I’ve spent the last four posts discussing AB 1482 The Tenant Protection Act also referred to by many as ‘rent control’. The reality is that we will not fully understand the ramifications of this law for several years until it is fully implemented and comprehended by the courts, government agencies, attorneys, landlords, and tenants. More discovery will occur as different landlord versus tenant scenarios arise and there’s case study to evaluate.
We can draw conclusions based on examples from other cities that already have rent controls in place. I will provide updated blog posts as we receive more data on AB 1482 and other laws affecting real estate. Below is my conclusion based on my research, study, and discussions.
Property Specific Values
During the Great Recession that lasted from 2008-2012 values declined across the board. There was no city or property that was immune from it. Some cities and regions declined more than others but overall all property owners experienced a decrease in the values of their apartments caused by high unemployment, lower rents, higher vacancies, foreclosures, and so much more.
Similarly, many investors believe that overall apartment values will decline due to the implementation of AB 1482 (Rent Control). I disagree with this notion. Based on my research of different scenarios, I contest that values will be property specific and not universal across California. Multifamily/Apartment buildings that feature new construction, recent certificate of occupancy (15 years or newer), significant renovations, leases at market rate, or several vacant units (exempt) will be in high demand and sell for higher prices and at lower cap rates.
In contrast, properties that require heavy renovations with long-term tenants at below market rents will sell for lower prices and will command higher cap rates. “Mom and Pop” owners that have historically kept rents low in exchange for making minimal improvements to their properties will get shell shocked the most when they sell or refinance their properties. These types of landlords will wish they would have sold when the market was at its peak with no AB 1482.
We will not experience a universal decline in multifamily/apartment values due to AB 1482 Rent Control.
Just-Cause will reap Havoc
As I’ve mentioned before, Just-Cause and No-Cause evictions are the “elephant in the room” that will negatively impact inexperienced landlords. I anticipate that the ripple effect caused by these types of notices and evictions will take 12-18 months. Once landlords experience a Just-Cause eviction or potentially an unsuccessful eviction in front of a rent control board, they will then truly understand the time consuming and costly ramifications of AB 1482. In addition, tenants will have much more information as it pertains to their rights under the Tenant Protection Act and will act accordingly making it much more difficult for landlords to vacate unlawful tenants. Once this has cycled through the multifamily market for a few years many private investors will sell and seek commercial properties or out-of-state investments.
Positive Impact on existing tenants
Tenants that are at below market rents will experience the most benefits but will also live in deteriorating housing with no motivation from landlords to improve their properties. The bill also provides certainty of rental rates and provides tenants ample time to move if they’re given a notice to vacate. Tenants that benefit from this law are less likely to move which is a win from a policy objective standpoint.
Decline in Home Ownership
Tenants will have less motivation to move especially if they’re locked into below market rental rates. As housing gets more expensive affordability will decline making renting much more attractive. The downside risk to our economy is that home ownership is the number one factor in the creation of wealth and as less people own the income gap will continue to increase. Home ownership also contributes to lower crime rates and better neighborhoods through pride of ownership.
Negatively impact Tenants
AB 1482 was designed by politicians to protect tenants from outrageous rent increases which might create more homelessness. Unfortunately, this law will increase rents on existing tenants by a higher percentage than what was previously charged. Secondly, it will significantly increase rents on new tenants that lease available vacant units. Furthermore, the Just-Cause rights don’t protect tenants until they’ve resided within a unit for twelve (12) continuous months meaning that landlords and management companies will put all new tenants on a 6-10 month probationary lease period. If any tenant causes issues they will receive a notice to vacate before they obtain Just-Cause protection from AB 1482. Any tenant applicant that has a blemished credit history or background will get declined for housing which is unfortunate because these types of tenants are some of the best tenants since they want to prove that they’ve recovered from their past.
Negative impact to the Central Valley
Cities and counties with already in place rent control ordinances will not experience any negative impacts since they have more stringent laws than AB 1482. The central valley has always attracted investors because of its lower price points than the Bay Area/Los Angeles and that it had no rent control. Now, that blanket rent control exists the valley will lose some of its luster. Investors may opt to invest in markets that they own in since they’re already rent controlled and there’s no reason to leave and purchase into an inferior subject to rent control. I exclude the Sacramento region because it has several major draws such as the Capitol, NBA Basketball, and now Major League Soccer (MLS) and features a rejuvenated downtown. Other cities that have no draw or anchor will feel the negative impact of this law.
Eviction Attorney’s to Benefit
AB 1482 Just-Cause will make eviction attorney’s very wealthy. They’re not at fault, this law is politically motivated and they will certainly benefit the most from it. The cost for evictions in San Francisco and San Jose can exceed over $50,000 per tenant. As tenants receive more protection and guidance from agencies, costs to evict tenants will sky-rocket. The days of $1k-$2k will soon turn into a highly desired memory.
Commercial properties will Benefit
As discussed, many investors that sell and choose to keep their investment dollars in CA will seek exempt apartment complexes or commercial properties. Retail Centers that have previously sat on the market may experience an increase in sales.
Single-Family Residences (SFRs) and Condos will experience value increases
SFRs are EXEMPT from AB 1482 unless they’re owned by a large corporation or entity with a manager that is part of a large corporation. If SFRs are exempt this means they will become much more valuable!
Increase in Vacant units and Owner-Occupied sales
Anything that is exempt from rent control will become more valuable. This includes vacant units. Why would an owner opt to leave units vacant instead of creating rental income? Simple, if the property is not exempt from rent control and has vacant units it is worth much more to an investor. Why? Because an investor can create value by improving those units and charging a higher than market rent. The negative is that for some time the unit is not available for lease creating a larger housing shortage. Non-exempt investmentors may opt to vacate a tenant occupied property through Non-Cause notice and sell the property at a premium. Owners will map their apartment communities into condominium conversions and sell owner-occupied units. FHA, Fannie Mae, and Freddie Mach have recently eased their lending guidelines for owner-occupied condominiums since they’re the most affordable for buyers. This means that tenants will experience displacement thus increasing the housing shortage.
Lending and Appraisal Restrictions
Lenders will lower their loan-to-value ratios meaning that borrowers will have to come in with more equity to obtain debt. Lenders will base their values on in place income and not give value to rent increases. Appraisers will be much more conservative and will value properties based on allowable rent increases and not market rates.
Summary
California is short over 4 million units of housing and there’s no end in sight. AB 1482 was put into place by politicians to answer the call from renters seeking relief from continued rent increases and “unlawful” evictions. Unfortunately, the Tenant Protection Act, which was created to help tenants makes it more expensive for them. In addition, it makes it more costly and burdensome for landlords creating a negative net effect. Although landlords are happy to see guaranteed rent increases they will change their tune once they experience a Just-Cause eviction process for an unlawful tenant. This bill will cause an even greater housing shortage and an increase in rents over the next several years. Politicians will analyze the results annually and they will blame the landlord when they see that their policies only made matters worse. In turn, they will add on more stringent laws to AB 1482 under the guise that they were not stringent enough from the onset which will only perpetuate the housing crisis.
My biggest concern is that the additional by-laws that they attach to AB 1482 throughout the years will devastate the multifamily sector. These by-laws/ordinances were stricken from previous discussions but that means they’re up for future consideration. In the future I anticipate that a rent control will apply to vacant units and it will be considered discriminatory to not lease to a Section 8 tenant at a market rate complex.
Consider that our firm has sold thousands of apartment units through this era of rent increases and I’ve yet to witness tenant displacement or homelessness. When I sell apartment communities I get to know many of the tenants well. We become friends and they’re a great resource for neighborhood trends, what improvements are needed, what issues a property has, and details on the other tenants.
The solution for affordable housing is through more construction but only when all the obstacles and fees are decreased not increased. Owners that have kept up with their improvements and rent increases will benefit while owners that have not will have to pay the piper.
It will take time, but we will experience affects from AB 1482 in the next couple of years.
Ask yourself, do laws in CA get more stringent or less throughout the years? Consider the answer when evaluating your portfolio.
Written by Adrian Del Rio