Understanding Prop 21, the Rental Affordability Act (Costa-Hawkins reform ballot measure)
Many California cities with expensive housing such as Los Angeles, San Francisco, Santa Monica, and Berkeley have rent control, which limits how much residential rents can be increased each year.
The Rental Affordability Act proposition will be on the November 2020 ballot to strengthen rent control. More details on their website, RentControlNow.org, and below.
Rent control in California has been limited since the 1995 Costa-Hawkins state law.
Originally, some cities had vacancy control as well, which kept rents the same even after the original tenant moved out. In 1995, the California state legislature pass Costa-Hawkins, a bill that placed three limits on what cities could do, which are:
Limits under Costa-Hawkins:
1. Any building built after 1995, or after the year a city enacted rent control (whichever was earlier) could no longer be rent controlled.
2. Any single family house or condo could no longer be rent controlled.
3. Vacancy control no longer allowed. Under the new system of vacancy decontrol, once the original tenant moved out, rents could be raised to any price. This also means that if you are a subtenant, your rent can go up if the master tenant moves out, even if you want to stay.
The current system under Costa-Hawkins with vacancy decontrol has challenges for tenants… and property investors.
For tenants, the problems are obvious.
- The supply of cheap apartments shrinks every time an original tenant moves.
- Roommates get priced out when the master tenant leaves.
- Landlords harass rent controlled tenants or neglect their buildings, hoping that the tenants will move out so that rent can be raised.
For property investors, Costa-Hawkins increases profits for those who’ve already bought a building, but creates challenges for those wanting to invest. The cap rate, currently around 4–5%, determines the value of an apartment building. Typically a building is valued at 20 to 25 times its annual net operating income.
However, under Costa-Hawkins, an apartment’s net operating income is unpredictable. If the tenant moves out, you could charge market rate rent. But if they stay for a long time, your income will be low.
So how much does one offer when buying a building? Offer too much, and you might end up losing money. Offer too low, and someone else who is more irrationally optimistic or willing to use dirty tricks to force tenants out will outbid you for the property.
Reforming Costa-Hawkins has broad support but faces well-funded opposition.
Ever since 1995, tenant organizations have been working on overturning Costa-Hawkins. With efforts in the state legislature stalled, tenants have also turned to the ballot. Most recently, in 2018, Proposition 10 was on the ballot to repeal Costa-Hawkins. Although supported by the California Democratic Party, unions, tenants, and hundreds of organizations, the campaign was outspent 3 to 1 and failed, with 41% voting yes vs. 59% voting no.
Opponents of Prop 10, which included the Republican Party, the California Association of Realtors, and corporations that owned apartment buildings, spent $71 million to defeat Prop 10. Their main arguments were:
- Prop 10 would scare away investment in building new housing.
- Prop 10 would place a burden on homeowners who were planning to downsize and rent out their current house for retirement income.
- Bringing back vacancy control would cause landlords to neglect their buildings or take them off the rental market.
The new Rental Affordability Act ballot measure addresses Prop 10’s weaknesses.
While Prop 10 was a full repeal of Costa-Hawkins, the new Rental Affordability Act — written by the same team behind Prop 10 — has three exemptions to address the arguments that defeated Prop 10.
- New buildings exempt for 15 years.
- Houses and condos are exempt if the owner is an individual (not an LLC or corporation) that owns only 1 or 2 homes.
- Vacancy control is limited, with a 15% rent increase allowed when the original tenant moves out (up to once every 3 years).
The Rental Affordability Act is a compromise that provides stability for tenants, landlords, homeowners, and developers.
Tenants would no longer live in fear of roommates leaving or harassment from their landlord, and would also be able to find lower rents when moving to a new unit.
Landlords would have predictable cash flows and no longer have to overpay to buy a building.
Homeowners would remain willing to rent out their house, without the risk of being stuck with a long-term tenant paying below market rate.
Developers would have 15 unrestricted years to earn back the cost of construction. Even after 15 years, the 15% vacancy increases would keep rents close to market rate.
The Rental Affordability Act is just one part of the solution — we also need funding for Affordable Housing and we need zoning reforms to build more housing.
The Rental Affordability Act buys California more time to solve the housing crisis, but can’t do it alone. Even with the RAA’s vacancy control, over the next 30 years, tenants moving in and out every 3–10 years on average means rents going up 50–100%, even more in college towns where tenancies are short.
As long as market rate rent rises faster than inflation, housing affordability will be a challenge.
California needs more homes.
Based on the number of jobs here, California has 3.5 million fewer homes than it needs. YIMBY policies such as upzoning near jobs and transit can address this challenge for upper and moderate income Californians.
However, for working class and fixed income Californians, many additional homes need to be subsidized affordable housing.
The cost of construction is so high that even if per-unit land costs were reduced by switching to higher density, housing would remain out of reach. Just like we subsidize public education and healthcare, we also need affordable housing, social housing, public housing.
Both funding and building housing will take years, if not decades. In the meantime, tenants still need to afford rent, and that’s where rent control comes in.