California Bill AB 1482

[Julio Bobadilla]

I live in Kern County, CA and was about to start investing in real estate especially because of how central this county is and all the expected growth, but this new law AB 1482 establishes rent control and just cause restrictions on removing tenants. Should I still get 1 or 2 rentals to get my feet wet before going out of state, I've also considered buying nice vacation homes by lakes, beach etc. and Air BNB instead. What would you do?

[Jim T.]

For small investors, such as me, here are the big things to consider to be exempt from this bill

1. The property has to be "alienable separate from the title to any other dwelling unit" meaning a separate deed. Condos generally  qualify as there is a separate deed per unit.  Earlier drafts included the phrase "single family residences"  instead which would not have included condos. Thankfully the state senate cleaned this up to include condos. 

2. The owner can't be a corporation or an LLC with any portion to a corporation.

3. You have to include the following in your lease
“This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject to the just cause requirements of Section 1946.2 of the Civil Code. This property meets the requirements of Sections 1947.12 (c)(5) and 1946.2 (e)(7) of the Civil Code and the owner is not any of the following: (1) a real estate investment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or (3) a limited liability company in which at least one member is a corporation.”

Please reference AB 1482 for details. I just included snippets and paraphrased others. There are other restrictions.

There is another rent control bill getting signatures now sponsored by the same guy that did the failed Prop 10 last  last year. I have not seen it but I read that it will exempt those investors with 2 or fewer rentals. I would guess this bill will not pass as most voters will be content with AB1482. 

For me, the ability to end tenancies without just cause is more important than the rent limits (which exceed what I have done anyway). I am not planning to sell any rentals ever but my heirs might. I just want the flexibility to be retained. 

The fact it does not include anything to limit vacancy decontrol is also inportant. Most small landlords I know keep increases moderate until a tenant leaves in which case they price back to market rates. If vacancy decontrol were prohibited, landlords would have no choice than annual market increases. 

So, how will a small landlord fare with AB1482 limiting corporate apartments while being exempt? My thoughts:

1. The bill allows 15 years of exemptions for new apartments. I don't think that is enough for large buildings. I think this will limit any new large projects. 

2. The bill will pull most existing apartments into these rent restrictions. These units, in hot areas, will likely get the max increase (5%+inflation to a max of 10% per year). I have never given an existing tenant a 5% increase, let alone a 5%+inflation increase. 

While limiting new units to come to market and allow existing units to climb at 5%+inflation, it seems the small landlords that are exempt will have better flexibility and options going forward. As long as your portfolio is exempt from AB1482, it seems rentals in California will continue to be a good investment.   

Disclaimer: All the above are just my personal thoughts. I am not a lawyer and the interpertation of AB1482 is mine alone. You should consider that some or all of what I stated is completely false. I gave my thoughts merely to give some ideas to research.