In cities and states across America, the price of housing continues to tick up year after year. This has put financial pressure on families who are increasingly finding themselves displaced by renters who can pay more to live in their respective areas. The unintended consequence is that those who are displaced are forced to relocate elsewhere, often much farther from their workplace, schools, relatives and more. Those who save on housing by moving farther from the urban core then end up spending a disproportionate amount of their income on transportation-related costs. As a way of mitigating increased housing prices (and therefore, increased rents), many cities and states are considering adopting rent control. Rent control policies can vary from city to city, or state to state, but all are designed with the same intent in mind: to limit how much a landlord can increase an apartment’s rent on an annual basis. At Trion Properties, many of our multi-family investments are in California and Oregon. Here’s our guide for everything you need to know about new rent control policies in both states.
What Is Rent Control?
Rent control, as noted above, is a way for legislative bodies to artificially cap the market value of rents in the areas under their jurisdiction. There is no federal rent control legislation. Instead, rent control laws are passed at either the state or municipal level. In each case, the legislation can vary widely. In some cases, there is a set cap on how much a landlord can increase rents each year (say, 5%). In other cases, the annual increase is tied to another metric, such as the Consumer Price Index, which is then typically adjusted for inflation. Rent control laws are usually more comprehensive than addressing just price increases. Most also include specifications about a landlord’s responsibility to make repairs, timing and notifications around lease renewals, evictions, and special rules for protected classes such as families with children or senior citizens. Rent control laws are typically overseen by “rent control boards” or agencies that have broad powers to enforce these rules. As such, in areas with rent control, most landlord-tenant issues are resolved in informal hearings instead of through the court system, particularly around issues like eviction. Rent control laws were popular in the 1970s and 1980s, but organized landlord opposition to the laws caused some of them to be repealed or weakened after the late 1980s. In recent years there has been a groundswell of support, in some communities, for instating (or reinstating) rent control policies given the upward pressure on housing prices in some areas. In this article, we take a look at the California and Oregon rent control bills that were passed in 2019.
California Rent Control Bill
California Landlord Tenant Law 2019
California passed sweeping, statewide rent control legislation in September 2019. The rent cap bill, Assembly Bill (AB) 1482, stipulates that for the next ten years, landlords will only be able to raise rent on existing tenants by 5% each year, after being adjusted for inflation. In other words, if the local rate of inflation is 2% that year, the landlord can effectively increase the rent by 7% in total. The law takes effect on January 1, 2020 and expires in 2030. There are a few exceptions. For example, the rent cap will initially only apply to California apartments built before 2004. It also exempts single-family home rentals (unless owned by a corporation) and owner-occupied duplexes. The new legislation will not have a major impact on some communities, as California previously had statewide legislation that allowed municipalities to opt into whether they instituted rent control. As such, many California communities, particularly in the Bay Area and outside of Los Angeles, have already had rent control policies on the books for years. In cities where rent control already exists, such as San Francisco and Oakland, the local rent control policies will remain intact. AB 1482 does not override municipal rent control regulations, it simply creates rent control policies in the rest of the communities without rent control.
No Cause Eviction in California
AB 1482 also create new legislation around evictions. Under the new law, all applicable evictions must be based on “just cause,” meaning the owner must have a just cause for the eviction. “Just cause” is divided into two categories: (1) At-Fault Evictions; and (2) No-Fault Evictions. An At-Fault Eviction, for example, could include a scenario in which the tenant has stopped paying rent or is otherwise in violation of their lease agreement. A No-Fault Eviction, on the other hand, refers to scenarios in which the tenant does nothing wrong, but the landlord has a reason they’d like the tenants to leave – such as for the sake of renovating units or making other significant capital improvements that cannot take place while tenants are living there. Selling the property is not considered a just cause for eviction under the new law. With this new law, landlords must provide a reason for the eviction by filing a Notice to Quit. It must fall within the permissible reasons, as set forth by the law. Landlords can no longer just issue a 30- or 60-day notice of termination of tenancy, which used to be the standard.
California’s new rent control law is intended to provide renters with additional rights in their landlord-tenant relationship. For example, the new law stipulates that there are only a handful of situations in which an otherwise lease-abiding tenants can be evicted. Those reasons include:
- Intent by the owner or their relative to occupy the property. For leases that begin on or after July 1, 2020, only the owner is permitted to occupy the unit, and only if the renter agrees in writing to the lease termination or if the lease has a provision for termination based on owner or owner-relative occupancy;
- Withdrawal of the rental property from the rental market;
- Intent to demolish or substantially remodel the unit; and/or
- If the owner is complying with a local ordinance, court order, or other government entity and such action results in the need for tenants to vacate the property.
Moreover, under the new legislation, when a termination of tenancy is based on a no-fault cause, the landlord must provide relocation assistance or a rent waiver to the tenant. The relocation fee must be equal to one month of the tenant’s rent in effect as of the date that the notice of termination of tenancy was issued, and must be paid within 15 calendar days of issuing that termination notice. A rent waiver must also be equal to one month of rent. If a landlord fails to pay relocation assistance or provide a rent waiver, the termination of tenancy becomes void.
While California’s rent control law certainly favors the interest of tenants, there are still several protections that have been established for landlords, as well. For example, several properties are exempt from the new rent control regulation. For example, single-family homes and owner-occupied duplexes are exempt from rent control, as are any properties that had a certificate of occupancy issued within the past 15 years (i.e., any properties built after 2004). In cases such as these, landlords simply have to give written notice to tenants that their units are exempt from rent control. (However, just because a property is exempt from rent control does not necessarily mean it’s exempt from just-cause protections.) Specialty housing such as a nonprofits, hospitals, religious facilities, licensed care and health facilities, schools and college dorms operated by the school or college, government-sponsored affordable housing, hotels, and other transient housing properties are also exempt from the law. Landlords also preserve other rights. For example, landlords can still increase rents – sometimes by a lot, depending on inflation. The rent control law is intended to provide protection against the most egregious rent increases. If the law were to have taken effect in 2019, California landlords could have increased rents by 8.3%, which is 5% plus the 3.3% increase tied to inflation. An 8.3% increase on a year-over-year basis is not insignificant by any means. Finally, the law only caps rental increases on existing tenants. Landlords can increase rents to market rate whenever a unit becomes vacant. Therefore, if a tenant willingly leaves at the end of their lease, the landlord can set the new rental rate at any rate they choose; the new 5% + CPI increase takes effect from there.
Implications for Investors
Many California real estate investors are understandably on edge given the sweeping tenant protections that have just been enacted. There are several implications to this law that landlords should consider:
- Units may turn over less frequently. Because landlords are able to set rent to market prices upon the signing of a new lease, it will be in the best interest of tenants to renew their leases each year as a way of avoiding higher prices elsewhere.
- Property improvements may be hard to justify. There is real concern among investors that the new rent control law takes away any incentive for landlords to continually improve and invest in their rental units, given the fact that they cannot raise rents more than a certain amount to cover those costs. Yes, a landlord can pursue a no-fault eviction to make substantial improvements, but it will be harder to recoup the costs of more run-of-the-mill upgrades such as modernizing fixtures, lighting and appliances.
- The rate of property development may decline. Investors trend to be inherently wary of rent controlled markets, and as such, new investment in California’s cities and towns may contract as investors deploy their capital in other, unregulated markets.
Oregon Rent Control Bill
Oregon Landlord Tenant Law 2019
In February 2019, Oregon became the first state in the nation to pass a comprehensive rent control regulation. The new law, Senate Bill 608, contained an emergency clause that required the new rent control and eviction protections to go into effect immediately. Under Oregon’s new rent control policy, landlords can only increase rents by 7%, plus inflation, on an annual basis. In 2019, that meant landlords could increase rents by 10.3%, as the local CPI increase was 3.3% this year. (Typically, the CPI rate in Western states ranges from just under 1% to around 3.5%.) The rent increase restrictions exempt new construction for 15 years, and landlords may raise rents without any cap if renters leave on their own accord.
No Cause Eviction in Oregon
Oregon’s new rent control law also limits no-cause evictions. Under the new laws, the only times a landlord can end a tenancy with a no-cause notice is:
- During the first year of a tenancy. If a tenant has occupied the property for more than 12 months, no-cause evictions apply; or
- If the landlord lives on the property and the property only has two units. This includes owner-occupied duplex situations as well as single-family properties with an accessory dwelling unit (ADU), such as a detached cottage, carriage house, or apartment above the garage. In these situations, a landlord can give a no-cause notice regardless of how long a tenant has occupied a property. This clause can also be invoked if a landlord is selling the property and the buyer, the new owner, intends to owner-occupy the property upon sale.
After the first year of tenancy, a landlord can only end a tenancy if: (a) a tenant violates terms of the lease; or (b) for one of four “landlord-based” reasons listed below.
Like the California legislation, the new Oregon rent control policy provides tremendous tenant protections. Under the Oregon legislation, tenant leases can only be terminated with a no-fault eviction in the following four scenarios:
- The landlord intends to either demolish the unit or use the unit for something other than a permanent residence (e.g., an office, short-term housing, etc.);
- The landlord intends to make repairs or renovations that will cause the property to be uninhabitable during construction;
- The landlord or the landlord’s immediate family member plans to move in and occupy the property; and/or
- The landlord has sold the unit and the buyer, the new owner, plans to owner-occupy the property upon sale (assuming the property contains two units or less).
In each of the four cases above, a landlord must provide 90-days’ notice for any no-fault eviction. The landlord must also pay the tenant the equivalent of month’s rent as relocation assistance.
Landlords in Oregon have retained several rights, despite these sweeping tenant protections. First, landlords can still evict tenants for cause. If a tenant misses a rent payment or otherwise violates the lease, the owner can begin eviction proceedings. This is easiest to do in month-to-month leases. Under a fixed-term tenancy, a tenant must violate the lease three times over the last 12 months, in which case the landlord can then refuse to renew the lease if the tenant has lived there longer than a year. However, landlords are obligated to give a written warning to tenants after each of the three violations. Second, a landlord can issue a no-cause notice of eviction within the first year of a month-to-month tenancy. In this case, a landlord simply has to give 30-days’ notice (in writing) to the tenant. In either of the aforementioned scenarios, the landlord does not have to provide relocation assistance. Relocation assistance also does not apply to owners whose properties contain four or fewer units, regardless of whether the property is owner-occupied. At these smaller properties, an owner simply has to give 90-days’ written notice if planning to do a no-fault eviction. As was the case in California, the rent control laws in Oregon do not apply to properties built within the past 15 years, providing another exemption for landlords of newer properties. Similarly, landlords are free to increase rents to market rate when a unit becomes vacant, assuming the tenant was not evicted without cause, in which case the rent increase stays in place.
Implications for Investors
Oregon’s new rent control policy has a few prominent implications for investors, such as:
- Lack of new development may result in higher home prices. With rent control in place, a tool that artificially constrains rental prices, investors may look to invest outside of Oregon. New construction is only exempt for 15 years, which is a blip on the radar for most long-term buy and hold investors. As such, new housing development might slow, which could have the unintended consequence of increasing prices and exacerbating Oregon’s affordable housing crisis (which the rent control policy was intended to alleviate).
- Units will still turn over. Oregon’s rental cap is 2% higher than California’s, which, when adjusted to include the consumer price index, can still result in double-digit rental increases. An annual 10+ percent increase is still a tough pill for some tenants to swallow and may do less to keep tenants in place than more marginal rental increases. Therefore, landlords can rest assured knowing that they can still have substantial year-over-year rent hikes – and again, can bring units to market rent as soon as a unit becomes vacant.
Rent Control in California vs. Oregon
There are two primary differences between the rent control bills passed in California and Oregon. The first is around the rent cap. In California, annual increases are capped at 5% plus inflation. In Oregon, the annual increase is slightly higher, at 7% plus inflation. The two-point difference might not sound like a big deal on the surface, but on a unit that rents for $2,000 a month, that’s a difference of $40 per month or $480 per year. What’s more, the annual rent increase creates a new baseline for rent increases the following year. With compounding, Oregon landlords will be able to charge significantly more to an in-place tenant than a California landlord charging the same amount during the first year of tenancy. The other major difference is around relocation payments in the case of no-fault or just-cause evictions. In California, there are no exclusions for relocation payments. In Oregon, any property with four or fewer units is exempt from having to pay tenants relocation payments – an exclusion that can save owners several thousands of dollars, particularly in the case of a four-unit property where all tenants are being evicted. This will be a major benefit to Oregon landlords, as Oregon tends to have more rental properties with four or fewer units whereas California has a greater preponderance of larger apartment buildings.
Investors who own, or who are interested in buying, multifamily real estate in either California or Oregon should carefully review these new rent control regulations. Those found in violation of these bills face steep penalties and fines by local oversight committees. It also remains to be seen how effective these regulations will be in tempering apartment rents. Most experts suggest that Oregon’s regulations, being less stringent, will have less of an impact than those in California. Either way, if these rent control policies have any impact, it might be enough evidence to encourage other states to consider pursuing their own rent control regulations. New York, Washington and other states have already indicated their interest in rent control, following in the footsteps of California and Oregon. Any investor looking to buying property in California, Oregon, or the other states where rent control is being considered should take the time to fully understand all the implications these regulations could have on their investment. Find out more about us at Trion Properties or check out our portfolio of multi-family homes in California and Oregon.