Time could be running out to protect yourself from losing tens of thousands of dollars a year or more in rent and property value.
The calls for rent stabilization legislation throughout California are echoing across the state as housing advocates, labor leaders, and community organizations rally and obtain the support they need to place a bill on the ballot in November that repeals the Costa-Hawkins Rental Housing Act.
Enacted in 1995, the Costa-Hawkins Rental Housing Act, AKA Costa-Hawkins, is a California state law which places limits on municipal rent control ordinances. Critics of the act are out to take it down and they’re closer than ever to making it happen.
According to the San Diego Tribune, at $1,887, rents in San Diego County reached a record high last month (April 2018), bringing with it a wave of discontent and statewide support for an all-out repeal of Costa-Hawkins. And while a prior measure that would have expanded rent control in California failed to pass in Sacramento earlier this year, the takedown effort has gained new steam and garnered major strong financial, political, and organizational backing, including from major donors to the tune of approximately $2.16 million, and close to 565,000 signatures from registered voters in all 58 state counties.
California Cities That Have Rent Control Laws:
- Berkeley Hills
- East palo alto
- Los Angeles
- San Francisco
- San jose
- Santa Monica
- Thousand Oaks
- West Hollywood
While Sacramento may seem far away, the San Diego market is also feeling the heat as local grass roots activists started a Change.org petition and have amassed close to 11,000 signatures from local voters. Activists interrupted a city council meeting held last month managing to get related action items on the agenda for the next council meeting. Regardless of what happens at the meeting, rent stabilization is looming for San Diego property owners.
Landlords cannot ignore the fact that rent control laws already exist in 15 other California cities, including three of the largest cities in the state, besides San Diego: Los Angeles, San Jose, and San Francisco.
The time for action is right now. Landlords must take immediate steps to protect their income and property values. Why now? Because if you don’t, you could be putting at risk tens of thousands of dollars in revenue.
Here’s how you can avoid that potential loss:
1. Make capital and operational improvements now.
Most rent control bills include a provision that allows landlords to pass through expenditures for capital improvements they make in their buildings. In effect, the provision gives landlords the ability to increase the rent to absorb a portion of the investment yet not receive the benefit of the full market value of that investment had the rent control regulations not been in place. In fact, the whole purpose of the provision is to control and limit how much can be passed through to the tenant. The amortization schedule, the applicable interest rate, and the increase amount are typically all controlled by schedules in the rent control legislation.
In Oakland, for instance, the maximum allowable pass through amount is 70% of the total expenditure. You can apply interest (on a rate designated by the regulation) over a specific period of time (also designated by the regulation) over a specific number of years (you guessed it,
provided by the regulation) to arrive at the monthly amortized amount. Once you’ve figured out what that is, you are still controlled by the fact that the new rent cannot be more than 10% of the current rent, which means you may have to reduce the applicable amount even further.
For example, if you made $100,000 in improvements to your building after rent control regulations were enacted, you may only be able to pass through 70% of that figure. Moreover, the amortized amount will be further constrained by the 10% cap.
However, if you made the improvements prior to the rent control regulations, the same property owner would have been able to pass through 100%.
Are you willing to leave that income on the table?
If that wasn’t enough, most cities require that you petition a rent board or other similar entity and obtain approval prior to making adjustments to the rent. Forms have to be filled out, fees paid, cases made, and more fun bureaucratic hurdles have to be jumped that will make the whole process tedious and time consuming.
To avoid the hassle and get the full market value–and return–of the investment you make, make your improvements now. You will be able to increase the rent to market value–above the potential rent control rate and not below it or the limitations set upon you by the new regulations.
2. Make improvements to individual units now
Another area in which you can get a jump start now to save your bottom line later, is in improvements to the individual units. Do you have vacancies coming up for which you were on the fence about remodeling or upgrading? If so, now is the time to make those upgrades and negotiate increases for those improvements. Spruce up the units to spruce up your pocket by asking top rents for your unit class. A small investment can go a long way in the short and long-term by starting to lock in top rents today before rent control regulation passes. More importantly, after rent control legislation is passed, you may not be able to increase the rent even after making improvements.
3. Raise your rents to market rates now
While the rent control bill is still being debated, and may or may not be passed for some time, the process of raising rents can be lengthy as leases cycle through to renew and/or apartments become available.
Think about it. In most cases, a one-year lease you executed last month, still has 11 more months to go before you have the opportunity to raise the rent without making improvements to the building or units. Moreover, in the past, there have been instances where the new rent control law has mandated an immediate cessation of increases, even if the process was in the middle of a 30-day notice. The longer you wait, the fewer rents you may be able to increase and the more revenue it is going to cost you.
Three questions to ask yourself right now:
- How much money do you want to lose?
- Are you willing to get caught at below-market rates if the rent stabilization bill gets passed and you are no longer able to increase your rates?
- How much more revenue can you bring in if you started implementing the increases in your rates right now?
Raise your rents now to protect your investment. You will be much better positioned if you make the increase and then offer incentives instead of getting caught at below-market rates and not being able to do anything about it. Through our property management company, StoneHarbor Property Management, we are finding that our clients’ units are renting just as quickly at market rents as they were before raising their prices.
Bottom Line: Don’t get caught at below-market rates. Make your capital and unit improvements now. Take immediate action before the ability to choose how much you can ask for your units, what improvements you should make, and how much you receive as a return on your investment is taken away from you.
Contact us at (619) 930-9335 for a no-cost, no-obligation consultation. We’re happy to provide rent comparables for similar units in your area, discuss ways you can raise your rates and still attract new tenants, or simply answer any questions you may have.
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