each California city would begin to pass their own rent control ordinances. In turn, they believe rents will go down, and that many Californian’s will be able to find affordable housing. They believe that increased rents are a result of landlords fueled by monetary greed. This act would allow cities to prevent landlords from increasing rents once a tenant leaves (among other things). Curious what those other things are? We’ll break down what that could look like later in this article with National City.
Source: Affordable Housing Act Website
While it is no question that rents are sky-rocketing and that a solution needs to be reached – allowing cities to pass rent control ordinances is not the answer. In fact, I would argue rent control would just exacerbate the problem.
Why Rent Control Won’t Work
A recent study by the Legislative Analysts Office (LAO) looked at Proposition 10 and said it would lower ALL property values so much so that the state stands to lose 10’s of millions of dollars over the next few years as a result of lower property taxes.
Repealing Costa-Hawkins would lead to shortages in both the quantity and quality of housing. Profits are what incentivize landlords to maintain a building in good shape. If rents are capped at a certain limit, what is the incentive for landlords to maintain the building? Buildings would become neglected and long-term improvements wouldn’t be invested in. This can create unsafe living conditions for tenants.
Rent control would limit property owner’s potential cash flow to dangerous levels. When you think about things like increased expenses and rising interest rates, this could put owners at risk. If the owner can’t make their mortgage payment because rents have been caped, they risk losing their property. This could create a domino effect amongst many property owners. Tenants might also have to look for a new place to live.
There are already many risks associated with owning a multi-family building, so if you factor in rent control, what is the incentive to buy a place? Owners might opt to convert their building into condos if they do not see enough cash flow to turn a profit. This would take away even more rentals from the San Diego market.
In 2016, the Union Tribune asked 14 experts whether they believed rent control would benefit the San Diego economy, all 14 experts answered, “No”. They cited everything from shrinking the supply, decreasing affordability long-term, to driving tenants out to repurpose buildings.
History has shown us that rent control doesn’t work. Look at New York City in the 1970s and 80s. Landlords simply stopped maintaining the buildings, amenities were no longer looked after, living conditions became dangerous, and eventually, entire streets blocks were left vacant. New York’s neighborhoods fell into an economic recession and investment was at an all-time low.
The Impact on Development
What about developers and investors? Would the same incentives remain for them to continue to build new construction if they knew property values would be artificially capped?
A recent CoStar report discussed the impact that rent control could have on development.
“Many developers are concerned about the economic impact there will be on new development if it is subject to rent control… it would change the “whole economics” of how developers view potential development opportunities… It’s hard enough and costly enough for a developer to make a decision to build housing, and now they are put on notice that the housing may be subject to rent regulation… they may very well be unwilling to make those tough decisions of being invested in building a development”.
If developers are unwilling to build new units, which San Diego desperately needs, that is a losing scenario for all parties involved. This would place us further behind meeting the demand for housing. Alan Gin at the University of San Diego argues,
“the problem is the lack of construction of both single-family and multi-family residential units. Controlling rents would reduce the incentive to build more multi-family units”.
If developers see fewer incentives to build housing, they may turn to other development avenues like commercial, retail, office, etc…
The Building Industry Association recently commissioned a study that found that up to 40 percent of the cost of a new home is attributable to the 45 agencies that govern home building in California. This means that on a $5,000,000 project, $2,000,000 is spent paying these 45 agencies that govern homebuilding. Legislation like the California Enviornmental Quality Act (CEQA), while once good intentioned, has proven to be a major roadblock to countless developers.
Rent control not only discourages development, but it would contribute to less affordable housing developments being built. Austin Neudecker of Rev points out that rent control would increase the prices for those who cannot find a controlled unit. New York City and San Francisco are prime examples where soaring rental prices and rampant abuse of rent-controlled housing exists.
Another big concern with rent control is tenants deciding to stay for extended periods of time in their current unit or subleasing it out. This makes it harder for people who need affordable housing to get into units.
A 2017 Standford Study and this LAO report also concluded that rent control does more harm than good. I recommend giving these a read, they provide some valuable insight into what happened in San Francisco and their attempts at rent control.
National City (Proposition W)
Rent control is much closer to home than you may think. The National City Rent Control and Community Stability Ordinance (Proposition W) will be voted on November 6th. This ordinance will halt construction, harm the local economy, and do nothing to help with the housing crisis.
Here is a quick highlight of the ordinance’s pitfalls courtesy of ProtectOurHousing
- Caps annual rent increases at an amount equivalent to the increase in the Consumer Price Index (CPI), but never more than 5%.
- Rolls rent back to Spring 2018 for existing residents that were in their units at that time. This means if you didn’t increase your rents then, you’re locked into those rates.
- Upon receipt of a petition by a tenant or rental owner, the rent may be adjusted upwards or downwards in accordance with the Measure.
- Creates a five-member rent board. At least three members must be tenants in controlled units. There are no seats specifically for property owners. You could, in theory, end up with a 5-member tenant board.
- Creates a per unit fee to support the Rent Board, starting at $120 per unit per year (most existing Rent Boards charge $350 per unit per year). That comes right off your bottom line, while they’re already caping your rents!
- The City Council and City Manager shall have no authority to oversee, supervise, or approve the Rent Board’s budget.
- Requires Rent Board approval for all evictions (little to no recourse should they deny it).
- Property owners who fail to comply with provisions in the Rent Control Measure can be held liable for damages including emotional distress.
- The Rent Control Board will make legal assistance available for tenants related to evictions, Board petitions, hearings, and appeals.
- Enacts Just Cause Protections, limiting an owner’s right to require a tenant to vacate a unit. This makes the removal of problematic tenants very difficult, leaving good residents to suffer.
- Withdrawal of units from the market requires 120 days to 1-year notice and requires relocation assistance of $7,000 and $10,000 if they are elderly, disabled, or have minor children.
- If Costa-Hawkins isn’t repealed but Prop W passes, ALL rental units in National City must pay $80/per year/per unit for Just Cause and also will be subject to relocation fees.
- Owners who move into their own units will also be required to pay relocation costs.
- Duplexes and homes with “granny flat” rentals will be subject to rent control unless the owner lives in one of the units.
- Prohibits Ratio Utility Billing Systems (RUBs), thereby hurting conversation efforts.
- If you decide to renovate the property and put a bunch of money into it, that evicted tenant will have first right of refusal at the market rate which they rented it at before.
As you can see, this list is quite overwhelming. National City could very well set the tone for future rent control ordinances throughout San Diego County. It is imperative this bill does not pass in order to save future cities from this same disaster. There are approximately 70,000 residents in National City and 70% of the population rent. With 25,000 reigstered voters, it is important they are informed of the impact this legislation would have on them.
What A Failure to Kill Prop 10 and Prop W Means for San Diego
A failure to kill Proposition 10 and Proposition W would create a cascading effect. As these fights continue to go on in cities throughout San Diego County, the costs for various associations and professionals to go out and amend these ordinances to find workable solutions would become astronomical. We would be stretching ourselves far too thin. We need to send a clear message by defeating Prop 10 and Prop W and protecting Costa Hawkins.
It’s important to remember that if Prop 10 passes, that does not mean rent control is enacted. It simply allows cities the right to pass ordinances similar to what is trying to be done in National City.
Think about this for a moment. If produce is too expensive, should we limit how much the farmer makes? What about if Apple Computers are too expensive? Do we start paying people who make them less?
The same concept applies to landlords when being asked to accept rent control. Just because rents are going up, it doesn’t mean the responsibility falls on owners and developers.
Or how about this
Rent Control does nothing to empower homeownership. It doesn’t give us more supply and furthermore, it keeps you and your future heirs in a constant state of renting. Is that really what you want?
More permanent solutions lie within increasing zoning, reducing the time it takes to build, and expanding our public transit system and building communities around those transit centers.
Lowering parking space requirements could prove to help as we enter a future where vehicle ownership could decline. Developers fees should be prorated by size. As it currently stands, big and small units face the same fees, which gives developers no incentive to build smaller, less expensive units.
These are just jumping off points but could be great starts to solving what is arguably one of San Diego’s biggest dilemmas. I will be updating this post as more developments arise, so please stay posted.
Where you can get involved
If you know people who have property, or better yet reside in National City, have them vote no on prop W!
Written by Blake Imperl in collaboration with Curtis Gabhart
Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.