After my article last month on new ADU laws, some readers emailed me to ask what’s up with the new California rent control law that passed around the same time. Assembly Bill no. 1482 (AB 1482) adds new statewide restrictions on annual rent increases and evictions, effective through January 1, 2030.
Named by its authors the Tenant Protection Act of 2019, AB 1482 aims to stabilize rent prices, particularly for tenants in areas where rental market values have been rising faster than inflation. But what does this mean for property owners with tenants? With the caveat that anyone affected by this complex law needs to read and understand it thoroughly for themselves, or seek advice from a professional to help interpret and apply it, here’s my quick plain-language recap.
First up, let’s look at the cases where this doesn’t apply: if the property is under 15 years old; if the tenant rents a room but shares common facilities with the homeowner; if the tenant rents a single-family dwelling; if the tenant rents a duplex unit where the other unit is owner-occupied; if the tenant rents one of up to two ADUs on an owner-occupied property; or in a number of far less common situations (e.g., low-income developments or nursing homes, among other facilities, where the law provides other conditions): in any of these cases, the new conditions below do not apply, so a bunch of you owners worrying about additional regulatory burdens can breathe a sigh of relief — for now, at least, but you might want to keep reading just in case Sacramento starts eyeing your property classes someday.
For those of you invested in triplex-or-denser buildings over 15 years old, however, there’s a new playing field.
Under the new law, tenants can only be evicted under certain circumstances, and may even be entitled to compensation. Perhaps reasonably, tenants asked to vacate for lease violations or other illegal activity must first be given the opportunity to remedy the situation. But now for no-fault just cause terminations (for instance, the owner is vacating the unit to house themselves or a family member, or to substantially remodel), the owner must compensate the tenant with a month’s rent, either in cash or as a waiver for the final month.
Complicating that new financial burden, the new law caps rent increases at five percent plus inflation (or ten percent, whichever is lower), and sets a retroactive benchmark for rental prices as of March 15, 2019. Any property owners who may have kept their rents below market value are going to be stuck with that as a baseline until those tenants choose to vacate.
So if you’re considering selling a complex full of under-market renters, you may in turn not be able to sell that property for its full market rate. Under-market renters will have the incentive to stay in their cozy situation rather than move up to a larger/better unit or consider homeownership, so over time, the surrounding rental market value may outpace your building’s capped rents. Owners will have to increase their rainy day fund to account for the mandated no-fault just cause payment; when units do turn over, owners will be incentivized to hedge by raising new rents even beyond current market value.
Anyone who’s ever tried to rent an apartment within or near the Los Angeles city limits has felt this vicious cycle at work. Anecdotally, trying to find a rental in L.A. (where similar laws have been on the books for years) is like looking for a unicorn at the Greyhound station. In turn, L.A. rental property owners can feel trapped in an investment whose dividends are no longer theirs or even feel trapped by a bad tenant.
This is not meant to discourage you from investing in rental properties. Despite a few bad apples, providing shelter to others is something to be proud of and can be a personally rewarding experience. With these changes effective across California, things will reach a new normal over time — and an income property investment should be made with the long term in mind. Additionally, this law has a scheduled sunset date of January 1, 2030, by which date the state must present an audit of the law’s impact.
As with any major purchase, do your homework and do your math. If you’re curious about getting into income properties or have any other real estate questions, call me at 619-944-2798 or email me at [email protected].