Proposition 21’s Rental Affordability Act: What You Need to Know

When legislators in Sacramento won’t protect tenants then it’s up to the people to step up. On this November’s ballot is Proposition 21 which would roll back landlord-friendly provisions in state law enacted in 1995 under the controversial Costa-Hawkins Rental Housing Act. Tenants who rent in a building newer than 1995, for example, or who rent a condominium or single-family home can thank ‘Costa-Hawkins’ for allowing the landlord unlimited rent increases. Here’s what you need to know about Proposition 21 on November’s ballot.

Proposition 21 would amend a section of state law known as the Costa-Hawkins Rental Housing Act that limits the ability of any California locality to regulate rental housing. The Act in 1995 passed out of the landlord-friendly legislature in response to rent control and it was signed by Republican Governor Pete Wilson. Ever since, ‘Costa-Hawkins,’ as it is known, has preempted local efforts to limit rent increases and has exempted a large (and growing) segment of the statewide rental market from rent control.
Tenant advocates have been gunning for Costa-Hawkins for decades. Proposition 10 in 2018 would have repealed Costa-Hawkins but it was soundly defeated by voters in the face of a $70 million landlord campaign to oppose it. (Money well-spent!). Proposition 21 would amend, instead of repeal, Costa-Hawkins.

About Proposition 21 Backers

Proposition 21 is backed by the Los Angeles-based Aids Healthcare Foundation (AHF) which is a global health concern and the largest provider of HIV/AIDS care in the United States. AHF is supporting reform of Costa-Hawkins because it says positive health outcomes is directly associated with household stability:

Widespread gentrification and displacement in Los Angeles and San Francisco were particularly problematic for AHF patients, who struggled to find stable, affordable housing. AHF patients in Atlanta, Chicago, New York, Seattle, and Washington D.C. have been facing similar difficulties. Housing is a public health issue.

Toward that end, AHF provides affordable housing through its Healthy Housing Foundation division, which buys Los Angeles hotels to shelter extremely-low income households facing homelessness. AHF also advocates for affordable housing policies through its Housing Is A Human Right division which is behind the ‘Yes on 21‘ campaign.

AHF has deep-enough pockets to put millions behind qualifying this statewide measure for the November ballot. AHF also backed Proposition 10 with $30 million but landlords spent double that amount — nearly $70 million! — to defeat it. AHF is a powerful foil for landlord-backed groups like the California Apartment Association and Apartment Association of Greater Los Angeles.

About Proposition 21

Proposition 21 would roll back certain provisions in state law that limit the local implementation of rent control. The goal is to maintain existing rental housing affordability and provide a measure of stability to households that rent. The purpose and intent of the measure as described in Section 3:

  • To allow California’s cities and counties to develop and implement rent control policies that ensure renters can find and afford rental housing in their jurisdictions.
  • To improve the quality of life for millions of California renters and reduce the number of Californians who face critical housing challenges and homelessness.
  • To stem the tide of evictions and displacement affecting communities across California.

The state’s Legislative Analyst Office analyzed Proposition 21 and the top takeaway was that “rental housing is expensive in California.” Proposition 21 if passed by voters would address that for many tenants by enacting the ‘Rental Affordability Act.’ It would amend state law to remove certain limitations on local governments that adopt rent control.

If Proposition 21 passes, it would require no action by any local government. They would not have to adopt rent control or make any policy change if they already have rent control. Proposition 21 merely allows local governments (like Beverly Hills) that choose to regulate rental housing to enact policies that are best-suited to local conditions.

About the ‘Rental Affordability Act’

If Proposition 21 is passed by voters in November, the Rental Affordability Act will amend certain sections of the California Civil Code that were introduced by the Costa-Hawkins Rental Housing Act in 1995. The Secretary of State summarizes the key points of Proposition 21 in the ballot description:

  • Amends state law to allow local governments to establish rent control on residential properties over 15 years old.
  • Allows rent increases on rent-controlled properties of up to 15 percent over three years from previous tenant’s rent above any increase allowed by local ordinance.
  • Exempts individuals who own no more than two homes from new rent-control policies.

Proposition 21 would allow a locality like Beverly Hills to regulate all rental housing in its jurisdiction whereas Costa-Hawkins today preempts such regulation through categorical exemptions.

Here are some key provisions of Costa-Hawkins that would be amended (if voters pass Proposition 21) and the practical effect of each amendment on tenants and landlords.

Costa-Hawkins allows a property owner to raise the rent of a rent-controlled dwelling unit to market rate after a voluntary vacancy [§1954.53(a)]. This is called ‘vacancy decontrol.’ The Rental Affordability Act would end vacancy decontrol by permitting only an increase of 15% over the rent paid by the previous tenant plus any increase allowed by local ordinance.

The purpose of this amendment is to temper the rise in rental housing costs. The prevailing asking rent is driven by the market, of course, but in California we see housing costs generally increase far faster than inflation or wages. That is true for rent-controlled housing too after a unit is voluntarily vacated. The Rental Affordability Act would ensure that the initial rent for a rent-controlled unit could not be doubled, say, after a longtime tenant vacates. Rent-controlled housing would stay rent-controlled.

The net effect is that the prospective tenant moving into rent-controlled housing would pay a rent that is something below market rent. It would over time narrow the difference between the rent paid by longtime tenants and those who moved in later. That discrepancy today can stretch to a factor of two or three: the longtime tenant pays $1,500 while her upstairs neighbor pays $4,500 for essentially the same unit.

Costa-Hawkins Rental Housing Act limits the reach of rent control by exempting all rented single-family homes and condominiums [Civil Code §1954.52(a)(3)]. Proposition 21’s Rental Affordability Act would amend state law to afford an exemption from rent control only to single-family rented homes and condominiums where the owner is a “natural person” owning no more than two residential dwellings or housing units.

The purpose of this amendment is to allow a locality to extend rent control to properties owned by corporate, private equity, and other forms of non-individual ownership while shielding individual owners (i.e., mom-and-pop landlords) and homeowners who may rent out their second home. So where a household today rents a single-family home or condo and can see their rent increased by an unlimited amount each year, the passage of Proposition 21 would mean that a locality could for the first time regulate the annual rent increase IF those properties are not individually owned or are leased second homes.

For Beverly Hills households renting a single-family home or condominium, and that dwelling was occupied prior to 2005, passage of Proposition 21 would mean the annual rent increase is capped (currently the max increase is 3.1%). If Proposition 21 fails then those households could continue to see unlimited rent increases.

Costa-Hawkins Rental Housing Act exempts properties from rent control in perpetuity if initially tenanted on or after February 1, 1995 [Civil Code §1954.52(a)(1)]. The Rental Affordability Act enacted by Proposition 21 would amend state law to instead create a rolling, 15-year exemption window after initially tenanted beyond which the property could be rent controlled.

The purpose of this amendment is to allow a locality the option to put price controls on rent after the property owner has had ample opportunity (15 years) to recoup the costs of constructing the housing. Proposition 21 if passed would end the in-perpetuity exemption from rent control: a rental property that was initially tenanted 15 years or more prior to the current date can then be rent controlled if the locality chooses to do so.

A few examples will clarify the effect of the amendment:

A Beverly Hills household rents an apartment in a building first tenanted in 1995. Under current law there is no rent control nor any cap on the annual rent increase. If Proposition 21 passes that property can now be rent-controlled and households renting there would benefit from a 3.1% maximum annual rent increase because the building’s initial occupancy (1995) was much longer ago than 15 years (and thus falls outside of the 15-year window).

A Beverly Hills household rents an apartment in a building first tenanted in December of 2005. Today that property is not rent-controlled and so the rent increase is not capped. If Proposition 21 passes, then come December (15 years after it was initially tenanted) then the property would lose its exemption from rent control pursuant to Costa-Hawkins because it effectively ‘ages-out’ beyond the 15-year window for exemption. Households there would see their annual rent increase capped.

A household that rents an apartment in a building constructed today will not see an immediate benefit. Once the 15-year exemption window closes, in 2035 for example, the annual rent increase could be capped because the property would then be rent-controlled.

Costa-Hawkins exempts in perpetuity any property that was exempted under local ordinance at the time the law was enacted regardless of when that property was initially tenanted [Civil Code §1954.52(a)(c)]. The Rental Affordability Act would amend that provision to strip that exemption. So long as a rental property would not be exempted from rent control pursuant to local ordinance, that property can be rent-controlled.

The purpose of this amendment is to put an end to the arbitrary exemption of rental properties that would otherwise be subject to a locality’s rent control ordinance but cannot be rent-controlled pursuant to Costa-Hawkins. That exemption is arbitrary because there is no criterion like property type or date of initial occupancy but instead as a rule exempts those properties exempted under local ordinance as it was written a quarter-century ago.

The effect of the amendment is to allow a local jurisdiction to determine which rental properties should be rent controlled rather than abide by an arbitrary, categorical exemption to rent control. Consider City of Los Angeles where the rent stabilization ordinance exempts from rent control “housing accommodations located in a structure for which a certificate of occupancy was first issued after October 1, 1978.” That provision was added before Costa-Hawkins. But when the state law was enacted, all all properties first occupied after October of 1978 were forever beyond the reach of rent control.

Costa-Hawkins allows a dwelling unit to return to market rent after a voluntary vacancy [§1954.53(a)]. The Rental Affordability Act would impose one important condition under which no rent increase would be allowed following a vacancy. If a dwelling was cited for “serious health, safety, fire or building code violations” within at least 60 days prior to the vacancy, and that condition was not abated for at least 60 days and remained unabated when the prior tenant vacated, then the landlord could not increase the rent following the vacancy.

The intent here seems twofold: to encourage the landlord to abate unsafe conditions in a timely manner when reported by the tenant; and to protect tenants against ‘constructive eviction’ where the landlord intentionally maintains unsafe conditions as a means to pressure a tenant to leave.

Should Proposition 21 be passed by voters and the Rental Affordability Act enacted, the effect of this amendment is that landlords would take reported health and safety violations more seriously than some landlords take alleged violations today. The obvious example is habitability: landlords have little incentive to abate unsafe conditions (like visible mold) because should the current tenant voluntarily vacate then the unit will ask market rent — and perhaps much more after remodeling. That is a perverse incentive that appeals to less-scrupulous landlords!

Putting Proposition 21 in Perspective

The Costa-Hawkins Rental Housing Act was enacted at the behest of property interests that fete Sacramento lawmakers at elaborate luncheons and that fund expensive state senate and assembly campaigns. That largesse has paid-off! As a result of Costa-Hawkins,

  • Beverly Hills cannot regulate the rent for rental housing constructed after 1995;
  • Beverly Hills cannot regulate the rent for rented condominiums and single-family homes (which may be as much as 15% of our rental market); and most important,
  • Beverly Hills cannot keep landlords from asking market rent when vacated.

However Costa-Hawkins does not affect a locality that has not enacted rent control. So the practical reach of Proposition 21 is quite limited: it affects only rent-control cities of which there are fewer than 20 in California.

Moreover, Proposition 21 if passed would only amend certain provisions of the Costa-Hawkins Rental Housing Act; it would not repeal it entirely. Landlords could still raise the rent on vacant units (just not as much as before, if the housing is rent-controlled) and landlords would have 15 years to recoup the cost of construction. Landlords would not enjoy a perpetual exemption from rent control where a locality has it.

Benefits to Beverly Hills Tenants

The effect on most Beverly Hills multifamily tenants is modest. Proposition 21 would bring few additional apartment buildings under rent control. Relatively few rental properties were constructed over the past decades; most are already rent-stabilized. There are some rented single-family dwellings and condominium units that might come under rent stabilization but the number is not clear.

Single-family and condo tenants would derive a real benefit from rent stabilization but there are two big caveats: 1) city council would have to expand rent stabilization to include those properties, which is no sure thing as council has expressed an interest not to include them; and 2) the Rental Affordability Act includes an exception for individuals who own no more than two properties and we don’t know how many such dwellings are owned by individuals (much less who owns three or more). It is difficult to estimate how many properties would be affected if Proposition 21 passes.

Over time however the benefit to all Beverly Hills tenants would be significant. When a unit is vacated the rent would not rise to market but somewhere below market due to the 15% ‘vacancy control’ cap so long as rents are rising fast. In a near-deflationary situation that provision would be less advantageous for tenants because rents would presumably increase at a slower rate anyway.

The bottom line: no landlord will go broke operating rental housing in Beverly Hills. In fact, when the city tightened the rent stabilization ordinance in 2017 and 2018 we didn’t see many landlords run for the hills (literally). Leasing apartments in Beverly Hills is still too good a business to walk away from. And the upside is not in the leasing, anyway, but in the selling. The payoff comes later.

Landlords in 2018 spent SIXTY MILLION BUCKS to defeat Proposition 10 which was put on the ballot to repeal Costa-Hawkins. This year landlords have contributed $35 million to date in order to defeat Proposition 21.

Our Take

Renters Alliance went into considerable detail in this explainer because the issue is complicated. And because insight into the implications of Proposition 21 is difficult to discern from on-air discussions like Prop 21: California Voters Get (Another) Chance To Vote On Rent Control on KPCC’s Airtalk.

At the end of the day the real issue is local control. Should a city that chooses to regulate rental housing be allowed to regulate rental housing as policymakers see fit? The state’s Legislative Analyst Office boils down the choice this way:

A YES vote on this measure means: State law would allow cities and counties to apply more kinds of rent control to more properties than under current law. A NO vote on this measure means: State law would maintain current limits on rent control laws cities and counties can apply.

Landlords have made up their mind and they’ve already put tens of millions behind the ‘No on 21’ effort to hold onto their profits. We believe it’s time for Proposition 21 as we argue in our companion editorial, Renters Alliance Endorses Proposition 21. Visit ‘Yes on 21’ for more information and a full list of endorsements.