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PRESIDENT’S REPORT
APRIL 2008
KEEP YOUR EYES ON THE PRIZE
All too often, we become mired in our legislative defeats and the multitude
of laws that have eroded property rights over the years. Admittedly,
the rental industry became much more combative, and difficult, in the late
1970s when city after city, including our own, passed rent control.
The bad news intensified when the long-standing promise to exempt
owner-occupied small buildings from rent control was broken in 1993 with the
passage of Proposition I. In the late 1990s and into this decade, the
City really ramped up its onslaught, making owner move-ins difficult (if not
impossible), reducing capital pass-throughs, mandating roommate replacement,
and not permitting severances of housing services. Most recently, the
voters approved a measure making certain types of evictions prohibitively
expensive by requiring massive pay-outs to tenants for “relocation
expenses.” The end result of this calamity is over-regulation to the
detriment of everyone, including tenants, who now suffer as a result of
higher rents and understandably hostile landlords.
Yet one gift we sometimes fail to appreciate is that magnificent state law
known as Costa-Hawkins. This statute, which became effective in 1995,
marked a major turning point for the housing industry. In the late
1980s and early 1990s, terrified apartment owners watched at cities such as
Berkeley, Cotati, East Palo Alto, and West Hollywood adopted what was known
as “vacancy control.” Vacancy control means that even if a unit is
vacated, the rent remains fixed at a governmentally mandated price.
Thus, in cities with vacancy control, owners would have to register their
units with the local rent boards, and the registered rent became the
allowable amount that could be charged regardless of who lived in the unit.
Hence, there was no such thing as fair market rent or potential “up side”
for investors.
Not surprisingly, San Francisco’s government quickly became enamored with
the notion of full rent regulation and began implementing vacancy control.
However, this effort was halted when local and state industry leaders
corroborated to draft and pass Costa-Hawkins. Indeed, former SFAA
President Merrie Turner-Lightener was instrumental in drafting this
legislation.
With Costa-Hawkins, owners can now set the rental rate of vacant apartments
to whatever rent they want. Units are not registered with the Rent
Board, and the government cannot tell an owner what to charge for a vacated
unit. Some of our friends who own rent-controlled units in New York
City are not so lucky, as this jurisdiction still suffers from vacancy
control.
Costa-Hawkins is also crucial for several other very important reasons.
First, it tells cities and counties with rent laws that buildings built
after February 1, 1995 cannot be subject to residential rent control.
This is important because it incentivizes builders to construct new
apartment buildings. While the San Francisco law states that units
constructed after June 13, 1979 are mostly exempt, we know, from widespread
experience, that the Legislature changes the rent laws on an extraordinarily
frequent basis. Now, thanks to Costa-Hawkins, City Hall cannot impart
rent control onto projects built after 1995. At the present time, the
California Apartment Association and other groups are taking a case before
the California Supreme Court to fight the City of Santa Cruz’s attempt to
impose rent controls on newly-constructed second units on an owner’s
property; hopefully, the clear legislative intent and plain meaning of
Costa-Hawkins will be upheld by our state’s highest court.
Second, Costa-Hawkins exempted from rent regulation single-family homes and
condominiums where the tenancy began on or after January 1, 1996. This
means that owners of condominiums and single-family homes in San Francisco
that were built before June 13, 1979, and were formerly subject to rent
regulation, may now ignore the annual allowable rental increase limitations
provided that the tenancy began after December 31, 1995. However,
these units are still subject to the local eviction controls, meaning that
the tenancy cannot be terminated unless the landlord invokes one of the 15
allowable just cause reasons. In addition, condominiums that have not
been sold to bona fide purchasers for value by the developer (the owner or
owners who converted the building to a condominium project) generally do not
receive this benefit.
Third, and most important, is the ability that Costa-Hawkins affords to
apartment owners to set a new rent when the last original occupant no longer
permanently resides in the unit, and the remaining subtenant(s) took
occupancy after December 31, 1995. For example, if you rented a unit
to Tenant A and Tenant B, and in 1998 Tenant C moved in, when Tenant A and
Tenant B move out the rent can be raised to fair market value.
There is a substantial amount of confusion and interpretation surrounding
this critical provision of Costa-Hawkins. Not surprisingly, tenant
advocates have made every effort to limit its use by owners. For
starters, the remaining subtenants usually argue that the original occupant
still permanently resides in the unit. In other words, they assert
that the term permanently resides, which is not defined in the law, has a
broad meaning and essentially precludes a Costa-Hawkins rent increase if the
original occupant has any connection whatsoever with the rental unit.
Thus, if the original occupant still sends the rent check or has some
furniture at the apartment, even though he moved to Amsterdam, they advocate
that the original occupant has not permanently vacated. Many judges at
the Rent Board accept this argument.
Tenants also commonly utilize the defense that the owner has waived any
right to implement a Costa-Hawkins rent increase by recognizing the
subtenant as an original occupant. In fact, the Rent Board has passed
a series of regulations that attempt to define “waiver,” even though
Costa-Hawkins is relatively silent on this issue. (Costa-Hawkins
actually states that “acceptance of rent by the owner does not operate as a
waiver… unless the owner has received written notice from [the departing
original tenant] and thereafter accepted rent [from the subtenant].”)
The Rent Board insists that a landlord must increase the rent, or reserve
the right to increase the rent, within 90 days after the original tenant
vacates. The Rent Board also implies waiver if the subtenant shows
that the landlord “affirmatively represented” to the subtenants that they
may remain in the unit at the rent-controlled rate. Obviously, these
types of local rules invite and encourage tenants to attack Costa-Hawkins
rent increases, and oftentimes we suffer defeat at the Rent Board when, in
all likelihood, the Rent Board has exceeded its authority by misinterpreting
and restricting application of a state law.
Related to Costa-Hawkins is a local Rent Board regulation that was passed
about six years ago by the Rent Board Commissioners. Known as “Section
1.21,” this law allows landlords to raise the rent to whatever they want if
they show that the tenant no longer “principally resides” in the rental
unit. Enacted to de-control units being used as part-time second
homes, Section 1.21 is effective when the tenant has not permanently vacated
but continues to use the apartment infrequently and not as a main residence.
For instance, a tenant who now lives in Portland, Oregon but keeps the place
in the City for occasional Giant games and nights out on the town may now
have to pay a fair market rent. Santa Monica also has a similar law,
and the California Court of Appeal has recently affirmed the right of local
rent boards to implement rules decontrolling units that are not used as a
principal place of residence.
So, in the spirit of the presidential campaign season, this column is
circulated to impart a sense of hope and accomplishment. Our industry,
while suffering defeats on many issues, has successfully stayed off vacancy
control, and the one-time practice of selling keys or passing down rental
units to family and friends, a sight common in New York and some of the
European cities that have embraced rent control, has been eradicated in our
city and state. When the local campaign season kicks off into high
gear shortly, and you are asked to contribute your time and money to support
worthy candidates and causes, remember Costa-Hawkins and Section 1.21.
Also remember that both laws could be repealed or scaled down, which would
effectively diminish the “up side” of your investment. In sum, do not
doubt the ability of our local organizations to make a real difference, and
never concede that our efforts are hopeless. Finally, remember that
apathy will ensure that laws we cherish will fall by the wayside, as there
are many here and throughout the state that are striving, with good funding
and organization, to re-establish vacancy control as a misguided means to
guarantee affordable housing.
DW
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