BILL ANALYSIS
SB 1257
Page 1
SENATE THIRD READING
SB 1257 (Costa) - As Amended: May 11, 1995
SENATE VOTE: 22-14
ASSEMBLY ACTIONS:
COMMITTEE H. & C.D. VOTE 6-2 COMMITTEE APPR.
VOTE 10-7
Ayes: Hauser, Hawkins, Boland, Ayes: Poochigian, Aguiar,
Bordonaro
Conroy, Margett, Richter Brewer, Frusetta,
Goldsmith
Oldberg, Richter,
Rogan,
Takasugi
Nays: Campbell, Mazzoni Nays: V. Brown, Bates, Burton
Friedman, Lee, K. Murray
Villaraigosa
DIGEST
Existing law:
1) Makes no statutory provision for, but does not prohibit, the
adoption of local rent control ordinances. Case law, Birkenfeld
v. City of Berkeley (1976) 17 Cal. 3d 129, held that rent control
is a proper exercise of a local government's police power if it is
reasonably calculated to eliminate excessive rents and at the same
time provide landlords with just and reasonable returns on their
properties.
2) Provides that the right to control rents on housing units
financed by the California Housing Finance Agency (CHFA) or the
Department of Housing and Community Development (HCD) resides with
CHFA or HCD, and the units cannot be subject to rent control
imposed by any state or local agency.
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3) Establishes, under local ordinances, residential rent controls
which may be generally categorized as "strict" or "moderate."
Strict rent control is characterized by the continuing control
of rent when a unit becomes vacant and prohibits a rent
increase when a new tenant occupies the unit (vacancy control).
Moderate rent control does not control the rent on a unit when
it becomes vacant, and permits the rent to rise to the market
rate when a new tenant moves in. After this new rent is
determined, the rent is again controlled (vacancy decontrol).
Vacancy control ordinances are in place in Berkeley, Santa
Monica, Cotati, East Palo Alto and West Hollywood.
4) Local ordinances, apply to single- and multi-family rental
housing with a variety of exemptions. Ordinances may exempt
from rent control single family residences, including
condominiums, owner-occupied duplexes or triplexes, or all
developments of four units or less. The City of Los Angeles,
for example, exempts luxury units, single-family detached homes
and second units from rent control, but not condominiums. Most
ordinances exempt new construction.
This bill establishes a comprehensive scheme to regulate local
residential rent control, as follows:
1) Vacancy Decontrol. Establishes vacancy decontrol for
residential dwelling units which are vacated by the former
tenant, except where that termination was caused by a
landlord's service of a notice changing the terms of the
tenancy or evicting the tenant upon 30-days notice.
a) Specifies that the rental rate of a dwelling or unit whose
rental rate is controlled by ordinance or charter provision in
effect on January 1, 1995, shall, until January 1, 1999, be
established as follows:
Upon a vacancy, as specified, an owner of residential real
property may, not more than twice, establish the initial rental
rate for a dwelling or unit in an amount that is no greater
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than 25% more than the rental rate in effect for the
immediately preceding tenancy or in an amount that is 80% of
the prevailing market rent for comparable units, whichever
amount is greater.
b) Does not apply if the rent control is pursuant to an
agreement between the local public entity and the owner for a
"direct financial contribution" or other specified assistance from
the locality. Does not apply to impair any obligation of
contracts entered into prior to January 1, 1996.
2) Single-family Exemption. Exempts from local controls a new
tenancy created after January 1, 1996 in a single family home,
condominium, townhouse, specified community apartment projects and
stock cooperatives, and any dwelling unit which could be sold or
transferred separately. This provision would not apply until the
termination of a tenancy in effect on
January 1, 1996, or to a tenancy that has been terminated by
the owner pursuant either to a 30-day notice of termination or a
change in the terms of the tenancy.
3) New Construction Exemption. Exempts from local controls any
new construction which is issued a certificate of occupancy after
February 1, 1995, and exempts from local controls any residential
real property which is already exempt from local controls as of
February 1, 1995 pursuant to a local exemption for newly
constructed units.
4) Evictions. Provides that this bill would not affect any
authority of a public entity that otherwise exists to regulate
the basis for eviction (such as local just cause eviction
ordinances).
FISCAL EFFECT
Unknown
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COMMENTS
1) Fourteen cities impose rent control on residential units. This
bill applies to residential rent control, as follows:
a) Vacancy Decontrol. Five vacancy control cities would be
affected: Berkeley, Cotati, East Palo Alto, Santa Monica and
West Hollywood.
b) Single-family Exemption. This bill exempts from rent
control single-family residences and other similar units upon
the first vacancy after January 1, 1996. The cities affected
are: Berkeley, East Palo Alto, Los Angeles, Oakland, San
Francisco, Santa Monica and West Hollywood.
c) New Construction. The only rent control cities which do
not exempt new construction from rent control and,
therefore, would be affected by this bill are East Palo
Alto, Cotati (partial exemption) and Los Gatos (partial
exemption).
d) Number of Units. According to information furnished by
opponents of the bill, this measure would affect (upon first
vacancy) 52,000 single-family homes and similar units and
79,800 apartments units.
SINGLE FAMILY HOMES APARTMENTS
AND CONDOMINIUMS
San Francisco 27,000 Santa Monica 34,500
Los Angeles 10,900 Berkeley 25,200
Oakland 5,000 West Hollywood 17,300
Santa Monica 3,700 East Palo Alto 2,800
Berkeley 2,200
______________________________
West Hollywood 2,200
East Palo Alto 1,000 TOTAL APARTMENTS
79,800
____________________________
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TOTAL SINGLE FAMILY
AND CONDOMINIUMS 52,000 TOTAL ALL UNITS
131,800
2) Proponents view this bill as a moderate approach to overturn
extreme vacancy control ordinances which unduly and unfairly
interfere into the free market. Strict vacancy control laws
deter construction of new rental housing and discourage new
private investments. Strict rent control laws encourage some
owners to take their units off the market or to sell the
property.
Further, vacancy control laws are extremely burdensome and
expensive to administer. For example, the Santa Monica Rent
Board has a budget of $4.7 million to regulate about 27,000
units. In contrast, the City of Los Angeles's Rent Board
budget is $7 million to regulate 500,000 units. Vacancy
control results in the availability of fewer affordable housing
units to tenants.
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Proponents of this bill state that census data shows that
between 1980 and 1990, the total of renter-occupied housing
units decreased in Berkeley, Santa Monica and West Hollywood
while the number of rental units in the
surrounding counties increased.
Proponents contend that a statewide new construction exemption
is necessary to encourage construction of much needed housing
units, which is discouraged by strict local rent controls. In
support, the California Bankers Association (CBA) states that
from a lender's perspective, extreme vacancy control ordinances
have a negative impact on the qualification of prospective
borrowers who wish to secure a loan with residential property
subject to the rent control law. The property owner/borrower
cannot adjust rents to meet market conditions and obtain a
sufficient revenue stream to properly maintain or improve the
property, which can adversely affect the borrower's ability to
repay the loan. CBA contends that under strict vacancy control
ordinances, there is no incentive for the construction of much
needed new multi-family residential housing.
3) Opponents argue that this bill is an inappropriate intrusion
into the right of local communities to enact housing policy to
meet local needs. Local officials and residents make
deliberate choices to address the unique needs of their own
communities.
It is pointed out that this bill affects four jurisdictions,
East Palo Alto, Berkeley, Santa Monica and West Hollywood, all
of which are built-out communities surrounded by higher-priced
housing markets. In such fully built-out communities there
will not be enough new construction to ensure affordable
housing.
Opponents also dispute assertions that rent controls have
caused massive reductions in the number of available rental
units in rent control jurisdictions, and contend instead that
reductions are due to factors such as property owners choosing
to sell their single family houses when prices were extremely
high, owners choosing to "go out of business" under the Ellis
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Act or selling to the existing tenants as "tenants-in-common"
pursuant to local ordinances.
Finally, opponents assert that this bill would cause housing
prices to spiral, with the result that affordable housing would
be available to fewer households.
Analysis prepared by: Stephen Holloway / ahcd / 445-2320
FN 017518