How the industry is preparing for another rent regulation battle

California landlords brace for “full-contact” confrontation

Oct.October 30, 2019 12:35 PM
California Governor Gavin Newsom (Illustrations by Paul Dilakian)

If there’s one home truth landlords have learned of late, it’s that millions of dollars in lobbying muscle can only take you so far.

With lawmakers in major U.S. cities prioritizing rent regulation, owners have been left to lick their wounds, evidenced in the statewide rent control measure recently passed in California. It’s a victory for the 4.6 million renters in properties that will be subject to the new law (AB 1482), which caps all rent increases at 5 percent plus the consumer price index and implements “just cause” eviction rules that prohibit landlords from rent-gouging or forcing tenants to vacate in order to raise the rent on a unit.

National politicians have piled on. Just a week after the law’s passing, Democratic presidential candidate Bernie Sanders proposed a $2.5 trillion plan that included an even stricter rent cap. He later dug in his heels with a tweet, proclaiming, “We need national rent control.”

Rep. Alexandria Ocasio-Cortez followed up with her own version of a rent control plan. It targets “market-controlling” landlords with five or more properties, capping their rent increases at 3 percent, and would revoke federal backing of mortgages for landlords who repeatedly harass tenants.

Rent control is spreading, but California’s bigger fight is yet to come.

AB 1482’s passage was largely a compromise that real estate could live with after the industry beat back activists’ push for local determination of annual rent limits. But even that bill may find new life.

At the end of last year, the Proposition 10 ballot measure, which would have lifted a ban on municipalities enacting their own forms of rent control, was roundly defeated. And though activist Michael Weinstein’s AIDS Healthcare Foundation’s “Housing is a Human Right” campaign failed, another fight is already ramping up. His new Prop 10 2.0 proposal, which would allow cities and counties to impose rent control on buildings after they turn 15 years old, has been spurred on by national calls for rent control.

“These are unprecedented federal platforms. It’s certainly eye-opening for folks in the industry who think that rent control is just a California or New York problem,” said Jim Lapides, vice president of the National Multifamily Housing Council (NMHC). “Now the stakes are that every state in the country could be impacted. If someone in the industry thinks it won’t affect them — it’s going to.”

Fightin’ words

Trash talk is reaching epic levels in the aftermath of the state law’s passage. Dennis Block, a real estate attorney who specializes in evictions, called AB 1482 “insidious” and said that the California Legislature “ripped the carpet out from underneath” real estate investors. Block predicted investors will be leaving the state for friendlier locales.

“I think [municipalities that have enacted ‘good cause’ eviction] are uncivilized societies, and they don’t believe in free enterprise,” Block said. “They are truly trying to destroy the market. What they’re trying to do is redistribute the wealth.”

Block gave a keynote address at a real estate trade show the week after AB 1482 was signed, encouraging landlords to evict their tenants as quickly as possible before the “just cause” provision set in.

Days later, advocates reported a surge in evictions. “We’re dealing with dozens of buildings calling our hotline,” said Trinidad Ruiz, an organizer with the Los Angeles Tenant Union. Katie McKeon, an attorney with the pro bono law firm Public Counsel, called it “a massive uptick in no-fault evictions” over the past two weeks.

In an emergency ordinance, the Los Angeles City Council placed a moratorium on evictions and eviction notices sent over the last several weeks before the “just cause” eviction provision took effect.

Aids Healthcare’s Weinstein said that Block’s statements “help our cause tremendously.”

“I don’t know who is managing PR on the industry side, I don’t know if they care, but they look terrible,” Weinstein said.

The California Apartment Association (CAA) condemned Block’s statements as “unconscionable.”

“[Block] does not speak for the rental housing industry,” said Debra Carlton, who runs public affairs for the trade group. “Property owners should not make any decisions based on Block’s fear-mongering or the perceived ramifications of AB 1482.”

The devil you know

Not all industry figures saw AB 1482 as calamitous. The Business Roundtable, which counts Blackstone Group CEO Steven Schwarzman among its board members, even penned a letter in support of the measure.

CAA dropped its own opposition to AB 1482 when it realized the bill was likely to pass, and after getting some important changes to the “just cause” provision. In the final version of the bill, “just cause” protections do not kick in until 12 months after a tenancy starts. And that clock restarts if a tenant gets a new roommate, CAA CEO Tom Bannon said. But his group, which represents both real estate investment trusts and smaller property owners, is gearing up for a fight against Proposition 10 2.0.

“A lot of things were being discussed under the table,” said Paul Rutter, a real estate attorney at Cozen O’Connor. “It wasn’t as bad as it could have been.”

The ability to take vacancy units out of rent control was a key victory — one Lapides hopes the industry can hold on to in the coming legislative session.

“That’s the hope, at least. Vacancy control would be an absolute killer for the industry,” he said.

In fact, significant changes were made to the bill behind the scenes over the summer, including leaving vacancy decontrol in place — allowing for the deregulation of vacant apartments — and exemptions for month-to-month tenants in the measure’s “just cause” eviction component.

The rules around enforcement are another key component of the new law: Single-family homes are exempted from the “just cause” eviction component except if they are owned by a corporation. “To be very blunt, the data around renters is really lacking,” said a spokesperson for the lead sponsor of AB 1482, Assemblyman David Chiu.

It will largely be up to California’s courts to determine the implementation of the statewide rent cap and “just cause” eviction, according to Chiu. Unlike New York, which enacted sweeping rent regulation rules in June, California does not have a state agency devoted to the implementation of the new law.

“Landlord-tenant laws are enforced by the public being educated on their rights and individuals indicating their rights through our legal system,” Chiu said.

The battle on the horizon

If the industry hopes to fend off lower caps on rent increases, the time to act is now. That’s where national groups like the NMHC come in, according to Lapides.

Though based in Washington, D.C., the NMHC is focused on working with local groups, including the CAA.

The CAA’s Bannon said that his group, which pushed hard to fend off Proposition 10, is keeping a close watch on fights in California and beyond. He’s received many calls from around the country, he said, from multifamily owners asking what to do in the face of local rent control fights.

“You can’t help but look at this stuff because politics in California is a full-contact sport sometimes. You have to get ready,” Bannon said.

NMHC member Essex Property Trust, a publicly traded REIT specializing in affordable housing, attributes 83 percent of its annual net operating income to California. In its latest earnings call, CEO Michael Schall said that his firm was tracking the renewed push for Proposition 10 “pretty carefully.”

The political action committee the firm backs, Californians for Responsible Housing, is “alive and well and organized in case of this,” Schall said.

Californians for Responsible Housing spent $50 million opposing the Proposition 10 ballot measure. In addition to Essex Property Trust, its backing came from AvalonBay Communities; Blackstone and a Blackstone-linked single-family home rental company, Invitation Homes; Marcus and Millichap; Prometheus Real Estate; Equity Residential and the California Association of Realtors, according to California election filings.

Despite Essex Property Trust’s assurances to its investors, Californians for Responsible Housing spokesperson Steven Maviglio said that the PAC has not yet formed an official campaign, since Proposition 10 2.0 has not qualified for the ballot, though it is widely expected to get the signatures needed to do so.

Like the real estate industry’s advocacy groups, the tenant advocates do not always see eye to eye on strategy. According to Democratic Socialists of America Los Angeles member Arielle Sallai, the decision to push for a ballot measure came from Weinstein, a millionaire whom the New York Times once called an “ex-Trotskyite.”

Weinstein has made repealing the Costa-Hawkins Rental Housing Act his personal crusade. The law, passed in 1995, allows municipalities to craft new rent regulations, but only on rental properties built before 1995.

Weinstein commands a yearly salary of $458,000, and tenant advocates have questioned his willingness to collaborate.

“Tenant advocates did not choose to do a ballot measure. Michael Weinstein did, without much discussion… or any discussion,” Sallai said.

But Weinstein said that his group collaborates with 500 tenant groups across the state, although they have no formalized structure. And he is not dissuaded from his cause by developers who say a rent cap will stymie housing development.

“That would be a credible argument if they were producing any affordable housing,” Weinstein said. “Trickle-down economics has been completely debunked. It doesn’t matter how many Ferraris you can build if all you can afford is a Chevy.”

Chiu, the lead sponsor of AB 1482, said that the AIDS Healthcare Foundation did not support the bill and had no involvement in its development. Chiu continues to support repealing the Costa-Hawkins restrictions on rent control, although he has doubts about the strategy behind a ballot-measure campaign.

“I have always thought it would be best for legislature to craft policies rather than going to the ballot,” Chiu said. “I’ve been telling people for years that Sacramento’s failure to legislate anything would lead to intense ballot measures out of necessity.”

René Moya, the director of the AIDS Healthcare Foundation “Housing is a Human Right” campaign, said AB 1482 is “not rent control” and only prevents one-time rent gouging rather than stabilize rents. Moya warns that the cap — which will limit rent increases to 7 to 9 percent in practice — may spur landlords to seek the maximum rental increase each year, especially in the face of the spread of more stringent rent control.

“I’m no psychic. But the likelihood is that landlords will raise rent to that cap every year, now that there is a signal to them that it’s an acceptable rate,” she said.

Nevertheless, Moya said the effort to repeal Costa-Hawkins is in a “much better place” than it was before.

“We have collected half a million signatures for our ballot measure,” Moya said. “We will mention this to the public. Rent control works, works at scale and works fast.”


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