23 Oct Don’t Forget: 2007 Rent Control Expansion!
By Wolf Baschung, CCIM, CPM
Los Angeles’ commercial property buyers intending to purchase multi-unit rentals should assiduously investigate the history of the property before finalizing the sale, lest they purchase an asset they deem not to be subject to rent control only to find themselves with a rent-controlled albatross that may place them in the position of an unintended charitable organization.
Rent-control laws passed in 2007 have been fought since their inception, but with less than resounding success. Although the intent of the law was to provide suitable housing for low-income tenants, the actuality of the law has forced some landlords to become unwitting and unwilling charitable organizations. Often, because the landlords are unable to increase rent rates to match inflation, their rental units operate at a loss every month.
Since rent control is not based on income, some of the residents who benefit from the rent-control laws may be more financially fluid than their landlords. Unlike subsidized housing, landlords do not receive government compensation for their loss of rent in a rent-controlled building. The notorious gangster Whitey Bulger was living in a rent-controlled apartment and paying about two-thirds of market value, even though he had close to $1 million in cash in his apartment.
Since many rent-controlled buildings are situated on prime Los Angeles real estate, property owners can take a substantial financial loss each month. Not only are they unable to sell their building(s), but the rent they can charge is only a fraction of their units’ market value.
Although the logical option would be to sell the building, the 2007 rent-control laws have eliminated that possibility. Not only can the landlord not increase rents to match inflation, in many instances he or she is unable to evict the tenants and/or sell the building in order to change the use of the property. The inability to individually monitor controllable factors, such as water usage, is another factor that has landlords fuming over rent-control restrictions. Installing individual meters is cost-prohibitive but annual utility rates increase considerably more than the 3 percent rent increase allowed by rent-control laws.
A clause in the 2007 law states that if a rent-controlled building is demolished and new rental units constructed within five years subsequent to the sale, those new units are also to be subject to the rent-control stipulations. Initially, this was to apply only to buildings erected before 1979, but L.A.’s City Council expanded the reach of the bill so that it applied to all multi-tenant structures, regardless of the date of their construction.
If the new building has more units than the one it replaced, all of the new units are subject to rent-control laws, with two exceptions. If the new building has four or fewer units and the owner occupies one unit, the building is not subject to rent-control laws. Additionally, if the rent on at least 20 percent of the units in the new building is low enough that a low-income person could afford to live there, the rest of the units could be exempt from rent-control stipulations.
The original rent-control bill prohibited landlords from selling or demolishing their units in order to go out of the rental business. The motivation for this was the number of landlords who would demolish their rent-controlled units and replace them with expensive condominiums, thereby eliminating the rent-control restrictions and making a hefty profit at the expense of their low-income tenants.
However, the Ellis Act, passed in 1985, amended the original bill because it was deemed unconstitutional and unduly prohibitive. Landlords who invoke the Ellis Act can restructure the use of their property, subject to certain stipulations, which vary by municipality, by re-purposing the units or by selling the property and getting out of the residential landlord business.
In Los Angeles, restrictions on the sale of multi-unit rental properties have somewhat ameliorated the situation. However, abuse of the Ellis Law is still rampant and residents of many cities are urging their elected officials to clamp down on these abuses in order to protect their low-income constituents.
Part of the problem is the lack of follow up on landlords who claim they are selling their properties and will no longer be in the housing rental market. Cities have in the past taken the landlords at their word and not followed up to ensure that the property has not been sold and then re-purposed for rentals. Similarly, no follow up actions were taken to ensure that the rent-control buildings were not demolished and replaced with high-end rental units. Although follow up efforts are increasing, procedures are still very lax for ensuring that this does not happen.
Since 2009, evictions in the Los Angeles area have been steadily increasing and show no signs of slowing down; landlords may perceive that their time to rid themselves of rent-controlled units may be ending. In 2013, there were 308 evictions, 2014 saw more than a twofold increase to 725 evictions, many to long-term tenants of decades and many just before Christmas.
Since several cities in northern California are constructing rent-controlled housing and enacting additional legislation on the subject, Los Angeles may find itself following the path of its northerly sister cities. Opponents maintain that it limits development and financial growth. Proponents maintain that it encourages construction and new development as well as reduces the cost of homelessness.
Given that there are grievances on both sides of this issue, it may be some time before any satisfactory and permanent solution can be reached. Add to the mixture that the issue of rent control has become a political football and the resolution may take decades to occur.
Although the concept of rent-controlled housing was well intended, the result has been a morass of greed, corruption, lack of consideration for low-income and long-term tenants, financial nightmares for honest landlords, and enough political drama to ensure that no one will win on this matter. According to a 1981 and 1988 study conducted by the RAND Corporation, rent control may exacerbate the very issue it was designed to eliminate.