Fact check: Will rent control initiative spare California landlords with a rental or two?

Included in a California ballot measure to let cities establish rent control on more housing is an exemption for small landlords who own up to two single-family homes.

It’s a key detail that’s ignited a fierce debate between housing activists pushing Proposition 21 and realtors hoping to defeat the measure.

It centers on a common investment for people who do not consider themselves to be wealthy. Rent control advocates want to assure those small landlords that the initiative would not apply to them, but the real estate industry argues the exemption is not as robust as it looks on paper.

Proposition 21 is the second rent control ballot measure Californians will decide on in two years. In 2018, Proposition 10, a broader proposal to repeal the 25-year-old law that prohibits most new local rent control ordinances, floundered at the ballot box when 59.4% of voters rejected it.

The coalition behind both measures, led by the Los Angeles-based nonprofit AIDS Healthcare Foundation, revised this year’s proposition to instead chip away at the law, which bars local governments from imposing rent freezes on buildings constructed after Feb. 1, 1995 and single-family homes and condos.

The small landlord exemption is part of the new plan to appeal to more voters. The campaign ensures it will guarantee a “fair profit” for these owners, while keeping most tenants under the umbrella of what Proposition 21 aims to accomplish.

“Proposition 21 protects single-family homeowners by exempting them from rent control,” a campaign ad claims. “If you are not in the rental home business, this law will not affect you.”

Opponents, including the California Apartment Association, counter the exemption still falls woefully short of safeguarding these landlords, who face financial ruin should Proposition 21 pass.

“Prop 21. repeals legal protections for homeowners like me,” a small property owner says in an opposing ad. “That’s not the (California) Dream – it’s a nightmare.”

Who’s right?

Here are the facts:

Who’s a ‘small landlord?’

The debate boils down to the definition of a “small landlord.”

René Christian Moya, Proposition 21 campaign director, said the ballot measure was crafted to cover as many tenants as possible, which meant excluding corporations and anyone with more than two single-family homes from the small landlord exemption. The measure would also exclude buildings constructed in the last 15 years.

Thirty-five percent of the 5.9 million California renter households live in single-family structures, according to 2019 data from the Census Bureau, meaning the exemption wouldn’t apply for the majority of units.

Moya said only “incidental” homeowners hoping to “add a little extra income in their pockets” should get a pass from Proposition 21.

Steve Maviglio, spokesman for the No on 21 campaign, said the definition is far too narrow, because “small landlords usually own more than two units.”

“Their goal seems to be going after the giant landlords,” Maviglio added. “But that’s not who they’re catching in their net. They’re catching moms and pops who own three units or more.”

To make things more complicated, small landlords in Proposition 21 are identified as “natural persons,” a legal term meant to distinguish them from properties owned through what the Yes campaign calls “fictional business entities, like corporations, partnerships, LLCs.”

Maviglio said that won’t cover a number of other ways that small landlords own rental properties, such as partnerships and certain kinds of trusts.

Fair rate of return

Rent control laws in California can’t inhibit a landlord’s “fair rate of return on a property.” Costa-Hawkins also prevents any ordinance from limiting what landlords can charge a new renter once a unit is vacated.

Gov. Gavin Newsom signed a law last year to curb egregious rent gouging by capping annual rent increases on certain units. The law, Assembly Bill 1482, limits these increases at 5% plus inflation, or 10%, whichever is lower.

While Proposition 21 would let owners raises prices in between tenants, the measure would restrict that increase to a total 15% over three years.

That number would still let landlords earn their return, the campaign said, but without jeopardizing eviction for financially struggling Californians.

Maviglio dismissed that idea as unfair to landlords who’ve invested in several properties as additional income or retirement savings and who should be entitled to raising antiquated rents to market prices once a tenant moves out.

“This is their life savings,” he said. “They’ve worked for this.”

He also said Proposition 21 would lead landlords to yank millions of units from the market, further exacerbating the housing supply crisis.

The Legislative Analyst’s Office did anticipate in a review of Proposition 21 that if more cities expand rent control, some landlords might sell their rental housing to new owners to “avoid rent regulation.” The analysis also determined that because renters would likely spend less on housing, landlords would earn less income.

And overall, it’s likely “the value of rental housing would decline because potential landlords would not want to pay as much for these properties.”

This story was originally published October 15, 2020 at 12:21 PM with the headline "Fact check: Will rent control initiative spare California landlords with a rental or two?."