What is It?

Costa-Hawkins is a CA state law passed in 1995 which pre-empts local rent control ordinances on a statewide level. The law provides exemptions from rent control regulations for qualifying rental units, which include single family homes, condominiums, and "newly constructed" units (buildings built in 1995 and after, or since the inception date of rent control in qualifying jurisdictions). Costa-Hawkins also prevents local rent control jurisdictions from enacting "vacancy control" otherwise known as "strict rent control". In the absence of vacancy control, a housing provider is able to raise the rental rate on vacant units up to market rates, providing that the previous vacancy was either voluntary, or an at-fault eviction. Please note that Costa-Hawkins protections are only applicable to cities that currently have rent control regulations in place. Cities without rent control would not be affected so long as local rent control policies are not adopted in that city.

Why was it Originally Passed?

Believe it or not, Costa-Hawkins came to fruition due to a housing crisis in California. Prior to the existence Costa-Hawkins protections, cities that had enacted rent control policies severely limited a housing providers ability to increase operating income through increasing rents. Most rent control ordinances in California were originally passed in a fashion that locked housing providers into arbitrary "base rents", which were essentially rental rates that had been retroactively rolled back to rates charged at a time prior to an ordinance's passing. These base rents were not standardized market rents nor any sort of formulaic "starting point " based on a renter's ability to afford the rental amount. Whatever rent that was charged to the tenant, irrespective of a renter's income, size of the unit, or amenities, was locked in as the base rent, and that rental rate would only be allowed to increase at a small annual percentage. If housing providers were afforded with a vacancy on one of their units, most local ordinances limited the amount in which they could raise their rents, if any, to the next tenant (e.g. 10%).

A number of issues naturally arose from these strict rent control regulations. To start with, maintaining existing housing stock is expensive, as there are initial and long term  associated costs with providing rental housing. Essential property systems such as roofs, windows, heating systems, and plumbing often need to be replaced, along with cosmetic improvements such as painting and landscaping. There are also risks involved, as it's not uncommon to have an unruly tenant who damages the property, or an altercation that requires legal intervention with corresponding legal costs. With strictly controlled rents, the ability to adequately maintain a rental property, while also achieving a worthwhile return on investment is put into jeopardy. If an owner is not allowed to increase rents to cover the high costs associated with property maintenance, odds are the owner will be forced to defer the maintenance of the property, as they will not be able to afford nor are incentivized to further invest in the rental property, if their costs cannot be recouped.

This strict rental housing regulation quickly affected housing providers' ability to remain afloat. The most vulnerable of which was the small time "mom and pop" rental housing owner. These owners typically did not have the liquid capital to feed their buildings as costs rose and rental incomes remained stagnant. The result was an exodus of small housing providers from the rental market, and an increasingly dilapidated housing stock. With the enactment of the Ellis Act in 1985, those property owners that could no longer survive the in the rental market, were legally able to remove their properties from the rental market, and find other uses for their property.

The strict regulations adversely affected new development in rent controlled jurisdictions as well. Developers leery of subjecting their investment to such strict government regulation chose not to invest in rent controlled cities, as the risks were too high. Providing rental housing is a business, and if the risk vs return ratio is too high, investors choose to invest their money elsewhere.

Due to strict rent control, for over a decade cities with such regulations suffered from both a dilapidated existing housing stock, and an actual decrease in the number of units available. With virtually no new units constructed, and continued disincentive for existing owners to remain in business and instead remove their properties from the market, the housing stock and quality of housing decreased over time.

This housing crisis is what led to the passing of Costa-Hawkins protections. A bill that both exempted new construction from rent control, incentivizing developers to build and bring new rental units to market, and allowed for vacancy control, giving existing owners the ability to bring vacant units up to market rents. Vacancy control allowed owners to attract necessary capital as a means to both maintain and improve the existing housing stock.

How would a repeal affect the rental housing market?

A Costa-Hawkins repeal would give local rent control jurisdictions the authority to make the following amendments to local regulations:

• Single family homes and condominiums could be subject to full rent control
• All new construction, and existing rental units could to subject to full rent control
• Vacancy control; local jurisdictions would be able to regulate rents on vacant units brought to the market, limiting allowed increases or potentially preventing increases altogether.

Because most rent control ordinances in California were introduced prior to Costa Hawkins protections, a repeal of the law would cause the language of the ordinances to revert back to their original form. We are currently in a housing crisis, and a repeal would essentially reverse the original incentives to increase housing brought forth by Costa-Hawkins, exacerbating the issues we're already dealing with.

The effects on new development would be immediate. Developers would likely steer clear of cities with rent control policies. Future development plans could be pulled from the table, and it's even possible that developments currently in process would be canceled. The amount of time, money, and planning involved with developing property in California is daunting, and with an increasing trend towards government housing regulation, developers would either choose to invest in cities that provided more favorable economic conditions, or choose to invest out of state.

The effects of a Costa Hawkins repeal on existing housing would be both immediate and long term. The immediate effects would be a substantial decrease in property value to all rental properties in rent controlled cities.  If vacancy control is re-introduced to rent control jurisdictions, the utility of a rental property is greatly diminished and there is no longer any potential "upside" to owning that property.  Properties with existing below market rents would be hit the hardest. If a current or new owner of a building has no future ability to raise rents regardless of vacancies, not only is the current return on investment limited, but odds are that return will only further decrease, as the costs of maintaining that property will rise faster than any allowable rental increases. Due to these unfavorable conditions, those who can afford to, would potentially Ellis Act their properties, removing them from the rental market permanently and finding other ways to utilize their asset such as condo conversion. Others would hope to hold-on, or be forced to sell their property at a steep discount due to government regulation.

The long term effects of a repeal would mimic the conditions present in rent control jurisdictions prior to the passing of Costa-Hawkins protections. We would see a decrease in available housing stock and existing housing conditions would worsen, resulting in a dilapidation and decreased living conditions. Poorer urban areas, that were already subject to lower rents and a higher prevalence of deferred maintenance, would further deteriorate, potentially creating "slum" like conditions. Decreased property values over time would also equate to decreased revenue for rent controlled cities, weakening a cities ability to meets the demands of routine civic duties.

The effects of rent control and a potential Costa Hawkins repeal would most likely adversely affect cities that neighbor rent controlled jurisdictions. Strict rent control severely limits supply in those rent controlled cities, and the demand for housing naturally shifts to neighboring cities, increasing competition for rentals. Additionally, rental property owners who own buildings in neighboring non-rent controlled cities, might be fearful that their city will be next to adopt rent control regulations, and could raise rents to market on their existing renters in order to protect their investment from future regulations.

                          What is the answer?

The answer to our current housing crisis is simple; we need to build more housing units, both rental and owner occupied. It's the only way to strive towards true affordable housing. Strict, suffocating rent control laws might make rents artificially affordable for some, but this type of government action is at the expense of small property owners, tax revenues, city improvement, and future renters. The only way to keep up with the intense imbalance of  supply and demand for housing in California is to make sure that we build as many units as possible, and streamline the process. Most rent controlled cities are located in ideal geographic locations for dense housing; they are close to commerce, employment, public transportation. We need to build efficient, high density housing in these cities. A repeal of Costa-Hawkins would essentially end this possibility. If we choose to adopt regulations that will unequivocally reduce the supply and quality of housing, how are we solving the problem?