Santa Ana is a city with beautiful historical architecture and an emerging art district that is surrounded by trendy restaurants. In addition, there’s many great attractions such as the Bowers Museum, the Lyon Air Museum and the Discovery Cube Museum. Santa Ana has the advantage of being centrally located in Orange County and has a rich cultural heritage. This diverse city, comprised of over 50% renters, is the first in Orange County to enact a 3% rent cap or 80 % of inflation, whichever is less, on all buildings constructed in 1995 or earlier.
They also voted to enact a stricter “just-cause eviction” ordinance and to set aside up to $300,000 to create an “eviction legal defense fund” to protect tenants. With over 2,000 multifamily buildings, according to title records, only 11 were built after 1995, so the new law will affect almost all landlords.
In addition to being another blow against the free market economy on which our nation is founded, Santa Ana’s proposal seems unnecessary because state laws already protect tenants. Last year, the state implemented AB-1482, which caps annual rent increases at 5% plus inflation for homes at least 15 years old, and the law also requires landlords to have a “just cause” to evict tenants.
On the surface, this new legislation appears to be a victory for tenants who complain of overcrowded living conditions due to the rising cost of rent. But if a city that is comprised of a majority of renters makes itself unfriendly to landlords, property owners will sell, values will go down, the city will collect less in property taxes and instead of rising to its full potential as a center for art, culture and eclectic cuisine, Santa Ana will decline into a dilapidated city that no-one is proud to call home.
Petitioning the Bill
Landlords can petition for exemption from the local ordinance, for a few different reasons including “the need for repairs caused by circumstances other than ordinary wear and tear “and changes in reasonable operating and maintenance expenses.” Every year there are predictable increases to operating expenses including a 2% annual property tax increase and rising costs of insurance, landscaping, termite and pest control, property management fees, routine maintenance fees and general upkeep. Then there are the unexpected costs that a landlord must be prepared for such as needing to purchase new appliances, new flooring, fixing a leaky roof or repairing extensive water damage if a pipe bursts. If these common expenses would be an acceptable reason to qualify for an exemption from the 3% rent cap, then that’s EVERY property owner!
Unfortunately, if you would like to be considered for exemption, you will also have to pay for all associated costs for city employees to review your petition including if the city deems it necessary to employ outside experts to analyze your Fair Return Petition. The city manager will determine the fee on a case-by-case basis and the property owner must pay this prior to the city reviewing your petition.
Attack On Rental Property Owners
The new laws seem to target property ownership as a business. Other business owners are fine, but people who provide housing are portrayed as being immoral, corrupt and ruthless for seeking to make a profit from their business. At the City Council meeting Santa Ana, tenants described landlords as being greedy, selfish, unscrupulous, heartless and undeserving – which apparently gained the sympathy of the majority of councilmembers. Not only is this a discriminatory, mischaracterization of landlords, the irony is that many landlords are first-generation Americans who came to this country with nothing, made tremendous sacrifices and worked hard to buy rental property and achieve the American dream. Advocates for the policy such as Santa Ana resident Hang Nguyen, criticize landlords for being worried about making less money, and she juxtaposed this to residents in the city who are worried about keeping a roof over their head. Well, that roof is probably going to be missing a few shingles if a landlord can’t afford the upkeep.
Crippling Property Owners
This type of rational – that landlords can afford to earn less and tenants are entitled to pay below market value, directs this new policy against the fundamentals of capitalism. It also demonstrates that there is a mistaken belief that owning rental property guarantees earning lots of easy money. Landlords put in a lot of effort and take a lot of risk when they invest in an apartment and oftentimes don’t make money for many years after purchasing a rental complex. It can be between 4-8 years before an investor starts to see a meager amount of net cash flow. The process is gradual and rent increases that keep pace with the market are part of what a landlord relies on to eventually start to see a return on their investment. For many mom-and-pop investors, this is a slow, steady, 30-year process where they sacrifice a lot on the front end in order to be able to benefit from the passive income during the sunset years of their life.
Attack on Capitalism
With the new policy, providing rental housing won’t pencil out. A sustainable business needs revenues to exceed operating expenses within a reasonable amount of time. Landlords are held to a rigorous standard for providing safe housing, and things can quickly reach a breaking point where a landlord is sued by a tenant for not meeting the standards for habitable housing, so the property owner is forced to dig into their savings to cover the cost of upkeep or sell.
By targeting a specific industry and artificially limiting their viability, the government is overreaching and destroying the rental property business, and maybe this is intentional. If landlords exit the business in droves and property values drop due to low rents and deferred maintenance, this opens the door for the government to buy the properties at a cheap price and create government-run, low-income public housing. (Not that private housing it isn’t already being controlled by the government.)
This new legislation especially punishes landlords who have kept the rent low for their tenants because now they have no hope of ever achieving market rent unless the tenant moves out. If the government is going to impose strict price control measures, they should at least allow all the landlords an opportunity to raise the rents to market value before the measure is enacted.
Striving to Be the Best
Property owners should be allowed to make as much money as possible by providing excellent housing and service. Businesses shouldn’t be forced to be charities and forgo income to help those whom the government deems to be entitled to pay less. Taking away profits from landlords is government’s simplistic solution to try to solve the affordable housing crisis, and it’s unconstitutional. There are other solutions to these complex economic and social issues.
The City Council stated that one of the reasons for enacting the ordinance is: “The increasing housing rent burden and poverty faced by many residents in the City of Santa Ana threatens the health, safety, and welfare of its residents by forcing them to choose between paying rent and providing food, clothing and medical care for themselves and their families.”
The city isn’t forcing apparel stores to forgo profits to help clothe the residents of Santa Ana. They aren’t telling doctors in Santa Ana hospitals that they are rich enough, therefore it’s unethical for them to continue to profit from providing medical care for residents who have less money, and they aren’t telling grocery store owners to give up their earnings in order to solve hunger in Santa Ana. So why should housing providers be forced to bear the burden of solving the affordable housing crisis? Landlords are normal, hard-working people trying to build a livelihood and provide for their families in an already heavily regulated tenant-friendly industry. We ALL need to petition against the 3% rent control ordinance and protect the housing industry.
If you have questions or comments I can be reached by phone or text at 714.330.9999, by email at [email protected] or visit my website at www.InvestingInTheOC.com. Mercedes Shaffer is an agent with Pacific Sotheby’s International Realty and specializes in helping clients buy and sell investment real estate and 1031 Exchanges. DRE 02114448.