Information Regarding Proposition 10
From the CMA President
One of the recent challenges facing our industry is Proposition 10 which qualified for the November ballot. Prop 10 will repeal Costa-Hawkins Rental Housing Act (“Costa-Hawkins”) which is the State law regulating local rent control ordinances. In a nutshell, this law “froze” local rent control laws as they were in 1995 when Costa-Hawkins was passed. Furthermore, Costa-Hawkins has three important provisions: 1) it requires”vacancy decontrol” allowing landlords to raise rents to market rates when a unit goes vacant, 2) it permanently exempts new construction built after 1995, and 3) it exempts single-family residences and individually owned condominiums from rent control.
I am a registered Democrat and I understand there is a great need for affordable housing in many of our cities, however, I believe that rent control laws are counterproductive, and require private citizens to provide a public good. In my opinion, rent control does not work and is unjust.
Rent control benefits current renters at the expense of landlords by forcing down rental prices. But by reducing the profitability of rental housing, regulations such as rent control reduce the supply of rental housing over time via reduced new construction and maintenance, conversions to condos, or to Airbnb-type models. That harms all future renters while providing a bonanza to current tenants, all on the backs of landlords, not all of whom can afford it.
I recently financed a fix and flip in the very pricey San Francisco neighborhood of Noe Valley. The former owner was a school teacher who had owned this triplex for many years. His rents were so low that he could not afford to maintain the building which was in a pathetic state of repair when my client bought it. One of the units had been red tagged, and the other tenants lived in squalor. My client bought the building and paid the remaining tenants to leave. The building is now undergoing a major rehab and will probably be sold to an owner occupant because renting in San Francisco is too risky. Unfortunately, the result is a decrease in rental units on the market driving the cost of remaining units up.
The Board of Directors of CMA recently voted to endorse a “No on Prop 10” policy and will actively work for its defeat. Our Legislative Advocates, Mike Arnold and Mike Belote will be providing all CMA Members with material to circulate to your friends and clients to educate them about why rent control does not work.
Is Costa-Hawkins the perfect answer to the problem? Perhaps not. But its outright repeal would injure the very people the proponents of Prop 10 are trying to help.
Come to the CMA Seminar in October and find out more from our Legislative Advocates.
President, California Mortgage Association
November’s Proposition 10:
The Specter of Permanent Rent Control on All Types of Housing, Including All Single-Family Residences, Condominiums and Townhouses, Threatens California’s Housing Market, Stability, Lenders, and Landlords.
It Is Time to Step Up and Oppose This Pernicious Proposition.
by Patric J. Kelly, Esq.
Adleson, Hess & Kelly, a P.C.
CMA General Counsel
What is Proposition 10?
Proposition 10 is a statewide ballot measure certified for the November ballot. Prop 10, if passed, will return to local jurisdictions (cities and counties) the right to control the rents charged by landlords. Existing law, commonly known as the Costa-Hawkins Rental Housing Act (“Costa Hawkins”), will be repealed. Proposition 10 was sponsored by wealthy attorney Michael Weinstein and others, who obtained funding for the signature-gathering process and getting the measure certified by the Secretary of State.
Similar measures failed to pass the State Legislature in 2018 which, apparently, led to Mr. Weinstein’s efforts.
What is Costa-Hawkins?
Costa-Hawkins is currently California law. It was passed as a bi-partisan bill, enacted in 1995 by an overwhelming legislative vote. It prohibited local jurisdictions from enacting certain rent control measures, including barring rent control on housing first occupied after February 1, 1995, and on single-family residences and individually owned condominiums and townhouses.
The legislation also allowed “vacancy decontrol”, which assured landlords that they could raise rents to market rates after an existing tenant moved out of rent-controlled property.
What Are the Arguments in Favor of Proposition 10
The proponents of Proposition 10 claim that tenants are being pushed out of existing housing, particularly harming the poor, sick and disabled, because of increasing rents. Without any reference to studies or factual
argument, Proposition 10 proponents have resorted mainly to emotional appeals. Emotional appeals are not a good basis on which to establish statewide law with a tremendously negative economic effect on the state’s housing stock. However, they can be effective in swaying uninformed voters.
What Are the Arguments Against Proposition 10
- It will exacerbate the problem of higher rents by discouraging investment in and the construction of rental property. Not only rental housing, but all housing. Construction will decline, and existing rental housing will be converted to other uses. In San Francisco, for example, rent control has led to destruction of existing rental housing and turning such housing into high rise condos and other expensive housing or other uses. Rent control reduced the existing supply of rental units by 15 percent, it was estimated by one study. The City’s ordinances, it is estimated, raised rents in San Francisco by 5.1 percent, according to the same study.
- It will lead to deterioration of existing housing stock. Landlords will not be provided with sufficient rents to repair and maintain their properties.
- The proposed law is unfair. Small investors, who frequently own single-family residences or condo’s or townhouses as their major investment, often rely on these investments for retirement income. To impose rent control will seriously impact the income of these small investors. It seems unfair to impose the burden of providing affordable housing, a statewide policy concern, on the backs of small investors, or property investors in general. After all, the lack of housing has not been caused by landlords. They have created or supported such housing. Other, larger factors have impacted the housing shortage in California. For example, new and increased taxes, burdensome construction regulations, building costs and fees, all of which discourage the supply of new housing.
If the issue is a society-wide problem, then a society-wide solution should be implemented. For example, the state could implement tax credits for tenants, more incentives to build rental stock, and incentives to improve existing rental stock.
- Counties will see a reduction in their property tax revenues. The market value of rental property will decrease, both in absolute terms and in relation to unregulated property. This will results in a reduction in appraised values, thereby lessening real property tax collections which are based upon such values.
- There will be a huge increase in bureaucracy and administrative costs just to administer rent controlled properties. Rent control boards, appeals, registration of rentals, monitoring of compliance, and other rent control requirements all cost money, all of which will go to reduce the effectiveness of rent control in the first place.
- People in rent-controlled property tend not to move. This can have debilitating effects, such as people reconsidering taking improved jobs at a farther distance away; more traffic when people fail to move and must commute; costs of commuting and increased city or county services required because of additional traffic. But, those who do move, either voluntarily or forcefully, usually must move to poorer neighborhoods with lower education levels and higher unemployment.
- Entices tenants to engage in law violations. Violation of the law in attempts to keep control of rent controlled units in the form of illegal sub-tenancies, where the reduced rent is captured by a tenant, rather than the landlord.
- Does not benefit the people it is intended to benefit. Studies have shown that higher income, more affluent people are more likely to benefit from rent control than the poor. On the contrary, studies have shown that rent control is damaging to some of the very low-income renters they are supposed to protect.
- New apartment construction may be affected. Most developers understand that very high building fees and construction costs, relative to current market rents, will cause them to lose money on a newly constructed apartment building during the first few years of a project. These developers accept the risk that normal market forces and economic growth will move their development into a positive cashflow position sometime in the future, often multiple years after the project has stabilized. The injection of rent control into the picture will certainly deter much needed investment into the creation of new apartment buildings. These developers may not attract the debt and equity funds needed for these projects with rent control in place.
- The impact of rent control coupled with increasing interest rates. There are already concerns that the current low cap rate environment has forced recently purchased apartment building values too high to debt service with future increased interest rates. Therefore, rising interest rates in combination with rent control may have severe unintended consequences.
What Alternatives Exist to Rent Control
- A system of governmental social insurance for renters. Renters who see their rents go up could be eligible for tax credits or welfare payments, thus spreading the cost of improving access to rental housing across a broad spectrum of tax payers, rather than imposing the unfair burden solely on landlords. This is basically “social insurance” for renters and could include vouchers to help pay for the cost of moving.
- Reduction of regulations. Reduce regulations such as building fees, permit processing times and other inhibitions to construction of new housing.
- Improved Section 8-type housing programs. Such programs would be administered by the government.
- Reduction of taxes on housing sales. Reducing taxes on sales would encourage turn-over of properties and new owners upgrading properties.
- Bond issues for affordable housing. In fact, a bond measure just for this purpose is already on the November ballot.
Impact of Rent Control
Many studies have shown that laws imposing rent controls not only fail but actually hurt those they are intended to protect, the poor and disabled, and benefit those they are not intended to protect, for example, upscale young professionals. One study has concluded that the economic and social costs or rent control “almost always outweigh any perceived short-term benefits they provide.” A. Downs, A Reevaluation of Residential Rent Controls (Urban Land Institute, 1996). Another example from Europe is Portugal’s failed decades old attempt at rent control which has left landlords with no money for repairs and much less for profit. For decades, properties have become crumbling, peeling, dilapidated and rundown, particularly in Lisbon’s gorgeous historic center. www.citymetric.com/politics/lisbon-basically-bribing-foreignershelp-revive-its-housing-market-and-it-sworking-3180. Half of the rentals are subject to rent control. Thirty-six percent of these rent controlled rentals need repair. Some flats were rented under decades old rent control at 75 euros, whereas market rent was as high as 1,500 euros. Only 6.2% of construction funds go to renovation. www.youtube.com/watch?v=pLONJeBRZYA. This difficult situation in Portugal is improving now that rent controls are being reduced or eliminated and other steps (such as encouraging foreign investments) have been implemented.
A current and very comprehensive study, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco” by Rebecca Diamond, Timothy McQuade, Franklin Qian was published in January of 2018. This study confirms the detrimental impact of rent control solutions such as Proposition 10. It looked at San Francisco in particular. It came to some of the same conclusions set forth above under the What Are the Arguments Against Proposition 10.
What is CMA’s Official Position on Proposition 10?
CMA’s position, as authorized by its Board of Directors, is to oppose Proposition 10 and to actively support its defeat. Given what is viewed by the Board as the clear detriments caused by rent control ordinances, as evidenced by historical efforts at rent control in places such as Berkeley, Santa Monica and San Francisco, CMA encourages everyone involved in the lending industry to oppose Proposition 10. CMA also encourages the contacting of members of your community to oppose Proposition 10. It will be difficult to overcome the emotionally charged arguments of the proponents of Proposition 10 with the evidence and common logic that truly exists, but the effort must be made.
Contact any board member to discuss other ways to support the effort to defeat Proposition 10. Contribute to the effort. Educate yourself on the issues and do not hesitate to support its defeat in discussions with your compatriots. Talk with your lenders about it. A good article to read is “Yup, Rent Control Does More Harm Than Good – Economists put the profession’s conventional wisdom to the test, only to discover that it’s correct.” www.bloomberg.com/view/articles/2018-01-18/yup-rentcontrol-does-more-harm-than-good.