Who understands the vacancy control clause in CA Prop 21?

[Jon Schwartz]

Ballotpedia has a pretty good summation of the vacancy control clause in CA Prop 21, which will be on our ballot in November:

• Allows rent increases in rent-controlled properties of up to 15 percent over three years at start of new tenancy (above any increase allowed by local ordinance).

The actual text of the proposition reads as follows:

• In any jurisdiction that controls by charter provision, ordinance, or regulation the initial rental rate of a dwelling unit, if the previous tenant has voluntarily vacated, abandoned, or been evicted pursuant to paragraph (2) of Section 1161 of Code of Civil Procedure, the owner of the dwelling or unit shall be permitted to establish the initial rental rate for the vacant or abandoned dwelling or unit provided that the initial rate established pursuant to this subdivision, in combination with any increases in the rental rate during the subsequent three year period, is no greater than 15 percent more than the rental rate in effect for the immediately preceding tenancy. Any increase in the initial rental rate permitted by and established pursuant to this subdivision may be in addition to any increases in rental rates otherwise authorized pursuant to local law.

Source for both here.

Here's what that says to me:

If a unit goes vacant, the new tenant can be charged only 15% more than the previous tenant, not including local rent-control increases. It sounds like this 15% increase can be stretched out over three years, but why would a landlord do that? I'd rather raise the rent fully upfront so that I don't attract an unqualified tenant.

Do you read this text the same way? If so, I'm worried. This vacancy control really puts a damper on a lot of CA investing strategies.

For starters, if a building has hugely under-market rents, there's very little upside to renovating the building. If a triplex has three tired one-bedrooms that rent for $1000 when they should be at $2000, and this prop passes, new tenants can't be charged more than $1115. No landlord is going to renovate the old units if new ones will only generate $115/month extra. I mean, CA will just go stagnant, right?

But what about units that are currently at market? Let's math this out....

Let's say a tenant moves into an LA one-bedroom at today's market rent of $2000/month. Let's say that tenant stays for 7 years, the LA County average tenancy length, and rents appreciate at 5.7% annually, the LA average from 2010 to 2019 (source here). Furthermore, let's say that LA RSO allows a 3.5% rent increase every year (I'm just averaging 3% and 4%, which is what each year has been for the past several years).

In seven years, when there's a newly vacant apartment, the situation looks like this:

Market rent will have grown from $2000 to $2948. Meanwhile, your tenant's rent would have grown from $2000 to $2545. With your rental increase for the next tenant limited to 15%, the maximum you can charge your next tenant is $2926. That's not too terrible.

Let's look at a fifteen-year tenancy and see what happens:

Market rent grows from $2000 to $4594. Actual rent paid grows from $2000 to $3351. The most that a new tenant can be charged, then, is $3853. Oi. That's looking a lot worse.

Prop 21 really freaks me out for this vacancy control clause. How's everybody else feeling about it?

Best,

Jon