California Statewide Rent Control Will Likely Have Little Impact on LIHTC, Bond Properties

Published by James R. Kroger, Thomas Stagg on Tuesday, September 24, 2019 - 12:00am

California lawmakers passed A.B. 1482 this month that would impose a statewide limit on rent increases and require just cause for eviction or termination of tenancy on many rental properties. While this new law will likely have little to no impact on low-income housing tax credit (LIHTC) and tax-exempt bond (TEB) properties, it is still important to understand the mechanics and potential issues on market rate units.  The legislation will take effect in January 2020 and sunset in 2030, however, rent restrictions under the new law are retroactive to March 15, 2019.

Rent Control History

There has not previously been statewide rent control in California, but 15 cities had already implemented rent control at the city level, many years ago: Alameda, Berkeley, Beverly Hills, East Palo Alto, Hayward, Los Angeles, Los Gatos, Mountain View, Oakland, Palm Springs, Richmond, San Francisco, San Jose, Santa Monica and West Hollywood.  A law passed in 1995 (commonly known as Costa-Hawkins) modified rent control in these cities by disallowing rent control on units constructed after February 1995. Therefore, rent control did not apply to many properties in those 15 cities, most notably properties constructed after February 1995.

New Rent Control

A.B. 1482 says that it does not preempt housing subject to rent control from a public entity that restricts annual increases to an amount less than A.B. 1482.  Therefore, the existing rent control in the 15 cities may still be relevant.  A.B. 1482 also says that housing built in the last 15 years is exempt.  The combined effect of these two items varies based on the year a property was built:

  • properties built before 1995 must comply with existing rent control from a public entity or A.B. 1482, whichever is more restrictive
  • properties built before 2005 are now covered by A.B. 1482

A.B. 1482 will limit annual rent increases to the lower of 10 percent or 5 percent plus the percent change in the cost of living for the region where the property is located. For example, if the percent change in cost of living for a year was 3 percent then the maximum increase in rents for the year would be 8 percent. If the percent change in cost of living in a year was 6 percent, the maximum increase in rents for the year would be 10 percent.

When determining the base line for the increases, an owner would take the lowest rental rate charged for the unit and any time in the 12 months prior to the effective date of the anticipated increase. Pursuant to A.B. 1482, the lowest rental amount does not include “any rent discounts, incentives, concessions, or credits.” However, to avoid any manipulation by the owner, A.B. 1482 states that these amounts must be separately stated on the lease agreement.

For example, the lease rent for a rental unit on July 1, 2020 is $1,000 and the tenant is receiving a temporary concession of $100 that is clearly noted in the lease for a net rental payment of $900. On January 1, 2021 the lease rent was lowered to $950. In June 2021 the owner wants to increase the rent on the unit to be effective July 1, 2021. The percent change in CPI for the area was 3 percent. The maximum rent that the owner can charge to the unit would be $1,026 which is calculated by taking the lowest rent in the previous 12 months, which is the $950 rent in effect in January, times 1.08 percent.

A.B. 1482 defines cost of living as follows:

“Percentage change in the cost of living” means the percentage change from April 1 of the prior year to April 1of the current year in the regional Consumer Price Index for the region where the residential real property is located, as published by the United States Bureau of Labor Statistics. If a regional index is not available, the California Consumer Price Index for All Urban Consumers for all items, as determined by the Department of Industrial Relations, shall apply.”

According to the State of California Department of Industrial Relations Consumer Price Index and the Terner Center for Housing Innovation, historically, the cost of living adjustment in San Francisco, Los Angeles and San Diego from 2006 to 2017 has never exceeded 5 percent and only once exceeded 4 percent. The average increase in San Francisco, Los Angeles and San Diego during that period was 2.57 percent, 2.02 percent and 2.11 percent, respectively, which would result in an average max increase in rents of 7.57percent, 7.02 percent and 7.11 percent, respectively, each year assuming the new limits under A.B. 1482.

Once a unit becomes vacant, the owner can set the new rent to whatever amount they desire. Once the unit is occupied, any subsequent increases would be subject to the limits on increases outlined above.

One final item to note from A.B. 1482 is that it does not limit the ability for a tenant to sublease a unit, however, the rents on subleased units shall have to comply with A.B. 1482.

LIHTC and TEB Properties

As mentioned, this provision will likely not apply to most existing or newly constructed LIHTC properties. The rent cap provision is subject to numerous exemptions on certain types of properties.  A few of the exceptions are as follows:

  1. Housing restricted by deed, regulatory restriction contained in an agreement with a government agency, or other recorded document as affordable housing for persons and families of very low, low, or moderate income, as defined in Section 50093 of the Health and Safety Code, or subject to an agreement that provides housing subsidies for affordable housing for persons and families of very low, low, or moderate income, as defined in Section 50093 of the Health and Safety Code or comparable federal statutes.
  2. Housing subject to rent or price control through a public entity’s valid exercise of its police power consistent with Chapter 2.7 (commencing with Section 1954.50) that restricts annual increases in the rental rate to an amount less than that provided in A.B. 1482.
  3. Housing that has been issued a certificate of occupancy within the previous 15 years.

Although LIHTC and tax-exempt bond developments are not specifically included in the list, it is generally believed that they would be exempted under the first clause above because they are restricted by a deed or other regulatory agreements with a government agency as affordable housing.

In addition, even if the provision above did not apply, new construction developments within their initial 15-Year compliance period would not be subject to A.B. 1482 because it would generally be within 15 years since the property had been issued a certification of occupancy.

As an aside, LIHTC and bond-financed housing already have rules that limit rents through the way in which rents and qualifying income levels get determined under tax guidelines. In terms of rent cap, HUD has ceilings that are applied to income limits used for LIHTC and private activity bond financed properties.  HUD does not allow income limits to increase by more than the greater of 5 percent or twice the change in national median family income. Rent limits are generally derived from these HUD-restricted income limits, so they have the same rent cap.

Just Cause

A.B. 1482 also requires just cause for the termination of tenancy for tenants who have lived in a dwelling unit for more than 12 months. A.B. 1482 provided many examples of just cause including:

  • Default in the payment of rent.
  • A breach of a material term of the lease, as described in paragraph (3) of Section 1161 of the Code of Civil Procedure, 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 as described in paragraph (4) of Section 1161 of the Code of Civil Procedure.
  • Criminal activity by the tenant on the residential real property, including any common areas, or any criminal activity or criminal threat, on or off the residential real property, that is directed at any owner or agent of the owner of the residential real property.

Similar to the rent control ordinance there are properties that would be exempted from having to comply with this portion of A.B. 1482.  The list is very similar to the rent control list; and has numerous exemptions, a couple of which are as follows:

  1. Housing restricted by deed, regulatory restriction contained in an agreement with a government agency, or other recorded document as affordable housing for persons and families of very low, low, or moderate income, as defined in Section 50093 of the Health and Safety Code, or subject to an agreement that provides housing subsidies for affordable housing for persons and families of very low, low, or moderate income, as defined in Section 50093 of the Health and Safety Code or comparable federal statutes.
  2. Housing that has been issued a certificate of occupancy within the previous 15 years.

Once again the just cause provision does not appear to apply to LIHTC properties. However, it is important to note that for LIHTC properties, IRC Section 42 already requires good cause for termination of tenancy to LIHTC tenants.

No Fault Just Cause Termination

A.B. 1482 also outlines examples of when tenants can have their tenancy terminated for what is referred to as no fault just cause. These provisions largely apply to properties that are being removed from the rental market (e.g. become owner) or undergoing significant rehab. Note the definition in A.B. 1482 is quite different than the definition of substantial rehab for acquisition rehab credits on LIHTC properties. A.B. 1482 defines substantial rehab as follows:

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.

If a tenancy is being terminated under the no fault just cause provision, the owner is required to compensate the tenant for terminating their tenancy. The payments are generally equal to one month’s rent in effect when the notice of termination is issued. The payment can be made either by direct payment or by waiving the last month’s rent, prior to the last month’s rent being due.

Mixed Income Properties

As outlined above the provisions of A.B. 1482 do not apply to LIHTC properties. However, there is some question as to how the provisions would apply to market rate units inside of a LIHTC development. Obviously, for projects that are within 15 years of receiving a certification of occupancy, both the rent restriction and just cause provisions would not apply to the market rate units. However, for properties outside their initial 15 years or acquisition rehab projects, it is unclear if the exemption granted to deed restricted projects apply to all units in the development or just those units that are restricted as affordable units.

Acquisition Rehab

One set of LIHTC properties that might run into issues with the just cause provision are acquisition rehab developments that are not subject to a deed restriction upon acquisition. Generally speaking, acquisition rehab properties have to have been in service for more than 10 years for LIHTC properties in order to get tax credits on the acquisition cost, and therefore, it is likely that many these properties might have been in service even longer, maybe more than 15 years when they are acquired by the LIHTC partnership. These older properties wouldn’t qualify for the 15 year exemption under A.B. 1482, and there would then be some months between when the property is acquired and when the deed restrictions attach to the property, and the new just cause provisions would likely apply during this window. This may cause issues for owners wishing to terminate the tenancy of tenants who would not income qualify for LIHTC units.

Expiration

Currently A.B. 1482 is set to expire Jan. 1, 2030. If this expiration date is not changed, it will never apply to any developments constructed after 2014 because properties that have been in service for less than 15 years are exempted.

Conclusion

While A.B. 1482 has a far-reaching impact on many rental housing properties across California, it will likely have little impact on LIHTC and TEB properties. However, owners should be familiar with the provisions as there will likely be confusion as tenants, tenant right organizations, government agencies and others work through implementing the new law.