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Give Thanks for Costa-Hawkins

By David Wasserman

David WassermanAll too often, we become mired in our legislative defeats and the multitude of laws that have eroded property rights over the years. Admittedly, the rental industry became much more combative, and difficult, in the late 1970s when city after city, including our own, passed rent control. The bad news intensified when the longstanding promise to exempt owner-occupied small buildings from rent control was broken in 1994 with the passage of Proposition I. In the late 1990s and into this decade, the city really ramped up its onslaught, making owner move-ins difficult (if not impossible), reducing capital passthroughs, mandating roommate replacement, and disallowing the severances of housing services. Most recently, the voters approved a measure making certain types of evictions prohibitively expensive by requiring massive payouts to tenants for “relocation expenses.” The end result of this calamity is overregulation—a detriment to everyone, including tenants, who must now contend with higher rents and understandably hostile landlords.

Yet one gift we sometimes fail to appreciate is that magnificent state law known as Costa-Hawkins. This statute, which became effective in 1995, marked a major turning point for the housing industry. In the late 1980s and early 1990s, terrified apartment owners watched as cities such as Berkeley, Cotati, East Palo Alto and West Hollywood adopted what was known as “vacancy control.” Vacancy control means that even if a unit is vacated, the rent remains fixed at a governmentally mandated price. Thus, in cities with vacancy control, owners would have to register their units with the local rent boards, and the registered rent would become the allowable amount that could be charged regardless of who lived in
the unit. Hence, there would be no such thing as fair market rent or potential “up side” for investors.

Not surprisingly, San Francisco’s government quickly became enamored with the notion of full rent regulation and began implementing vacancy control. However, this effort was halted when local and state industry leaders collaborated to draft and pass Costa-Hawkins. Indeed, former SFAA President Merrie Turner Lightner was instrumental in drafting this legislation.

Thanks to Costa-Hawkins, owners can now set the rental rate of vacant apartments to whatever rent they want. Units are not registered with the local rent board, and the government cannot tell an owner what to charge for a vacated unit. Some of our friends who own rent-controlled units in New York City are not so lucky, as this jurisdiction still suffers from vacancy control.

Costa-Hawkins is also crucial for several other very important reasons. First, it tells cities and counties with rent laws that buildings built after February 1, 1995, cannot be subject to residential rent control. This is important because it incentivizes builders to construct new apartment buildings. While the San Francisco law states that units constructed after June 13, 1979, are mostly exempt, we know, from widespread experience, that the Legislature changes the rent laws on an extraordinarily frequent basis. Now, thanks to Costa-Hawkins, City Hall cannot impart rent control onto projects built after 1995. At the present time, the California Apartment Association and other groups are taking a case before the California Supreme Court to fight Santa Cruz’s attempt to impose rent controls on newly-constructed second units on an owner’s property; hopefully, the clear legislative intent and plain meaning of Costa-Hawkins will be upheld by our state’s highest court.

Second, Costa-Hawkins exempted from rent regulation single-family homes and condominiums where the tenancy began on or after January 1, 1996. This means that owners of condominiums and single-family homes in San Francisco that were built before June 13, 1979, and were formerly subject to rent regulation, may now ignore the annual allowable rental increase limitations, provided that the tenancy began after December 31, 1995. However, these units are still subject to local eviction controls, so the tenancy cannot be terminated unless the landlord invokes one of the 15 allowable just-cause reasons. In addition, condominiums that have not been sold to bona fide purchasers for value by the developer (the owner or owners who converted the building to a condominium project) generally do not receive this benefit.

Third, and most important, is the ability that Costa-Hawkins affords to apartment
owners to set a new rent when the last original occupant no longer permanently resides in the unit, and the remaining subtenant(s) took occupancy after December 31, 1995. For example, if you rented a unit to Tenant A and Tenant B, and in 1998 Tenant C moved in, when Tenant A and Tenant B move out, the rent can be raised to fair market value.

There is a substantial amount of confusion and interpretation surrounding this critical provision of Costa-Hawkins. Not surprisingly, tenant advocates have made every effort to limit its use by owners. For starters, the remaining subtenants usually argue that the original occupant still permanently resides in the unit. In other words, they assert that the term “permanently resides,” which is not defined in the law, has a broad meaning and essentially precludes a Costa-Hawkins rent increase if the original occupant has any connection whatsoever with the rental unit. Thus, if the original occupant still sends the rent check or has some furniture at the apartment, even though he moved to Amsterdam, they advocate that the original occupant has not permanently vacated. Many judges at the San Francisco Rent Board accept this argument.

Tenants also commonly utilize the defense that the owner has waived any right to implement a Costa-Hawkins rent increase by recognizing the subtenant as an original occupant. In fact, the Rent Board has passed a series of regulations that attempt to define “waiver,” even though Costa-Hawkins is relatively silent on this issue. (Costa-Hawkins actually states that, “acceptance of rent by the owner does not operate as a waiver . . . unless the owner has received written notice from [the departing original tenant] and thereafter accepted rent [from the subtenant].”) The Rent Board insists that a landlord must increase the rent, or reserve the right to increase the rent, within 90 days after the original tenant vacates. The Rent Board also implies a waiver if the subtenant shows that the landlord “affirmatively represented” to the subtenants that they may remain in the unit at the rent-controlled rate. Obviously, these types of local rules invite and encourage tenants to attack Costa-Hawkins rent increases, and oftentimes we suffer defeat at the Rent Board when, in all likelihood, the Rent Board has exceeded its authority by misinterpreting and restricting the application of a state law.

A local Rent Board regulation that was passed about six years ago by the Rent Board Commissioners is related to this portion of Costa-Hawkins. Known as “Section 1.21,” this law allows landlords to raise the rent to whatever they want if they show that the tenant no longer “principally resides” in the rental unit. Enacted to decontrol units being used as part-time second homes, Section 1.21 is effective when the tenant has not permanently vacated but continues to use the apartment infrequently and not as a main residence. For instance, a tenant who now lives in Oregon, but keeps the place in the city for occasional Giants games may now have to pay a fair market rent. Santa Monica also has a similar law, and the California Court of Appeal has recently affirmed the right of local rent boards to implement rules decontrolling units that are not used as a principal place of residence.

So, in the spirit of the presidential campaign season, this column is circulated to impart a sense of hope and accomplishment. Our industry, while suffering defeats on many issues, has successfully staved off vacancy control; and the one-time practice of passing down rental units to family and friends has been eradicated in our city and state. When the local campaign season kicks into high gear shortly, and you are asked to contribute your time and money to support worthy candidates and causes, remember Costa-Hawkins and Section 1.21.

Also remember that both laws could be repealed or scaled down, which would effectively diminish the up side of your investment. In sum, do not doubt the ability of our local organizations to make a real difference, and never concede that our efforts are hopeless. Finally, remember that apathy will ensure that laws we cherish will fall by the wayside, as there are many here and throughout the state who are striving, with good funding and organization, to re-establish vacancy control as a misguided means to guarantee affordable housing.

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. David Wasserman is with Wasserman-Stern and can be reached at 415-567-9600 Copyright © 2008 SF Apartment Magazine. All rights reserved.