For property stakeholders in California, the rental market presents growing challenges. The Tenant Protection Act of 2019 (Assembly Bill 1482) and local rent control ordinances have created substantial financial burdens for housing providers, especially those managing older buildings with rising maintenance and operational costs. This article discusses the need for introducing triple net leases for residential properties and suggests statutory reforms to alleviate financial pressures on housing providers while maintaining equitable housing solutions for tenants.
The Tenant Protection Act of 2019 capped annual rent increases and introduced just-cause eviction policies, marking a significant shift in California’s approach to housing. However, this statewide legislation operates alongside stricter local rent control laws in cities like Los Angeles, San Francisco, and Berkeley, creating a complex regulatory landscape for housing providers. The Burbank City Council is pushing for stricter local tenant protections.
The case for residential triple net leases in California is based on the need for a balanced allocation of financial responsibilities between property owners and tenants. Triple net leases, where tenants pay property taxes, insurance, and maintenance costs in addition to rent, offer a potential solution and should be permissible in the residential sector due to existing rent control laws.
Statutory changes to allow triple net leases are necessary due to several factors:
Unexpected Costs and New Taxes: Housing providers are increasingly burdened by rising water rates, utility fees, and insurance premiums, as well as new taxes and assessments voted on by citizens, such as parcel taxes and bond measures. An extreme example is local school Measure ABC that, if passed, will assess more than $1 billion in new property taxes against Burbank owners.
Ad Valorem Tax: Real estate is subject to a base ad valorem tax of 1% of property value, with additional taxes on top. Critics argue these extra taxes could be avoided with better fiscal management.
If approved by voters, additional obligations on California property include:
- Special Assessments: Charged for public improvements like streets and sewers.
- Mello-Roos Taxes: Levies within Community Facilities Districts to fund public amenities.
- Parcel Taxes: Flat taxes per property to support local services.
- Assessment Districts: Fees for specific projects like lighting and landscaping.
- Benefit Assessments: Fees for services providing direct benefits, like street cleaning.
- 1915 Bond Acts Assessments: Assessments under the 1915 Bond Act for infrastructure financing.
Ensuring well-funded government services is crucial, but the complexity of tax allocation often confuses taxpayers. Various taxes contribute to California’s General Fund, but calls for extra funding frequently lack context. For example, significant sums are allocated to high salaries for select state employees, such as the head coach at UCLA, who received $5,816,388 in 2022. Despite rent control protections, tenants are indirectly affected by the financial consequences of their voting decisions on taxes.
Statewide Accommodation for Cost Pass-Through: To address these challenges, there is a need for legislation allowing housing providers to pass through unforeseen costs to tenants, ensuring property ownership remains viable and rental properties are maintained.
California’s legislature should review the Tenant Protection Act of 2019 and local rent control statutes to permit triple net leases while balancing tenant and housing provider interests. Reforms should protect tenants from unreasonable financial burdens while allowing housing providers to recover legitimate expenses.
In conclusion, adopting residential triple net leases is a strategic response to the evolving challenges of California’s rental market. By advocating for statutory changes that accommodate the pass-through of unexpected costs, stakeholders can work towards a more sustainable and equitable housing market.
Christopher Matthew Spencer resides in Burbank, has been a California resident since 1985, and is an 8-year US Navy Veteran. He is a professional actor, writer, and film director, and has owned rental property in Los Angeles County since 1988.