Leasing 101: What A Property Manager Needs To Know About Rent Control
Contributed by the Team at LIVABLE
Rent control refers to legislation restricting rental rates in a city or state. The maximum rent that can be charged for a unit and the amount that the rent can be increased per year varies per municipality. Cities use rent control laws to regulate the housing market.
In the United States, rent control is not often used. According to a 2019 Urban Institute report, 182 towns in the United States have rent control laws, all of them located in New York, New Jersey, California, Maryland, or Washington, DC. In fact, 31 states prohibit municipal governments from passing rent control legislation. However, in recent years, the subject of rent regulation has resurfaced, particularly in cities and states where rising living costs combined with stagnating earnings have produced a housing affordability crisis for middle- and low-income individuals, as well as for seniors living on fixed incomes. Oregon was the first state to enact a statewide rent control law. The rule, which was passed in March 2019, limits annual rent increases to 7% plus the consumer price index increase.
How Does Rent Control Work?
The earliest rent control laws in the U.S. date back to the 1920s and were often outright rent freezes. These generally proved unworkable. In the 1970s, the idea of rent control surfaced again, this time in a more moderate form usually called “rent stabilization.” New York City, for example, has two rent control programs:
- For decades, the earliest rent control program has been gradually phased out. It imposed strict rent controls, but the only renters still protected by the law are those properties built prior to 1947 and only renters who have lived at those properties before 1975.
- About half of the city’s rentals are regulated under a more recent rent stabilization policy from the 1970s. The Rent Guidelines Board, whose nine members are selected by the mayor, determines the allowed percentage increase each year. The laws and exceptions are complicated, and they are overseen by a mix of city and state entities.
The high cost of living in New York City is frequently cited as proof that rent control doesn’t work. The average rent for a one-bedroom apartment in Manhattan was $4,642 for a doorman building and $3,167 for a non-doorman installation as of November 2021.
How to Offset Utility Bills In Rent-Controlled Areas
To offset utility bills in rent-controlled areas, you need a ratio utility billing company like Livable, with a custom utility management and cost recovery solutions in for commercial and residential properties. Livable’s cloud of services designed to reduce consumption while adding valuable dollars back onto your bottom line. Ratio Utility Billing Systems (RUBS) can be applied to any area even including those which are rent controlled making it easy for property managers like you to offset the fixed rent with separate utility bills between you and your residents.
Advantages And Disadvantages of Rent Control
The policy of rent regulation has long been contentious. Most rent control laws in cities now govern price increases for lease renewals rather than new tenants. This may have some advantages for landlords, who can charge whatever the market will bear for vacant flats or, in the worst-case scenario, retain residents who have every incentive to stay put and pay their rent on time. Some arguments against rent control include:
- Rent control affects the supply of housing because landlords would instead convert a building to condominiums or convert it to commercial use rather than comply with a rule limiting their earnings.
- New rental housing investment has come to a halt.
- Because of the poor return on investment for landlords, maintenance of rent-controlled buildings is often lax or non-existent.
- Housing shortages are created when renters remain in place at a rent-controlled unit for longer periods and eventually, rental units become mismatched to the needs of renters (e.g., a single parent remaining in a 3-bedroom unit long after divorce and children have become adults – that 3-bedroom unit is off the market and not available to the next family that needs it)
The main arguments “for” regulation include:
- Many locations in the U.S. are seeing rental prices rise at a far quicker rate than incomes for middle-income employment.
- Rent control may allow low-income families and persons on fixed incomes to live comfortably without fear of a rent increase that is personally devastating.
- With a long-term resident base in rent-controlled apartments, neighborhoods are safer and more stable.
Rent Control in California
In the simplest sense, “rent control” in California refers to city or county ordinances controlling the rent amount that landlords may charge. Rent control laws typically specify a maximum percentage by which landlords can increase rent (for example, 5%), as well as corresponding limits on the frequency of increases, as explained below. The yearly percentage by which landlords can raise rent is sometimes represented as a percentage of or in relationship to the annual Consumer Price Index (CPI).
The California Tenant Protection Act (Assembly Bill 1482) went into effect on January 1, 2020. Assembly Bill 1482 limits rent increases for qualified units in California to either 5% plus the change in the regional consumer price index (CPI) or 10% of the lowest rent charged in the 12 months preceding the increase, whichever is smaller. Additionally, rent may only be increased twice in 12 months (subject to the rent “cap”). Assembly Bill 1482 does not supersede more stringent city and county rent regulations, although it may apply to units that they don’t cover.
Properties in California Subject to Rent Control
Ordinary rental units, such as apartments within a complex, are subject to rent control legislation. However, not all California rentals are subject to rent regulation. The Costa-Hawkins Rental Housing Act of 1995 exempts from rent control single-family homes, condominiums, or multifamily properties constructed after February 1, 1995, and properties that have been built after a local ordinance’s effective date. The Costa-Hawkins Rental Housing Act also provides for “vacancy decontrol” of rent-controlled units, which means that when tenants vacate, landlords can raise rents to market levels (voluntarily or after being evicted for rent nonpayment or other lease infraction).
Owner-occupied buildings with no more than three or four units (depending on local regulations), short-term rentals (think Airbnb), government-subsidized tenancies (except in Berkeley and San Francisco) and detached (“granny”) units that could not sell separately from the main house are all exempt from rent control.
Evictions In Rent Control Areas
A tenancy usually terminates when a fixed-term lease expires or when a landlord or tenant in a month-to-month lease gives notice of termination. In either instance, a landlord has the legal authority to order a tenant to remove the rental without providing a reason (but cannot do so if the cause is retaliation for the tenant having exercised a tenant right or for a discriminatory reason).
For rent control to work, landlords must limit their rights to evict. Otherwise, they might evict prospective tenants prepared to pay higher rents. Most rent control ordinances demand “just cause”—reasonable grounds—for eviction. Just a few examples of just cause eviction provisions include:
- Failing to pay rent or having unauthorized roommates engage in illegal or forbidden activities such as drug dealing, disrupting neighbors (e.g., causing a nuisance), or damaging property—violating a significant term of the lease.
- The landlord wishes to move into the unit themselves
- The landlord wants to renovate the property thoroughly. (Landlords, in this case, may be required to provide tenants with a comparable unit or the option to re-let the refurbished unit at the same rent after the project is completed.)
Property owners who violate these restrictions often face stiff civil and criminal penalties. However, as a property manager, you can offset fixed rent by charging your utility bills separately per unit using Livable’s Ratio Utility Billing software. Call us and learn how you can set up a RUBs program to offset the rising utility cost in your rent-controlled buildings!
For more than a decade, Livable has been helping multifamily owners recover utility costs and increase the value of their investments through conservation. To find out how Livable can save you money, check out livable.com/aagla or call (877) 789-6027.