Preparing for the apocalypse

Housing providers need to future-proof their business if Proposition 33 passes.

In days, voters will decide the fate of the Costa-Hawkins Act, a 1995 law that limits the extent to which cities and local governments can impose rent control measures. Proposition 33, dubbed the “Justice for Renters Act,” would repeal this decade’s old law and give localities the license to institute or expand rent control, and most concerningly, eliminate vacancy decontrol.

That’s right—when a unit is vacant, the owner can currently raise the rent to whatever they like. But if Proposition 33 passes, local governments can limit rents on unit turnover. 

San Francisco, for one, is salivating over the prospect that the measure will pass. Mayor London Breed has indicated that she will sign legislation to expand rent control to an estimated 16,000 rental units not currently subject to rent control. The measure would cover structures built before 1994 rather than the current cutoff of 1979. 

If Proposition 33 becomes law, San Francisco’s impulse to expand rent control will lead to legislation that will assuredly sail through. Then, there will be a huge swath of housing providers who know absolutely nothing about the city’s rent and eviction controls because they haven’t been subject to this regulatory regime. It will be a steep learning curve. 

In a game of follow-the-follower, there is no reason to believe that other locales would not follow in the footsteps of San Francisco by expanding their regulations or instituting rent control if it is not currently on the books. 

We have no crystal ball, but owners can do the next best thing by future-proofing their rental business by taking steps now in the eventuality that this ill-conceived measure will pass.

Our industry partners have done a good job in educating rental property owners about the detriment of this ballot initiative but we don’t know if renters got the message that this is detrimental to landlords and tenants alike.

We are attorneys, not pollsters following the political winds, but there is a real possibility that Proposition 33 will pass because of the widespread belief that the rents are too damn high. With ever-rising costs, this sentiment is shared by voters in suburbia and cities not normally associated with tenant activism. So we’ll have to prepare for the contingency that California’s rental housing industry will be upended.

Raising rents

We know that there is a vast amount of landlords who are not getting “market rate rents” for their properties. But what exactly is market rate? There are many intangibles, but we like the website rentometer.com to get some ballpark numbers.

This is a touchy subject for many landlords who want to avoid imposing an additional financial burden on good tenants. Good tenants who pay their rent on time and take good care of the property are worth their weight in gold, and oftentimes there is a personal bond between landlords and tenants.

At the end of the day, though, we have to think strategically and smartly about our real estate investments and maximize rental income before landlords are restricted in their ability to do so.

Tenants’ advocates will say that raising rents is price gouging, but it’s impossible to raise rents above market level. If you’ve ever heard of the term supply and demand, housing providers cannot rent a unit for more than a tenant is willing to pay.

Our strong advice is to raise the rents to market rate if landlords are able to do so, and this will depend on many variables best approached with Bornstein Law. Where is the property located, and is the property subject to state rent control (AB 1482) or more restrictive rent control in local jurisdictions?

For any owners of single-family homes and condominiums who have thus far enjoyed an exemption from rent caps, we remind them that they can raise the rent to whatever amount their heart desires within reason, at whatever time they like. Take advantage of this while it lasts.

We do urge caution in raising rents too high. There is case law to suggest that excessive rent increases are tantamount to constructive eviction, meaning the rent is so high that it makes it impossible for a tenant to live in their home, giving them no choice but to leave.

'Tis the season for buyout agreements.

Whenever there is a voluntary vacancy, housing providers are typically able to raise the rent. A tenant surrender of possession agreement - colloquially known as a tenant buyout agreement - may be prudent for owners who are looking to effectuate a vacancy before any potential ordinances go into effect.

These are agreements whereby the tenant voluntarily vacates in exchange for compensation with the added benefit of removing all claims that arise from the tenancy, so it’s more than “cash for keys.”

We hosted a webinar on this topic and although a little dated because it was during the height of COVID, our core approach with tenant buyout agreements remains the same.

Substantial remodeling remains a viable way to recover possession of the unit, but it comes with a host of procedural requirements, including pulling permits before the work begins and clearly stating the scope of the work to be performed.

Substantial remodeling remains a viable way to recover possession of the unit, but it comes with a host of procedural requirements, including pulling permits before the work begins and clearly stating the scope of the work to be performed.

When we talk about substantial remodel, the operative term is substantial. Rest assured, it is not doing a paint job or sanding a hardwood floor. The key question to ask is whether the tenant can remain in the unit while the work is being performed. Think of a construction zone.

We’ll have to look at local ordinances for more guidance. There are many nuances on the local level, but in any case, expect to pay varying levels of relocation payments. Landlords may also be required to offer the rental unit back to the displaced tenant after being substantially renovated or necessary repairs have been completed. Complications abound, so please contact our office before attempting to transition a tenant out to fix up the place.

There has been increased scrutiny over what critics call "renovictions" and so we must follow all of the rules to the letter.

Parting thoughts

We have full confidence in our industry partners. They have done a terrific job of educating voters on the reasons to vote down Proposition 33. Yet as the late renowned sales trainer Zig Ziglar said, “People buy on emotion and then justify it with logic.” Although any logical person would cast NO at the ballot box, some rent-burdened voters will make their decision out of emotion.

Renters outnumber landlords, and there has been a deficit in ad dollars, so there is more than a whispering possibility that Proposition 33 will pass. We hope we are wrong. We hope that sober-minded voters will reject the measure, but hope is not a good legal strategy.