Good morning. Rent control has arrived with a thud. And unlike the anti-gouging ordinance we’ve been operating under for the past year, AB1482 affects ALL of California, not just the City of Chico or County of Butte. Governor Newsom signed the bill and it will go into effect beginning January 1, 2020.
AB1482 is formally titled “The Tenant Protection Act of 2019.” You likely have fears of how this new law affects you; let us do what we can to help explain and MAYBE allay some apprehensions.
First - and most reassuringly for some of you - there are exemptions. (But even those exemptions have exceptions, so this will be complicated.)
Exemption #1: is your investment property less than fifteen years old? No matter the size or number of units, any rental property is exempt for fifteen years from the date of its first certificate of occupancy. The establishment of age is a “rolling” calculation - when this law is goes into effect on 1/1/20, the age exemption will apply to all units constructed after 1/1/05. With each passing day, the construction exemption moves forward in parallel - so when reviewing the same law on January 1, 2028, the exemption will apply to units constructed after January 1, 2013 - but not automatically to those that are older.
Exemption #2: is your property “separately alienable?” This is a legal, real estate concept which asks, “can you transfer ownership of your ONE unit separately from any other unit?” If so, you are LIKELY exempt from this law. (I’ll explain the “likely” reference momentarily.) In layman’s terms, SINGLE FAMILY RESIDENCES, PUDs and CONDOMINIUMS are identified as “separately alienable,” and are, per the verbiage of this law, exempt.
HOWEVER, this particular exemption does not apply if ownership of the single family home or condo is held by a REIT (real estate investment trust), a corporation, or a LLC in which at least one member is a corporation. In those instances, even a single family residence or condo WOULD be subject to the Tenant Protection Act.
Exemption #3: is the property in question a duplex, AND does the property owner live in one of the two units as their primary residence? If so, this law doesn’t apply to the “second unit” in your building. Likewise, if you have a primary residence with one or two ADUs (accessory dwelling unit), AB1482 also does not apply to those units.
Exemption #4: if you are renting a room in your own house, with shared bath and kitchen access/usage.
Exemption #5: if your rental property is ALREADY under regulation by a MORE restrictive local rent control ordinance (i.e. San Francisco), THAT law takes precedence over AB1482.
Exemption #6: (this is a catch all, because these likely do not apply to many of our clientele) - dormitories, hotels and transient housing, deed-restricted low-income affordable housing units, hospitals, extended care and residential care facilities for the elderly. There may be one or two additional “obscure” exemptions of similar classification.
TO SUMMARIZE - most real estate investment owners who DO benefit from an exemption will be identified by #2 or #1 above. And for those protected by #1, it’s strictly a temporary solace - because if your development IS a multi-unit project, as soon as it’s fifteen years old, the terms of AB1482 will apply.
ONE FINAL NOTE ABOUT EXEMPTIONS - even a single family residence can lose its exemption if certain steps aren’t taken regarding the verbiage written into rental contracts and revisions. If Blue Oak Property Management is managing your investment, we will address this on your behalf. If you are self-managing or having someone else supervise your portfolio, reach out to me or your preferred professional property management firm for clarification.
THAT’S THE EXTENT OF THE GOOD NEWS. NOW TO THE NUTS AND BOLTS. The remainder of this analysis will discuss the application of AB1482 for those units that are so classified.
RENT CAPS: the allowable maximum rent increase annually will be limited to 5% plus CPI (consumer price index). The CPI number used is that percentage established and reported in April of each year by the Bureau of Labor Statistics. We are waiting on clarification on the specific percentage we are to use but it is going to be around 3%. Accordingly, the maximum allowable increase for existing tenants in for THIS twelve-month period would be limited to approximately 8%.
Three additional issues associated with rent increases:
- The formula for increases is 5%+CPI, but under no circumstances would it exceed 10% maximum. If the April CPI was MORE than 5%, the allowable rent increase for that period would still be capped at 10%.
- If you raised rent on any tenant MORE than the allowable amount any time after March 15, 2019 but before this law takes effect on 1/1/20, you must adjust the increase DOWN to no more than the allowable amount as of January 1, 2020. HOWEVER, you are not required to pay back to the tenant the increased amount they may have paid in those intervening months.
- When you incur a vacancy, there are no regulatory restrictions that would limit your right to adjust the advertised rent for your NEXT resident to fair market value established at the time of vacancy. Once that new tenant takes possession, they’d likewise be protected by the 5%+CPI cap. [Currently the City of Chico’s ordinance caps the amount you may raise the next tenant at 10%. We expect clarification this December from the City if the their ordinance will continue or be modified in light of AB1482.]
“JUST CAUSE” TENANT EVICTION PROTECTIONS: this concept has always been one of the most contentious limitations of any proposed rent control regulation. AB1482, once it is fully instituted, will restrict your authority to remove tenants from possession of their rental residence. There are two causes upon which an owner will legally be permitted to vacate a tenant; they fall under the classifications of either “Just Cause” or “No Fault.”
JUST CAUSE: a tenant breach of the rental agreement, including:
- Default in the payment of rent.
- A breach of a material term of the lease, including, but not limited to, violation of a provision of the lease after being issued a written notice to correct the violation.
- Maintaining, committing, or permitting the maintenance or commission of a nuisance.
- Committing waste (by their action or behavior, causing damage that reduces the inherent value of the property).
- The tenant had a written lease that terminated on or after January 1, 2020, and after a written request or demand from the owner, the tenant has refused to execute a written extension or renewal of the lease for an additional term of similar duration with similar provisions, provided that those terms do not violate this section or any other provision of law.
- Criminal activity by the tenant on the premises, including any common areas, or any criminal activity or criminal that is directed at any property owner or agent of the owner.
- Assigning or subletting the premises in violation of the tenant’s contract.
- The tenant’s refusal to allow the owner to enter the dwelling.
- Using the premises for an unlawful purpose.
- An employee, agent, or licensee’s failure to vacate after their termination as an employee, agent, or a licensee (i.e. on-site managers).
- When the tenant gives written notice to vacate to the owner, but subsequently fails to deliver fails to deliver possession
In any of the above instances, a properly created and delivered “3-Day Notice to Pay/Comply” would be required. In the event that the tenant did NOT remedy their violation after delivery of that notice, a “3-Day Notice to Quit” would thereafter be able to be created, served, and enforced.
Given the uncharted territory this new law will deliver us into, it will be highly recommended to speak with your property management professional and/or attorney for guidance. It’s almost assured that the majority of “Just Cause” terminations will result in legal actions and court cases.
In addition to “Just Cause,” there is a SECOND basis upon which to terminate a tenancy, described as “No Fault.” No Fault can include:
- An intent to occupy the property by the owner or their spouse, domestic partner, children, grandchildren, parents, or grandparents.
- Withdrawal of the residential real property from the rental market.
- Unsafe habitation, as determined by a government agency that has issued an order to vacate, order to comply, or other order that necessitates vacating the residential property.
- The owner complying with any of the following:
- An order issued by a government agency or court relating to habitability that necessitates vacating the residential real property.
- An order issued by a government agency or court to vacate the residential real property.
- A local ordinance that necessitates vacating the residential real property.
- If it is determined by any government agency or court that the tenant is at fault for the condition or conditions triggering the order or need to vacate, the tenant shall not be entitled to relocation assistance
- Intent to demolish or to substantially remodel the residential real property. “Substantially remodel” means the replacement or substantial modification of any structural, electrical, plumbing, or mechanical system that requires a permit from a governmental agency, or the abatement of hazardous materials, including lead-based paint, mold, or asbestos, in accordance with applicable federal, state, and local laws, that cannot be reasonably accomplished in a safe manner with the tenant in place and that requires the tenant to vacate the residential real property for at least 30 days. Cosmetic improvements alone, including painting, decorating, and minor repairs, or other work that can be performed safely without having the residential real property vacated, do not qualify as substantial rehabilitation.
For “NO FAULT” notices to vacate, the owner must offer the tenant impacted by this action one of two options, both which have similar financial impact, and are classified as a “relocation benefit.” The amount of a proffered relocation benefit would be one full month’s rent, in an amount equal to the last payment made by the tenant to the landlord.
The communications and process associated with offering this relocation benefit must be closely adhered to; failure to do so could invalidate owner’s “No Fault Notice of Intent to Terminate Tenancy.”
For the first twelve months of a resident’s tenancy in a unit that would otherwise be subject to AB1482, the “Just Cause” provisions DO NOT APPLY, and a “no cause” notice to vacate can be effected - as long as it complies with all other appropriate landlord/tenant laws. There is an additional time extension to that initial twelve months in certain roommate situations. This particular provision to the new law may make initial 12 month leases at time of move-in obsolete; 11 month or shorter term leases may be the new norm and that period of a tenancy may hereafter be reframed as a closely-watched “probationary period,” wherein the housing provider is constantly reassessing whether that particular resident is genuinely “permanent tenancy” material.
This bill actually has a “sunset clause” of January 1, 2030, at which time it will (nominally) cease to be of consequence. Forgive our cynicism, however - that’s a decade away, and we're inclined to believe that governmental regulations typically have a tendency to be self-perpetuating. We approach this as the law of the land, commencing as of January 1, 2020, and continuing indefinitely thereafter.
And we will continue to be here, navigating these waters and looking out for your best interests at all times. Thank you for taking the time to read this analysis.
Your team at Blue Oak Property Management