Saving Costa-Hawkins

Posted by wasserman

This November, our industry faces its toughest challenge in almost thirty years:  Saving Costa-Hawkins from repeal and preventing the inevitable rebirth and expansion of vacancy control.  More than enough ballot signatures have been collected and certified to place the Costa-Hawkins repeal measure on the November 2018 state ballot, meaning between now and then the campaign to preserve this vital law, spearheaded by the California Apartment Association, must educate California voters to vote NO.  In most of the state, folks have no idea what this law does; in fact, proponents of the repeal are advertising Costa-Hawkins as an encroachment by Sacramento on local housing policies.

Yet as we San Franciscans know all too well, Costa-Hawkins is critically essential because it rightfully prevents local governments like the increasingly progressive San Francisco Board of Supervisors from passing vacancy control measures.  From the inception of the rent law in 1979 until the enactment of Costa-Hawkins in the mid-1990s, there were three attempts to pass vacancy control in the City, each defeated by massively funded campaigns led by the SFAA and its industry partners.  Not all California jurisdictions were as fortunate; in particular, about five major towns suffered under vacancy control measures until Costa-Hawkins became law, most notable amongst this group being Berkeley, Santa Monica, and West Hollywood.

Vacancy control is pure rent control.  Stated simply, a vacancy control law limits the amount of rent that may be charged regardless of who moves into and out of a rental unit.  Indeed, an apartment may be completely vacated and remodeled, yet the rent of a new tenancy will be restricted by the government.  (The implementational mechanics of vacancy control require all owners to register their apartments with the local rent board, who then directly informs incoming tenants of what the rent will be regardless of what a lease states.)  About 20,000 apartment units in New York City are still straddled with this type of regulation, but California banned it outright when Costa-Hawkins passed.  As such, we here in San Francisco can realize a building’s upside potential as units gradually turn over even while current tenants enjoy rents that hardly increase from year to year.  This “win-win” scenario could all but disappear come January of 2019.

Almost every reputable economist, urban planner and social scientist recognize vacancy control for what it is:  a disaster.  Such laws, and even the threat of them, quash new construction and development because no private sector builder can afford to erect new housing with rent control measures in place.  As it stands now, the City’s onerous affordable housing component has stifled necessary new housing starts, and a statewide repeal of Costa-Hawkins essentially guarantees that developers will flee the state in mass, thereby further exacerbating the housing shortage.  Notwithstanding this mountain of evidence that illustrates the obvious, politicians here and throughout the state believe that artificially controlling the marketplace with these draconian measures will somehow protect current tenants from rising housing costs while spurring builders to construct more dwellings notwithstanding the facts that the return on investment will disqualify almost any provider from obtaining financing.

Costa-Hawkins not only prohibits vacancy control, but it also allows landlords to issue an unlimited rent increase when the last original occupant that rented an apartment in the beginning of the tenancy no longer permanently resides there.  The logic for this provision is simple:  Subsequent occupants who did not move into the home on day one but came in afterwards should not be afforded the same rent control protections as the original tenants.  Instead, when the last lessee vacates, a new rent is established.  If Costa-Hawkins is repealed, this fair rule goes away, meaning subtenants will stay on at the same rent and, under the City’s generous subletting laws, continue to sublet forever.  While San Francisco enacted a local rent regulation in the late 1980s to address this unfairness, that rule was since amended to track the provisions of Costa-Hawkins, meaning its repeal is likely to simultaneously spell the end of this local law.

For those of you who rent single-family homes and condominiums that are subject to the rent rules, Costa-Hawkins permits you to impose unlimited rent increases if the tenancy began in 1996 or thereafter.  A repeal would instantly make these tenancies subject to rent increase restrictions.  This allowance in Costa-Hawkins was made to encourage homeowners to rent out their homes so that they could enjoy unimpeded investment income during retirement years.  The repeal advocates seemingly do not mind if retiree income is decimated, not to mention the outright disincentive a repeal would create to homeowners that are now open to renting out their homes while they reside elsewhere.

With regard to new construction, Costa-Hawkins prevents the imposition of rent control measures on housing built after 1995.  This was done to encourage builders in California to keep building given the state’s never-ending population expansion.  The mere threat of the repeal has already caused major projects to be placed on hold, and an actual repeal would undoubtedly obliterate new multi-unit housing starts.  Here in San Francisco, the rent laws typically do not apply to housing where an initial certificate of occupancy was issued after June 13, 1979, the effective date of the SF rent ordinance.  With Costa-Hawkins out of the way, the City could, almost overnight, make rent control (and vacancy control) applicable to all housing regardless of the date of construction.  While tenant rights activist applaud such an occurrence citing that there should not be two classes of housing, they again overlook common logic:  Not only will all new housing starts stop, but owners of the tens of thousands of newly constructed units, which are mostly mapped as condominiums, will think twice before renting them to long term tenants.

Indeed, this reckless repeal effort will, if successful, achieve a couple of terrible milestones.  One, as discussed here, new housing development will stop, further constricting the supply of housing and driving the cost of living upwards.  Two, property owners will look to vacation and short-term occupants to fill their buildings.  Whether this is achieved legally or not, archaic rent control schemes will lead to alternative types of rentals, and with the advent of Airbnb and other short-term housing platforms, housing providers now enjoy many alternatives to the traditional model of housing permanent residents and their families.  Thirdly, owners will, out of financial necessity, fail to reinvest into their properties in the wake of looming vacancy control measures.  Why paint your building or beautify the lobby if your rents are dictated by a local rent board no matter the turnover in occupancy?  Even with the current scheme of rent stabilization where rents on current tenancies are severely restricted, capital improvement and operating/maintenance pass-throughs have been gutted, and terrible eviction control laws sanction bad tenant behavior, housing providers are leery of going above and beyond what is minimally required.  A repeal would extinguish any hope of meaningfully improving and enhancing our housing supply.

So with this ballot measure looming, time is short.  The campaign needs funding desperately.  Most appraisers believe that every apartment owner will lose between twenty and thirty percent of their building’s value if Costa-Hawkins is repealed and vacancy control is then imposed in their community.  Certainly San Francisco will be quick to enact such laws — only a fool would believe otherwise given what has transpired here since the late 1990s.  As such, we at the SFAA are asking every owner to donate $100 per rental unit NOW.  For a campaign to work, voter education through the media and press needs to begin well before the fall election season.  Therefore, please make your checks payable to (and forward payment to) “Californians for Responsible Housing,” 2350 Kerner Blvd., Ste. 250, San Rafael, CA  94901.  Please make this modest contribution now for your sake and the sake of our state.  And thank you from the CAA and SFAA!

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