Impending Initiatives Impacting the Value of Your Multifamily Investments

Impending Initiatives Impacting the Value of Your Multifamily Investments

  1. Potential Repeal Of Costa-Hawkins in the upcoming election. Costa-Hawkins essentially allows landlords to rent their vacant unit at market rate. If this were to go away, any upside potential in your multifamily investment would evaporate. Read more below.
  2. SB721 – this law has been around for a few years already and action is needed by Apartment owners by 2025. SB721 has been mentioned in the CAR Residential Income Purchase Agreements for over a year, though since we still find many owners that don’t know about the law, the law mandates owners of multifamily investments to inspect and if needed, reinforce all your balconies and elevated walkways. Read More below and a previous post here.

Quick Guide – Potential Repeal of the Costa Hawkins Rental Housing Act

Rent Control & It’s Impact on San Diego County Apartment Owners

The Justice for Renters campaign is back with a new initiative, the “California Prohibit State Limitations on Local Rent Control Initiative.” This cleverly worded proposal aims to repeal the Costa-Hawkins Rental Housing Act, a significant piece of legislation that currently limits the extent of rent control in California. While this initiative might appear to benefit renters on the surface, a deeper look reveals potential negative consequences for both the rental market and renters themselves.

Understanding Costa-Hawkins:

  • The Costa-Hawkins Rental Housing Act restricts cities from implementing rent control on buildings constructed after 1995 and exempts single-family homes and condos.
  • Repealing Costa-Hawkins would allow for more extensive local rent control measures, potentially including newer buildings and currently exempt properties.

Negative Consequences of Repealing Costa-Hawkins:

1. Impact on Rental Market:

  • Decreased Supply: Similar rent control laws in New York City have led to a significant number of rent-stabilized apartments being held off the market. The latest New York City Housing and Vacancy survey found that over 26,000 rent-stabilized units were vacant but unavailable for rent. This issue arises because landlords find it cost-prohibitive to renovate and rent out these units under strict rent control laws.
  • Renovation Challenges: Landlords argue that necessary repairs and renovations become financially unfeasible due to limits on recouping investment costs. The 2019 changes to New York’s rent regulations, which restricted rent increases on vacant apartments, serve as a case study showing how similar policies can lead to a housing shortage.

2. Increased Vacancies:

  • Incentives to Hold Units Vacant: With strict rent control, landlords may opt to keep units vacant rather than rent them out at a loss. In New York City, this has led to a heated debate between tenant advocates and landlords about the reasons behind the high number of vacant units. Santa Monica is a perfect example as it’s common for investors to utilize the Ellis Act to take an apartment building out of business entirely for a period of 5 years.
  • Regulatory Barriers: The inability to cover renovation costs through reasonable rent increases results in apartments remaining offline, exacerbating the housing shortage.

3. Lessons from New York City:

  • Record-Low Vacancy Rates: New York City’s apartment vacancy rate hit a record low of 1.4%, indicating a severe housing crisis. This is despite a significant number of units being held off the market due to rent control regulations.
  • Political Influence: Politicians seeking to gain favor with tenant activists have pushed for stringent rent control laws, which have inadvertently worsened the housing shortage by making it economically unfeasible for landlords to maintain and rent out their properties.

While the proposed repeal of Costa-Hawkins is framed as a renter-friendly initiative, its potential to harm the rental market and renters themselves is significant. By looking at the example of New York City, where similar regulations have led to a critical shortage of available rental units, it is clear that such policies can backfire. Apartment owners must consider the long-term implications of this initiative, as it could lead to reduced property values, increased vacancies, and a more strained rental market overall. Engaging with this issue now is crucial to safeguarding investments and ensuring a balanced, sustainable housing market in California.

More information:

https://californiansforresponsiblehousing.org/

Source: https://ballotpedia.org/California_Prohibit_State_Limitations_on_Local_Rent_Control_Initiative_(2024)

Senate Bill 721: What Apartment Owners Need to Know

Senate Bill 721 (SB 721), introduced by Senator Hill, significantly impacts the responsibilities and operations of apartment owners in California by mandating regular inspections of exterior elevated elements (EEEs) such as decks, balconies, porches, stairways, and walkways in buildings with three or more multifamily units. This legislation is designed to enhance safety and structural integrity, with a specific focus on wooden support structures.

Key Requirements:

Inspection Timeline and Personnel:

  • Deadline and Frequency: Inspections must be completed by January 1, 2025, and every six years thereafter.
  • Qualified Inspectors: Licensed architects, civil or structural engineers, specific building contractors, or certified building inspectors are authorized to conduct inspections.

Inspection Reports:

  • Reporting Requirements: Detailed reports must be provided within 45 days of inspection completion, including the current condition, future performance expectations, and any necessary repair recommendations.
  • Immediate Hazards: Any immediate hazards identified must be reported within 15 days, requiring prompt emergency repairs.

Repair Protocols:

  • Non-Emergency Repairs: These must be completed within 120 days, with possible extensions granted by local authorities.
  • Emergency Repairs: Must commence immediately upon identification.
  • Qualified Contractors: Repairs must be conducted by licensed contractors in compliance with professional recommendations and relevant codes.

Compliance and Penalties:

  • Civil Penalties and Liens: Failure to complete repairs within the designated timeframe can result in civil penalties and property liens.
  • Local Enforcement: Local agencies are empowered to enforce compliance, impose fines, and recover enforcement costs.

Record Maintenance:

  • Inspection Records: Owners must maintain inspection reports for at least two inspection cycles and disclose them to prospective buyers during property transactions.

Implications for Apartment Owners:

Financial and Logistical Burdens:

  • Cost of Inspections and Repairs: Owners bear the costs of inspections and potentially significant repairs, especially for older buildings or those with extensive wooden structures.
  • Administrative Burden: Maintaining detailed inspection records and ensuring timely disclosures during property transactions adds an administrative burden.

Increased Regulatory Oversight:

  • Local Enforcement: The bill empowers local agencies to enforce compliance aggressively, including imposing fines and recording liens against non-compliant properties.
  • Stricter Local Requirements: Local jurisdictions can impose more stringent regulations, leading to variability in compliance standards across different regions.

Enhanced Safety and Liability Management:

  • Safety Improvements: Regular inspections and mandated repairs improve the overall safety and longevity of EEEs, reducing the risk of accidents and associated liabilities.
  • Legal Protection: Compliance with SB 721 can mitigate legal risks by ensuring properties meet rigorous safety standards, potentially reducing the likelihood of litigation related to structural failures.

Market Impact:

  • Property Values: Enhanced safety standards may positively influence property values by increasing buyer confidence, although the cost of compliance may offset these gains.
  • Insurance: Improved structural integrity and safety compliance might positively affect insurance premiums and coverage terms.

SB 721 represents a comprehensive approach to enhancing the safety of exterior elevated elements in multifamily dwellings. While this law imposes significant responsibilities and potential costs on property owners, the long-term benefits of improved safety and reduced liability risks are substantial. Owners must proactively plan for inspections and repairs to ensure compliance and avoid penalties, thereby contributing to the overall safety and durability of California’s multifamily housing stock. Source: https://www.american-apartment-owners-association.org/property-management/what-apartment-owners-need-to-know-about-sb-721/

 

 



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evb@lee-associates.com

1902 Wright Place, Suite 180
Carlsbad, CA 92008, USA

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