Multifamily Owners Brace For Another Rent Control Battle

The California multifamily industry is preparing for another costly fight against a new rent control initiative on the November ballot.

Earlier this month, the Rental Affordability Act, backed by AIDS Healthcare Foundation owner Michael Weinstein’s Housing Is A Human Right organization, gathered 1 million signatures to qualify its latest measure that, if passed, would expand rent control in the state.

The RAA would give municipalities the power to implement and expand rent control policies that limit how much landlords can hike rent each year. It would also allow vacancy control, which limits how much a landlord can increase rent when a new renter moves in. Currently, when a tenant moves, the landlord is able to bring that unit to market-rate pricing.

“We’re back with the Rental Affordability Act because we know the crisis of housing affordability and homelessness has not gotten better. In fact, it’s gotten worse,” Housing Is A Human Right Campaign Director René Christian Moya said. “Because of that, we know the current solutions by the political establishment in Sacramento are insufficient.”

Apartment Association of Greater Los Angeles Executive Director Dan Yukelson called the RAA a "potentially disastrous" housing initiative.   

“After spending nearly $100M on campaigns for and against Proposition 10, which an overwhelming majority of Californians rejected just over a year ago, we are again nearing another costly political battle over the same issue on this November’s ballot,” Yukelson said. "All of this expense in the name of homelessness and affordable housing, yet the ballot initiative does not create one unit of housing, let alone affordable housing."

Steven Maviglio, spokesman for No On Prop. 10: Californians for Responsible Housing, said the new initiative will make housing in the state worse.

The introduction of a new ballot initiative from the same backers is not only a broken record, Maviglio said, it's a bad record.

“This is the point we made last campaign, the underlying foundation of this initiative will take housing off the market,” Maviglio said. “This will stunt the construction of new affordable units and make it worse for renters.”

The RAA initiative comes two years after the defeat of Housing Is A Human Rights’ Prop. 10, an initiative that would have repealed the state’s Costa-Hawkins Rental Housing Act. Passed in the mid-1990s, Costa Hawkins is a law that prohibits cities from enacting rent control on residential homes, condominiums and apartments built after 1995 and allows vacancy "de-control," or allowing units to be priced at the going market rate when vacated.

About 60% of voters voted against Prop. 10 in 2018. Opponents of the measure spent $72M to defeat the measure. Proponents spent about $25M, according to Ballotpedia. The following year, Gov. Gavin Newsom signed AB 1482 into law. It caps the amount a landlord, the owner of multifamily buildings (not built within the last 15 years) and corporations that own single-family homes can raise the rent at no more than 7%, plus inflation, a year.

A snapshot of what that means: had the new law come into effect in Los Angeles last year, the rent cap would have given landlords the ability to raise rent by 8.3%. In San Francisco, the cap would have been 9%, according to the LA Times. The new law also strengthened tenant protections. Landlords will now need to have “just cause” to evict tenants.

The newest attempt to regulate housing in California is part of a broader movement happening nationwide, with Oregon, New York, and other states and cities across the nation exploring various types of rent caps or rent control.

"Rent control, gentrification, is big news right now," Onyx Relocation President Shelby Istrin said. Istrin will be speaking at Bisnow's State of the Los Angeles Multifamily market on Feb. 27. 

"This is country-wide news, this is part of the election now ... But we know the macro effects of increased regulation will result in a development slowdown, followed by a supply constraint and raising rent and increased tensions between landlords and tenants," Istrin said.

Housing Is A Human Right's Moya said that rising homelessness and plummeting affordable housing stock are signs that the state is still not doing enough. Moya said the RAA is different from the Prop. 10 measure from a couple of years ago, because it is more moderate, a change that came after Prop. 10's defeat, when the group went back to the drawing board and redrafted the initiative.

If Prop. 10 had passed in 2018, the vacancy control provision would have been implemented across the state. But under the new proposal, the RAA would now put the onus on cities and counties to adopt it, he said, and would allow landlords a one-off rent increase of 15% every three years if a unit is vacant. The RAA also exempts single-family homeowners who own up to two homes, Moya said.

To incentivize developers to build new buildings, rental units cannot be regulated by rent control until they are at least 15 years old, Moya added.

"We know that a comprehensive policy response to housing must include the production of affordable housing, but it also must include the preservation of existing communities, especially vulnerable communities such as minority and working-class neighborhoods," Moya said. "It also means robust protections for tenants, including rent control in the hottest real estate market in the state."

Moya added the rent control issue in the state is not going to go away even if the current initiative gets defeated.

"The political environment has shifted," Moya said. "We are responding to those conditions ... I expect just as the sun rises every day, that some of the same stubborn actors are trying to stop what, I think, is an ultimate inevitability."

Opponents of the initiative include Berkadia Senior Director Bruce Furniss, who said if the RAA passes, it will cause "investors to be more cautious in the value-add space due to potential shifts in the lending environment."

An investor’s pro forma could be affected, as well as their ability to refinance and/or sell, due to the time now required to achieve post-rehab, stabilized rent levels, Furniss said.

"All in all, rent control laws disincentivize property enhancement and improvement. They take away the return on investment, incentive in the short-term, for developers to upgrade existing units to a competitive standard," he added. "Unfortunately, the net result is a property maintained to a lower, less competitive standard of amenities and upgrades."

Furniss added the RAA could drive investors away from the state or away from core downtown areas. Maviglio, the spokesman for the No On Prop. 10: Californians for Responsible Housing campaign, said the state is doing what it can to address the housing crisis. The RAA is a setback. 

"The goal here is to make more housing affordable and the way to do that is to increase supply," Maviglio said. He didn't say how much the campaign is aiming to raise, only that "this is going to be a hard-fought and expensive campaign."

Yukelson, from the Apartment Association of Greater Los Angeles, said the group would rather see the money that is going to be spent by both sides to go toward the conversion of the closed St. Vincent’s Medical Center in Los Angeles, which could house the city's growing homeless population.

"To care for homeless Angelenos, many of them served by the AIDS Healthcare Foundation, is a far better use of $100M than littering front yards and airwaves with more advertising on an issue that has run its course," Yukelson said.

"The rent control fight is over," Yukelson said. "It’s state law. And property owners are already feeling the pinch. Perhaps the time to start healing, for all of us, is now. Let’s work together to house our fellow Californians. We’ve got a crisis on our hands, and we must work together to fix it."