Under Attack Again: Costa-Hawkins – What is It and Why Should You Care?

Written by Apartment Management Magazine on . Posted in Blog

Calling All Property Owners: It is Not Just for Apartments, But Single-Family Homes and Condominiums Will Also be Adversely Impacted

By Daniel Yukelson, Executive Director

The Latest Threat to Our Livelihoods and Retirement

California’s rental housing providers are again under attack by a well-known and controversial adversary, Michael Weinstein, the President of the AIDS Healthcare Foundation. Called the “Justice for Renters Act,” this proposed, November 2024 statewide ballot initiative would eliminate the protections rental housing providers have today under the Costa-Hawkins Rental Housing Act (Costa-Hawkins).

The proposed initiative gives full control over rent control regulations to local governments, and if this initiative passes, the result for the rental housing business will be disastrous. If passed, local jurisdictions could (and many will) impose price (rent) controls on vacancies when rental units turnover (so-called “vacancy control”) and these local jurisdictions could also impose rent control on single-family homes and condominiums and on newly constructed buildings (or buildings constructed after passage of a local rent stabilization ordinance). Under current law, because of Costa-Hawkins, rental property owners are free to price vacant units at going market rental rates (so-called “vacancy de-control”) and various properties are also exempt, “free and clear” from local rent control such as single-family homes, condominiums, and properties within a jurisdiction constructed after a local rent stabilization ordinance was passed. Effective in 2020; however, Assembly Bill 1482, the “Tenant Protection Act of 2019,” imposed state rent control on properties exempt from local rent control that were constructed 15 or more years ago, but still exempts single-family homes, owner-occupied duplexes, and condominiums, among other property types.

During 2018 and 2020, the multifamily rental housing industry stood its ground in the fight for its life against two ill-conceived, rent control ballot initiatives, Proposition 10 (2018) and Proposition 21 (2020).  These two ballot initiatives could have amended the California Constitution to prohibit rental housing providers from charging market rental rates rent upon a vacancy (e.g., “vacancy control”).  Twice in just two years, the multifamily rental housing industry stood its ground and defeated these ballot initiatives by large margins and deploying hundreds of millions of dollars in each instance. In response to this latest threat to housing providers, the Apartment Association of Greater Los Angeles is working to organize a strong opposition with industry stakeholders to defeat this attack on our livelihoods and retirement income, but it will take money, lots of money.

Costa-Hawkins Rental Housing Act – A Primer

During the past several years, there has been a great deal of discussion and debate taking place regarding the “Costa-Hawkins Rental Housing Act of 1995” with many renter advocacy groups calling for its repeal.  Anyone that owns any kind of residential property in the State of California, whether new or old, or whether multifamily, single-family or even a condominium needs to be informed and care a great deal about preserving the protections under Costa-Hawkins.

Costa-Hawkins is a landmark, California state law that places protective limits on local rent control ordinances. Costa-Hawkins provides two major benefits: (i) first, it prohibits municipalities from establishing rent control over certain types of housing units such as single-family homes, condominiums and newly constructed rental units; and (ii) second, it permits “vacancy de-control”, or in other words, it allows rental housing providers to set their rents at the prevailing market upon a tenant’s vacancy.  Without Costa-Hawkins, rental housing providers in cities such as Santa Monica and West Hollywood could not raise their rent to market under any circumstances.  It is Costa-Hawkins that mandates cities to permit an apartment owner to rent an apartment, when vacant, at any price (e.g., market price).

Before Costa-Hawkins, rental housing providers in many jurisdictions were often forced out of business and faced bankruptcy.  Prior to the protections passed under Costa-Hawkins, a rental housing black market formed, and apartment buildings became dilapidated due to deferred maintenance as owners suffered financially.  It was not that long ago when the City of Santa Monica was referred to as the “Skid Row by the Sea” because housing providers could no longer afford to upkeep their properties.

A Bit of History: Causes Leading Up to Rent Control

Rent control policies first appeared in the early and mid-1900s around the World Wars in reaction to these two national emergencies.  It was then during the late 1970s that various municipalities throughout California and nationwide began enacting rent control ordinances due, in part, to rising real estate values and surging interest rates, which had made single family homes in California less and less affordable. As a result, people began moving into apartments in larger numbers causing a rental housing shortage.  At the same time, municipalities were making poor land use decisions by restricting construction of new housing units. As the demand for rental housing increased and the supply decreased, rental housing providers increased rents – it’s just the “old” supply and demand. And, to make matters worse, in the “perfect storm,” state and federal low-income housing assistance fell, Inflation increased, and yet at the same time, wages and salaries fell.

The City of Berkeley became the first California city to adopt a post-war rent control ordinance in 1972. In 1976, Governor Jerry Brown vetoed state legislation (Assembly Bill 3788) that would have prohibited local rent control laws.  Assembly Bill 3788 was supported the California Housing Council (CHC), a real estate trade association.  Subsequently, the CHC was able to get an initiative to prohibit rent control laws on the ballot in 1980, Proposition 10, but this initiative was soundly defeated.

In the meantime, in June 1978, Proposition 13 had been approved by a two to one margin by California’s voters. Prior to the election, Proposition 13 proponent, Howard Jarvis, and the California Apartment Association, had suggested that landlords would lower rents if Proposition 13 were to pass. Apparently, numerous voters at that time were said to have thought that by lowering landlord property taxes, Proposition 13 would automatically mean lower rents. The CHC, then became fearful of a tenant backlash if landlords failed to follow through in lowering rents, and decided to oppose Proposition 13. Despite post-election efforts by Governor Brown and the CHC, few landlords lowered their rents.

Across California, tenants quickly began to feel their numbers and formed local groups, which quickly grew in intensity and strength. Tenant activists organized political agitation directed at state and city government. Governor Brown’s newly created ‘tenant hot line’ was at one point, getting 12,000 calls per day. Due to continuing tenant pressure, rent strikes, and adverse news coverage about rent increases and angry tenants, especially seniors, the Los Angeles City Council passed a six-month rent freeze in August 1978.  By 1988, fourteen California municipalities had adopted full rent control ordinances.

While the strength of the tenant activism eventually began to dissipate, later attempts to repeal rent control at the state level failed. Today, approximately three-dozen out of 482 California cities have enacted rent control laws.

The Birth of the Costa-Hawkins Rental Housing Act

Authored by Jim Costa, a Democrat Senator from Fresno, and Phil Hawkins, a Republican member of the Assembly from Bellflower, Costa-Hawkins was first introduced in the Senate and eventually became Assembly Bill 1164. After several negotiated changes, it was passed in both chambers. Republican Governor, Pete Wilson, then signed AB 1164 into law and Costa-Hawkins was born.

Although Costa-Hawkins placed limitations on rent control, which was an agenda more favored by Republicans, quite a few Democrats supported the Act. The pro-tenant Western Center on Law and Poverty (WCLP) requested several amendments to the bill such as the prohibition of rent increases “if serious health, safety, fire, or building code violations were discovered and not corrected for six months.” Costa-Hawkins was later amended in 2002 to close a loophole and clarify the law related to condominium conversions. It prevented owners of apartment buildings, who obtained a certificate for conversion, to an exemption to rent control laws, without selling any such apartments as condominiums.

What Life Was Like Before Costa-Hawkins and the Passing of the Ellis Act

Without “vacancy-decontrol” under Costa-Hawkins, municipalities can control the rental marketplace in its entirety. Some cities, such as Santa Monica before the passage of Costa-Hawkins, have exercised “vacancy control” by limiting what rental housing providers can charge for their units once a tenant vacates. Without the protections of Costa-Hawkins, rental housing providers simply could not keep up with the increasing costs to profitably operate their property. As a result, some owners decided to leave the multifamily housing business entirely, while others converted their properties to other uses, such as condominiums. 

In the mid-1980’s, California passed the Ellis Act, a law to protect the right of owners to go out of the rental housing business so that they would not be forced to continue operating them at a loss.  The Ellis Act was in response to the City of Santa Monica’s challenge to the right of property owners to stop offering their rental housing, and in essence, attempted to compel owners to operate rental housing, even at a loss. Costa-Hawkins has been a great lifeline for rental housing providers and to property owners who have been able to make-up for some of “lost rental income ground” after units are voluntarily or legally vacated.  Without Costa-Hawkins’ protections, rent control laws would vastly expand at the local level, and California would return to the “dark ages” when the worst effects of rent control were allowed to thrive without limits while, at the same time, driving housing providers out of business, creating a decaying housing stock and drastically reducing housing supply.

Over the years, price control extremists have suggested only certain portions of Costa-Hawkins be modified by, for example, removing only prohibitions on single-family homes or new construction.  Rental housing providers and industry trade groups like the Apartment Association of Greater Los Angeles considers any attempt to alter Costa-Hawkins on par with allowing the “camel’s nose to peek under the tent,” and any change, no matter how extensive, can only lead to a moving the goal post until it is ultimately repealed in its entirety. When it comes to Costa-Hawkins, it has always been the position of rental housing providers that any modification is the proverbial red line in the sand. The latest attack on Costa-Hawkins through the proposed “Justice for Renters Act” would be far more than a mere modification and would completely “wipe-out” Costa-Hawkins from the face of the Earth.

Threats Against Costa-Hawkins

Costa-Hawkins is has been threatened with repeal both in the state assembly, and by well-organized, and extremely well-funded tenants’ rights groups who have submitted ballot initiatives such as past Propositions 10 and 21, and the latest so-called “Justice for Renters Act.”  We rental housing providers are again under attack!  If Costa-Hawkins is repealed through the “Justice for Renters Act,” many local  municipalities will dramatically expand rent control, including the usual suspects like Santa Monica, Los Angeles, Berkeley, San Francisco, and others for sure.

In 2018, a state bill, Assembly Bill 1506, that had been proposed by then Assembly Member Richard Bloom, a Democrat from Santa Monica, that would have repealed Costa-Hawkins if passed. However, that bill had been put on hold by the author amid fierce opposition from the rental housing industry and never again saw the light of day. 

This latest threat to Costa-Hawkins is once again being led by tenant advocacy groups and Michael Weinstein, President of the AIDS Healthcare Foundation who was the principal funder of past Propositions 10 and 21.  The AIDS Healthcare Foundation and its tenant advocacy groups are extremely well organized and funded, and if the past is any indication, will likely raise and deploy more than $80 to $100 million to ensure this latest initiative gets on the ballot and is passed.  The proponents of this latest ballot initiative will soon be “on the street” seeking signatures to secure its place on the November 2024 ballot. 

The Apartment Association of Greater Los Angeles and its allied rental housing associations have always come through and been able to defeat similar attacks against our industry at the State level several times before. However, this initiative will take everyone’s financial support and advocacy to defeat!  We ask that each of our members keep informed, attend Apartment Association meetings, write letters to your legislature, and actively help us to overcome the looming threat to our property rights.  You need to care about Costa-Hawkins.  Together we can win!

We need your financial support to FIGHT-BACK and to WIN! We need to ensure the voice of reason and common sense is heard and that your property rights and values are preserved.  With your help, it will provide us with the resources needed to defeat this latest, ill-conceived ballot initiative, and other State regulations and local ordinances. Together we can overturn, amend, and/or defeat the spread of harmful regulation! HELP US KEEP COSTA-HAWKINS ALIVE!  We appreciate any and all contributions to our Political Action Committee that will us to achieve success in turning back the tide of regulations against us. Thank you in advance for your continued support! Contribute today at www.AAGLA.org/IssuesPAC

Daniel Yukelson is currently the Executive Director of The Apartment Association of Greater Los Angeles (AAGLA).  As Certified Public Accountant, Yukelson began his career at Ernst & Young, the global accounting firm, and had served in senior financial roles principally as Chief Financial Officer for various public, private and start-up companies.  Prior to joining AAGLA, Yukelson served for 15 years as Chief Financial Officer for Premiere Radio Networks, now a subsidiary of I-Heart Media, and 3 years for Oasis West Realty, the owner of the Beverly Hilton and Waldorf Astoria Beverly Hills where he was involved with the development and construction of the Waldorf.