Who understands the vacancy control clause in CA Prop 21?

Question

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

Account Closed · Answer

Doesnt sound good

Darius Ogloza · Answer

The road to hell is paved with good intentions.  If you prohibit landlords from raising rent to markets you will not maintain the supply of affordable housing; you will reduce the supply of affordable housing through condo conversions.  Just watch.

Kyle J. · Answer

Do you live/vote in California?

This proposition is a bad proposition and would be bad for the state.

Major real estate groups, landlord associations, veterans groups, builders associations, etc (e.g. California Apartment Association, California Council for Affordable Housing, American Veterans, Women Veterans Alliance, etc) are all coming together to help defeat it.

Most the major newspaper publications throughout the state are against it:

Santa Rosa Press Democrat joins growing number of papers opposed to Prop 21

Orange County Register: Proposition 21 will make the housing crisis worse. Vote No.

The Mercury News: Editorial: More rent control won’t solve California housing crisis

The California Legislative Analyst’s Office, which is a NONPARTISAN government agency, has said the following:

Legislative Analyst’s Office: Prop 21 would cost ‘tens of millions per year’

Even the governor of the state has publicly come out and encouraged voters to vote NO on this proposition:

Gov. Newsom: Vote No on Proposition 21

It’s nothing more than another attempt to pass a bad proposition similar to Prop 10, which the smart voters in this state wisely rejected back in 2018.

Hopefully voters will reject this one too. Vote No on Prop 21

Jon Schwartz · Answer

Nic, you might want to read the text. This is a ballot proposition that WILL BE on the ballot on November 3. You've voted in CA before, yes? It's not law now, but if approved by a majority of voters, it will be.

Here's some more information for you:

https://ballotpedia.org/California_Proposition_21,_Local_Rent_Control_Initiative_(2020)

Jon Schwartz · Answer

Because of ballot propositions???

Account Closed · Answer

Sounds like once a unit is vacated, the initial rent can't be more than 15% (unless local law expressly authorizes).

Example: If a $1000 unit is vacated, then the rent can be raised 15% to $1150 and cannot be raised in year 2 and year 3 (unless local law expressly authorizes increases cuz right now most local laws don't specify rent increases). that's how i read the text.

But the really big change with prop 21 is allowing local law to enact rent control on a subset of all rental housing.

Account Closed · Answer

Same here. It's things like these that cause me to invest elsewhere. Smart money goes where it is welcome.

Dan H. · Answer

How will anyone know what the last tenant is paying.  I have units that are right next to each other with hundreds of dollars of rent difference.  My lease gets sent to the tenant.  My tenants that are below market rent know better than to discuss what they are paying for rent.

My point is not only is it poor policy, but I see no way to enforce it without a bureaucracy to support it.  This bureaucracy would need to have a role in every rent increase in the entire state.  Possibly need to be provided each lease update.

Then there are all the other issues related to having this extreme rent control.  Units would never undergo rehabs and given time would all be out of date and likely result in blighted areas.  The areas get blighted enough then they are candidates for eminent domain.  A large builder comes in, razes everything and builds what will make them the most money which typically will be high end housing as there will be a plethora of old out of date housing that has not been rehabbed due to rent control.  Vicious circle that likely will benefit only the largest of developers.

Darius Ogloza · Answer

@Jon Schwartz  Trust me, Jon, I am no fan of this absurdity.  I am just trying to maintain a stiff upper lip here and, to mix metaphors, to find whatever tattered silver lining that may exist.

Jon Schwartz · Answer

Darius, I agree with this, though I'm still freaked out by Prop 21. Vacancy control seems like a really blunt cudgel. Rent control with vacancy decontrol actually makes CA is a really interesting investment market in my mind. But once rents are indefinitely tied down, oof...

My new questions are:

What if an investor buys a building with a vacant unit? Is the new owner entitled to start from scratch at market rent, or must the new owner find the last tenant's rent amount and base the new rent on that?

And what about househackers? If a househacker relocates a tenant to occupy a unit, then moves out some years later, can he/she charge market rent for the new listing because his/her rent on the unit was $0? Or must he/she base the new rent on the relocated tenant's rent from some years ago?

Will these questions ultimately be settled in the courts?

Thanks!

Jon

Who understands the vacancy control clause in CA Prop 21?

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