The cost of renting in California has climbed steadily over the last two decades. Now, it is one of the most expensive locations to live in.
In response to the state’s high housing costs, declining middle-class employment, and influence of the worldwide COVID-19 pandemic, California has had to enact a series of measures to keep affordable housing for low and moderate-income tenants available in these tough economic times.
On January 1, 2020, a new set of regulations were implemented in California that restricted evictions and leases. This change has led many rental owners to wonder – How much can a landlord raise the rent in California?
What is Rent Control?
Rent control, or rent regulation, usually refers to laws and ordinances limiting how much a landlord can increase rent in a given period and set conditions for when and how much they can raise rents. Such regulations are set to make housing affordable by imposing price controls.
There are generally two types of rent regulation:
- Eviction control
- Price control.
Both require landlords to limit their rates for tenants based on factors such as salaries and inflation. Eviction controls specify criteria under which tenants cannot be evicted, whereas price controls define how landlords can increase rent.
Controlling the eviction rates is often difficult due to constant changes in housing markets; therefore, wage-related regulations are more common.
Rent control is more common in cities where competition for limited housing stock raises market-rate prices out of reach for these residents. According to the National Multifamily Housing Council’s website, rent control is not applicable in all United States.
For example, some states have neither rent control nor premonitions, including the following: Montana, Wyoming, Nebraska, Ohio, Maine, Hawaii, Delaware, Alaska, Nevada, Virginia, West Virginia, and Pennsylvania.
Rent increases in California: An Overview of AB 1482
Under normal circumstances, landlords can raise rental prices for their properties when they sign a new lease agreement (generally once 12 months) – as long as they’re giving tenants proper notice.
For example, if a landlord wants to raise the price of their unit from $1,000/month to $1,300/month, they must provide a written notice to the renter at least 30 days before their next payment is due. However, in California, there are different rules.
On January 1, California implemented statewide rent control. For the first time, the state has set limits on rent increases. The law that defines this is AB 1482 or the Tenant Protection Act. Under this statute, annual rent increases are limited to 5% plus the change in the regional Consumer Price Index (CPI), or no more than 10% of the lowest gross rental rate charged to the tenant during any 12-month period before the effective date of the increase.
In addition, if the rental price increases take effect before August 1 of any year, the “Last Year” CPI adjustment, from April two years ago through April one year ago, should be utilized to compute the acceptable rent hike for the area in which property is located.
Furthermore, all CPI percentages should be rounded to the nearest tenth of a percent.
Related fact: According to Zillow, just about 7% of California houses saw rent hikes larger than the 5% limit set by new statewide legislation. In San Francisco, rent in rent-controlled apartments may only be increased at a rate of 2.6% each year, whereas in Los Angeles, the city’s rent control ordinance restricts yearly hikes to no more than 3%.
Cities that already have rent control laws in places like Los Angeles and San Francisco will keep their existing rent control rules — the new state legislation won’t overwrite them. Instead, the legislation will allow the same protections to units and houses not already covered by rent control rules.
What Type of Properties are Included in California Rent Control?
Rent control rules cover typical rentals, including apartments. However, rent control does not apply to all rentals in California. The Costa-Hawkins Rental Housing Act, a 1995 state law, stipulates that single-family homes, condominiums, and units constructed after February 1, 1995, are not covered by local rent control regulation.
Related fact: California’s new rent control legislation regulates 2.4 million more units, bringing the state total to approximately 8 million rent-controlled units.
The Costa-Hawkins Act also permits vacancy decontrol of rent-controlled units, enabling landlords to raise rents to market levels when tenants leave (voluntarily or after being evicted for not paying rent).
Apartments, condominiums, and houses not subject to rent control include owner-occupied buildings with three or four units. Depending on local law, short-term rentals (such as Airbnb), government-subsidized tenancies, detached “granny” units that could not be sold separately from the main house.
There are a few other exceptions for this bill, including the following:
- Properties constructed in the last 15 years.
- Single-family homes unless they are owned by a corporation, real estate trust, or an LLC with a corporation member that is a member of the LLC.
- Duplexes where the owner resides in one of the units.
- Properties that are already subject to local rent control regulations.
- Housing restricted by a deed, regulatory limitations, or other recorded document limits affordability to low- or modest-income households.
- College dormitories.
- Mobile homes.
The Rent Increase Notice
A majority of jurisdictions require landlords to send an official rent increase notice to raise the price of rental units. This notification must detail the new price, as well as when it takes effect.
In California, the amount of time that must be given depends on:
- The property type
- Lease type
- Rent increase.
For any increases of more than 10%, a 90-day notice should be provided to tenants. For all month-to-month or yearly leases with tenants who have resided there for more than one year, a 60-day notice is required. For month-to-month renters who have resided there for less than a year, a 30-day notice is necessary, and for all week-to-week leases, regardless of the amount of time they have lived there.
Related fact: California’s rent control expires in 2030 unless the state legislature extends or reenacts it.
Because local laws may differ, landlords should be aware of the county or city’s landlord-tenant regulations and the other state’s rules to comply.
The Tenant Protection Act: What Happens to the California Eviction Process?
The AB 1482 legislation, like most rent control laws, includes tenant safeguards in the form of a ‘just cause’ showing for landlords wanting to end residential tenancies.
Because of these restrictions, landlords cannot evict tenants and set higher rents with their new tenants to avoid the rent caps imposed by the legislation. These ‘just cause’ rights apply when all of the tenants in a unit have lived there for at least 12 months, or when some of the tenants have resided there for less than 12 months, but at least one tenant occupied the property for 24 months.
If a rental property is unoccupied, the gross rental rate for the vacant unit may be reset to market rentals. On the other hand, the law prevents a landlord from displacing a tenant who has resided in a rental home for at least 12 months unless the landlord has ‘just cause.’
The statute establishes two distinct ‘just cause’ criteria:
At-Fault Just Cause: A landlord can terminate a tenancy for ‘at-fault just cause,’ which includes, among other things, the tenant:
- failure to pay rent
- criminal activity or use of the rental unit for an unlawful purpose
- breach of a material term in the lease
- refusal to execute a written renewal or extension of the lease after receiving a landlord’s written request.
If the breach is curable (i.e., overdue rent payment), as required by California Code of Civil Procedure § 1161, the landlord must provide the tenant with a reasonable opportunity to mend it.
No-Fault Just Cause: A landlord can terminate a tenancy for ‘no-fault just cause,’ which includes, among other things, the following situations:
- The landlord or a member of the landlord’s family wants to live in the unit.
- The landlord intends to demolish or substantially renovate the property.
- The landlord is required to comply with a local ordinance or order issued by a government entity.
If the landlord wants to terminate a tenancy for “no-fault just cause,” he must pay the tenant with one month’s worth of relocation assistance.
The bill also eliminates the just cause showing required before terminating a residential tenancy for certain housing types.
- Units built in the last 15 years
- Affordable housing is restricted by a deed restriction or contract that provides subsidies for low-income, low- and moderate-income households.
- Individual rooms or accessory dwelling units rented out by the homeowner.
- Dormitories for both colleges and schools.
- Units associated with a non-profit hospital, religious institution, extended care, or licensed residential care home.
- Single-family dwellings or condominiums rented by the owner, unless they are part of a real estate investment trust, corporate entity, or limited liability company. At least one member is a corporation.
- Duplexes where the owner occupies one unit and rents the other.
The Effects of Rent Control on Landlords
Rent control has numerous advantages for tenants, allowing them to achieve more excellent financial stability, keeping families in their houses, and preventing working-class individuals from being priced out of their long-time homes and communities.
Landlords also profit from rent control. Tenants are more likely to reside in a property for an extended period of time. Fewer tenant turnover leads to less work and stress for the landlord. It saves money since vacant periods might result in a loss of value.
However, one study has discovered that rent control frequently backfires and may keep housing inaccessible. The study found that while rent control’s expansion stopped tenant displacement, landlords in San Francisco responded to the legislation by departing from the rental market, selling their properties, and converting their rent-controlled structures into condominiums.
The supply of rental housing diminished as landlords converted their apartment buildings into more expensive condominiums and replaced old structures with new construction to avoid rent control restrictions. In the long run, the reduction in rental housing prompted rent hikes.
The housing bubble also exacerbated the city’s affordability crisis. Because many multi-family structures were converted to condos and new construction was delayed, it pushed up the cost of living.
There is no research or analysis on the effects of rent control in California. However, according to Avail, while the new law does not prevent landlords from hiking the rent after a tenant vacates, stronger eviction protections and a cap on rent hikes might reduce profit and boost turnover, limiting more significant increases.
Rent control has the potential to wreak havoc on a landlord’s bottom line. It might discourage them from maintaining or repairing their rental units since doing so may lead to fines. In California and across the United States, rent control can also raise property tax costs for landlords.
AB 1506 will impose strict limits on how much rents can be raised annually, as well as for the eviction process.
Therefore, the bill has explicit provisions on how much a landlord can raise the rent in California, allowing them to only increase the rent by a maximum of 5% each year if they live up to the following requirements:
- They keep their units habitable.
- They maintain them well.
On the surface, this seems like it would benefit tenants because it prevents unreasonable increases in cost for living accommodation over time.
However, this same legislation can negatively impact landlords by limiting their ability to charge what they want or need to cover expenses like property taxes, maintenance costs, insurance premiums, and mortgage payments.