Would Vacancy Control Really Work?
The City of Berkeley enacted a comprehensive rent control ordinance in 1980, which was regarded as “strict” due to its inclusion of vacancy control. Vacancy control ensured that price controls imposed by the city remained in effect even after a voluntary vacancy occurred. However, in 1995, the Costa-Hawkins Rental Housing Act (Assembly Bill 1164), known as Costa-Hawkins, was introduced as a state law. This legislation prohibited the implementation of local rent control on properties constructed after its enactment date, thereby altering the rent control landscape.
In addition, Costa-Hawkins eliminated vacancy control, prompting Berkeley to take measures to comply with the new law. However, Berkeley did not make any changes to its own ordinance, keeping it intact and readily available to reinstate if Costa-Hawkins were to be repealed. Opponents of Costa-Hawkins have been relentless in their efforts to empower Berkeley and other cities to revive vacancy control. Proposition 10 was unsuccessful on the November 2018 ballot, followed by another defeat in November 2022 with Proposition 21. Currently, a third endeavor called the “Justice for Renters Act” is underway, gathering signatures for the November 2024 ballot.
Another significant development is the introduction of Senate Bill 466 at the state level. Sponsored by Senator Wahab (D-Fremont), this bill aims to substantially weaken the rent control safeguards established by Costa-Hawkins. It seeks to eliminate the exemptions for properties constructed after the enactment of Costa-Hawkins in 1995 or the effective date of a local rent stabilization ordinance, whichever is earlier. Consequently, the rent increase restrictions imposed on these previously exempt properties would be significantly reduced.
How would it work?
Berkeley’s rent control law from 1980 provides an enlightening perspective on how advocates of vacancy control envision its practical implementation. The experience of Berkeley serves as a cautionary tale for cities like San Francisco, Los Angeles, and others, should they ever consider enacting similar measures.
In Berkeley’s vacancy control system, a base rent is established for a rental unit, and its annual increase is limited to a small percentage based on the changes in the Consumer Price Index (CPI), similar to San Francisco’s rent control. However, when a unit becomes voluntarily vacant, the landlord can only set the rent for the next tenant based on the previous tenant’s last rent, as mandated by the city or county. In other words, the rent is tied to the unit, not the tenant.
In 2018, in anticipation of Costa-Hawkins potentially being repealed through Proposition 10, Berkeley’s Rent Board proposed an initiative that would have asked voters to establish the current rents as the new base rent. Subsequent rent increases would be calculated from the rent charged when the tenant initially moved in, allowing new tenants to continue where the previous tenant left off. The Rent Board even stated that if Costa-Hawkins were repealed, any rent increases resulting from Costa-Hawkins-mandated vacancy decontrol would be reversed, and the current tenant’s rent would be rolled back to what it would have been with normal periodic increases.
San Francisco also attempted to implement vacancy control with its 1991 ballot measure, Measure M. This measure would have allowed a “vacancy allowance of 10% to 14%,” which could only be applied once within a 36-month period. For instance, landlords would not have been able to increase rent multiple times if their tenants vacated and rented the unit again twice a year, with each new rental subject to a 10% to 14% increase.
How Could Vacancy Control Impact the Economy?
Overnight, the value of numerous buildings would experience a significant decrease. One of the primary motivations for investors to purchase rental properties is to enhance their worth and generate greater cash flow by raising rents to match market rates through renovations and property improvements. However, in a vacancy-controlled market, this incentive would cease to exist, leading to a shift where investment focus would solely be on cash flow rather than appreciation. Consequently, the initial return on investments would need to be higher to compensate for the absence of value-added opportunities, resulting in a sharp decline in property prices.
The disappearance of the opportunity to add value would remove the incentive for owners to invest in property upgrades. Without the potential for upside returns, owners would lack the motivation to allocate resources towards improving their rental properties.
Moreover, the consequences would extend beyond individual owners, affecting smaller building owners who have diligently accumulated their savings as well as larger operators and institutions whose investors include pension funds, endowments, foundations, insurance companies, and trusts. The potential losses for these entities would amount to billions of dollars. Additionally, the adverse impact would extend to the 87 million Americans who own stock in real estate investment trusts (REITs), resulting in losses, increased foreclosures, and substantial income and property tax revenue loss for cities.
Without a financial incentive to maintain rental properties, neighborhoods would gradually deteriorate, leading to decreased home values, the exodus of retail establishments, and the emergence of urban blight as an unfortunate outcome.
Filed under: Landlord Legal Issues