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Ballot Initiative Could Increase Rent Control Options for Cities and Counties

The housing affordability crisis is one of the most contentious and complicated issues facing California legislators, but a new statewide initiative on the November 2018 ballot will give the state’s voters a direct voice in what could be a dramatic expansion of rent control policies across the state. If Proposition 10 passes, California cities and counties will have much greater ability to enact local rent control laws.

The current state law governing local rent control, known as the Costa-Hawkins Act, allows local governments to adopt only a narrow range of rent control measures. The three primary restrictions are: (1) rent control laws can restrict only apartments that were constructed before February 1995, (2) local ordinances must permit “vacancy decontrol” which allows landlords to raise rents to market levels once a tenant has moved out and a new tenant moves in, and (3) rents on single family homes and condominiums cannot be restricted. Perhaps due to these restrictions, only a few local rent control ordinances have been adopted since Costa-Hawkins was passed in 1995. However, interest in new rent control ordinances has picked up in the last few years as rents have skyrocketed throughout California.

Proposition 10 would repeal the Costa-Hawkins Act and give cities and counties explicit authority to adopt rent control laws. The only restriction in the initiative is that rent control laws shall not abridge a landlord’s right to a fair rate of return on a property, a restriction that essentially just restates existing law.

What Happens If the Ballot Initiative Passes?

If Proposition 10 passes, it could open the door to a wide variety of rent control ordinances proposed at the local level. Local governments would certainly propose to restrict units constructed after 1995, and might seek to restrict single family homes, condominiums and accessory dwelling units in addition to apartments. New ordinances would likely leave rent restrictions in place when a tenant moves out rather than allowing rents to increase to market rates. Following are a few of the other issues that might arise.

Rent Rollbacks

Many communities will not be satisfied with setting rents at current levels, but will want to roll back rents to past levels. Legal fights are to be expected over the question of whether this would give owners a fair rate of return on their investments, particularly if there has been a recent turnover in ownership. Analyzing the economics of rent restrictions is often a battle of experts.

Conversion to Ownership Units

Rent control can give owners an economic incentive to convert rental housing stock to ownership units, where sales prices are not restricted. Proposed ordinances might require owners to provide current tenants notices of conversion, rights to purchase units at discounted purchase prices, and/or cash relocation payments upon conversion of rental housing to for-sale units.

Landlords Use CEQA as Opposition Tool

Landlords will get creative in their opposition to local rent control ordinances. One of the most potent weapons against local ordinances might be the California Environmental Quality Act (CEQA), the state’s environmental review law that is often used in opposition to development projects. Opponents might argue that rent control ordinances will result in less spending on maintenance and capital investment in existing housing stock, allegedly causing housing developments and residential neighborhoods to become blighted over time. Environmental impact reports may need to study this effect and include mitigation measures to prevent blight from occurring. Proponents of rent control may seek to bypass CEQA by adopting ordinances through local ballot initiatives, which do not require CEQA approval.

Small Owner Enforcement Challenges

Communities that attempt to restrict rents on single family homes and condos may find it difficult to enforce rent restrictions against small owners. Few cities and counties currently even know whether single family homes and condos in their jurisdictions are owner-occupied or rented.

New Construction Exemption

One of the most powerful arguments against rent control is that it discourages new residential construction, making it difficult to expand the community’s housing supply. Some local governments might consider exempting new construction from their rent control ordinances, or at least providing a grace period for a certain time.

Meyers Nave will continue to provide updates on the status of Proposition 10. If you would like additional information or legal assistance evaluating the impact of this ballot initiative on your organization, please contact Jon Goetz at 800.464.3559 or jgoetz@meyersnave.com.