Rent control is always a hot topic. With California in a continual housing crisis, it’s important for property owners and landlords to keep up to date with changes to California rent control law in 2021. Today we’ll examine the current state of rent control laws in California in general, as well as those in two highly competitive Bay Area markets with their own rent control regulations. Lastly, we’ll look at an alternative way to increase the value of your income property without increasing the rent.
Rent Control Laws in the State of California
In 2019, effective January 2020, California passed California State Assembly Bill 1482, known as the California Tenant Protection Act. With the passage of this act, statewide rent control measures were instituted. The purpose of AB 1482 is twofold: to limit the amount landlords can increase rents and to limit the reasons a landlord can evict a tenant. The first aspect of AB 1482 is accomplished by restricting rent increases at 5% per year, plus the cost of inflation, as measured by the consumer price index (CPI).
In addition to restricting the amount that a landlord can increase rent in a single year, AB 1482 also added eviction restrictions by implementing a list of “just causes” for eviction, similar to those that were already in place in larger cities throughout the state. The intent is to make it more difficult to terminate a tenancy by limiting the reasons that a landlord can evict. AB 1482 shifts the burden of proof to the landlord to justify their reasons to evict versus issuing a simple termination of tenancy notice. When a lease ends, the occupant must have the opportunity to extend the lease, or to continue month to month. The occupant basically has an unending lease unless they are evicted for just cause or the tenant leaves of their own accord.
Allowable reasons for eviction include failure to pay rent, having undisclosed occupants in the home, or engaging in illegal or disruptive behavior. The state classifies these as “at-fault” just causes because the tenant is at fault for violating a provision of the rental agreement. There are also “no-fault” just causes that cover scenarios like when the owner intends to move into the unit themselves or have a family member move into the unit. Another no-fault just cause is when substantial remodeling or repair work is needed for the unit that would prevent the unit from being occupied for some time. A relocation payment equal to one month’s rent must be paid to tenants for all no-fault evictions if the unit in question is covered by AB 1482. In local jurisdictions with their own just cause ordinances, the requirements may be even stricter. This could include higher relocation payment amounts, requiring the landlord to provide an alternative property to the renter, and providing the tenant an opportunity to re-rent the property at the same rent when the remodeling has been completed.
It’s important to note that rent control laws primarily apply to apartment units. Per the Costa-Hawkins Rental Act, rent control laws do not apply to single-family homes or condos with a few exceptions. Newly built units, including accessory dwelling units (ADUs), are also typically exempt from rent control laws for 15 years from the date of issue of a certificate of occupancy.
In cities with just cause for eviction ordinances and units not subject to the local jurisdiction’s rent control ordinance, this now allows for the calculation of damages for a wrongful eviction lawsuit under the state’s rent control ordinance. We always recommend a landlord hires competent legal counsel prior to terminating a tenancy.
We’ll get into more detail about this a little later, but first, let’s look at some distinctions for two of California’s most competitive rental markets.
San Francisco Rent Control Laws
As one of the most in-demand rental markets in the country, the City and County of San Francisco have implemented their own rent and eviction control laws since 1979, independent of the state of California. The San Francisco Rent Board sets the maximum percentage that rent can be increased on such units to 60% of the regional consumer price index (CPI) for the 12-month period ending October 31st of each year. San Francisco’s Rent Ordinance only applies to units with a certificate of occupancy issued prior to 1979. Units newer than this are not subject to local rent control, but they may be subject to state rent control under AB 1482. Single-family homes, condos, and select other properties remain exempt from any form of rent control under the 1995 Costa-Hawkins Rental Housing Act.
San Francisco landlords with units covered by local rent control may petition the Rent Board for rent increases related to capital improvements or operating and maintenance expenses for the property. In such scenarios, the maximum allowable rent increase is5% + CPI with a max of 10%. San Francisco rent control laws also allow landlords to potentially “bank” unused rent increases rather than increasing the rent annually.
As part of its Rent Ordinance, San Francisco also includes a list of just causes for eviction that applies to all units city-wide, regardless of certificate of occupancy date. They are similar to but more restrictive than the state’s list of just causes. In addition, San Francisco requires relocation payments for most “no-fault” evictions such as owner move-in (OMI) evictions.
Oakland Rent Control Laws
Like San Francisco, the City of Oakland has also instituted its own rent and eviction controls, which are more restrictive than the State of California’s. Unlike San Francisco, however, the rent and eviction controls were passed separately. Oakland’s local rent ordinance applies to units with a certificate of occupancy issued before January 1, 1983, while their Just Cause for Eviction Ordinance applies to units with a certificate of occupancy issued before January 1, 1996.
Whenever a tenant moves into a rent-controlled unit in Oakland, that tenant must receive a Rent Adjustment Program (RAP) Notice to Tenants. This ensures that new tenants are made aware of the Oakland Rent Board and that they know their rights as tenants. If a tenant does not receive this notice, no rent increase is valid until they receive the RAP notice.
Each July 1st, the Oakland Rent Adjustment Program calculates the maximum rent increase allowable, based on the regional CPI. The regional CPI calculated for the year is valid between July 1st through June 30th of the following year. Similar to San Francisco, property owners can petition for an increase above this amount for things like capital improvements or an increase in housing services. In no case, however, can the rent be increased greater than the state’s rent control maximum of 5%+CPI or 10%, whichever is lower.
When it comes to just causes for eviction, Oakland is more restrictive than the state. In addition, Oakland requires substantially higher relocation payments for “no-fault” evictions.
Ways to Increase Value
One way that landlords can increase rent beyond the annual adjustment is by making capital improvements to their property and then passing a portion of the costs through to tenants in the form of a rent increase. Capital improvements are defined as improvements that primarily benefit the tenant, such as a new roof, new windows, kitchen, or other investment into the condition of the property. Once landlords complete the work, they may petition the rent board for what is known as a passthrough, increasing the tenant’s rent, and in essence passing a portion of the costs to them. While this is one way to exceed the standard allowable rent increase, tenants do have the right to contest the validity of the improvements, including whether they were necessary or not, or primarily benefited them. Capital improvements pass-throughs take time and are a tedious process. At Edrington and Associates, we help clients with Oakland Rent Increase Petitions.
Build an ADU
Perhaps the best way to increase monthly revenue for your income property is not through a rent increase at all. Recent changes to California laws regarding Accessory Dwelling Units (ADUs) have made it easier and more profitable for landlords and property owners to add additional units onto their existing properties. The push for more ADUs is due to the high demand for housing. Overly restrictive zoning laws, high impact, and permit fees, and over-regulation in housing are responsible for the inflated rent and home prices. By adding an ADU to your existing property, you will be adding more affordable housing options into the community, while also greatly increasing your own income potential far more than a rent increase. Even more, newly constructed ADUs are not subject to any form of rent control for the first 15 years after receiving their certificate of occupancy. This means that your new units can be rented immediately at market rates, and they are not subject to the same rent control that older units are held to. For a landlord looking to increase their potential income dramatically, investing in an ADU can be a fantastic decision.
Rent control laws are not new in California, but the recent statewide law makes it more important than ever to know exactly what is allowable by the state or your local jurisdiction. At Edrington and Associates, we bring decades of experience in property management and real estate in the Bay Area to the table for all our clients. We can help advise you on rent control issues, as well as assist with capital improvement pass-throughs and ADU projects. We’d love to sit down with you to discuss all the options at your disposal to help you increase your profitability. Don’t hesitate to reach out to us to see how we can help you make the most of your real estate investments.