By Robert L. Cain
Own rental property? Homelessness is all your fault. Shortage of available rentals is all your fault. Higher rents are all your fault. State legislatures are on the warpath to make housing better for renters but are punishing rental owners and damaging the rental property business. In New York, Oregon, and California, and the city of Seattle, increased restrictions on the rights of rental property owners are making owning rental property a bad business decision driving landlords out of the business. What those who want to improve tenants’ situations forget is that you can’t do just one thing. They believe that they can pass laws and the parties who are negatively affected will just stand by and eat it. They won’t.
Rental owners have a couple of options for counteracting the effects of the laws states and municipalities enact that negatively affect their businesses. We’ll look at those at the end
This year the New York State legislature passed what the sponsors described as the “strongest tenant protections in history.” What it really does is ensure that rental properties in New York will deteriorate. If a landlord wants to make a capital improvement on a property, those include such things as boilers, roof replacement, or, according to the IRS “Addition of new or replacement components or material sub-components to property,” anything that “Extends the useful life of the property” and “Ameliorates a material condition or defect.” The new law caps such expenditures at $15,000 on individual apartment improvements for 15 years for which the landlord can increase rent. Then the rent reverts to what it was before the renovation.
Spend more than $15,000, it comes out of the landlord’s pocket. Landlords can only raise the rent 2 percent a year to pay for the improvements when before they could raise it 6 percent.
New York also caps the maximum rent increases for rent-controlled tenants. Those are to be set at “the average of the last five Rent Guidelines Board annual rent increases of one-year, rent-stabilized renewals, or at 7.5 percent, whichever is less.”
If a tenant complains about a rent “overcharge,” the court or state Division of Housing and Community can go back six or more years, up from four, looking at rent history to determine if the overcharge was too high.
And that’s for existing tenants. New tenants get protections, too. A New York Times article reports, “Security deposits will be limited to one month’s rent and procedures will be improved to make it easier for renters to get their security deposits back. Tenants who were seen as troublemakers by landlords — perhaps for standing up for their rights — would sometimes end up on blacklists that would be shared among rental agencies. That practice would be banned.” In addition, “[existing] Tenants would be better protected during the eviction process, particularly against retaliatory evictions.” No, there won’t be an official “blacklist,” but landlords can still call other landlords for references.
Look for buildings and units to fall into disrepair because landlords simply can’t get financing to pay for improvements and repairs. A lender has to be able to show that the property owner could get enough more rent to cover the loan payments. No financing, and the rental owner won’t be able to make the improvements. That in turn decreases the value of real estate because unresolved repair problems and deteriorating buildings drive down real estate prices.
The regulations will hit the “mom-and-pop landlords hardest because many of them are surviving month to month. Any inability to raise rents appropriately can result in their simply abandoning their properties as has happened in the past. A coalition of four real estate groups, the Taxpayers for an Affordable New York, said, “This legislation fails to address the city’s housing crisis, and will lead to disinvestment in the city’s private sector rental stock, consigning hundreds of thousands of rent-regulated tenants to living in buildings that are likely to fall into disrepair.”
What’s just as bad is that if a property owner wants to move into his or her own property or have a family member move in, he or she may not be able to because only one “owner use” conversion is permitted.
As if that isn’t enough, there’s more, though not so egregious, that is easy to find by doing a search for New York rent laws.
That’s just New York. Landlords are the targets of recent restrictive legislation in other states, as well.
Seattle has for many years been on the forefront of attacks on landlords. Washington state Landlord-Tenant Law provides for a 20-day, no-cause termination notice. That didn’t work for the City of Seattle. Instead, they passed the just-cause eviction ordinance many years ago. That requires a one-year lease and a “just cause” for terminating a tenancy. “Just cause,” of course, can include non-payment of rent and violation of lease terms. But it cannot be because the landlord wants the tenant out and doesn’t want to deal with a formal eviction and with court and court costs.
Then the city of Seattle recently passed two ordinances designed to “combat racial discrimination.” The 2016 “first in time” ordinance and the 2017 “Fair Chance Housing Ordinance” are supposed to keep landlords from slyly avoiding renting to minorities.
The “first in time” ordinance required that landlords rent to the first applicant who meets their rental standards. That law was overturned on March 28, 2018 by a trial judge because it violates a property owner’s right to choose whom to allow on his or her property. However, the Fair Housing issue is still in place. If a member of a protected class believes he or she was illegally discriminated against, the Fair Housing enforcers will investigate beginning with the assumption that every landlord wants to illegally discriminate and it is their job to catch them. One method to avoid having to rent to a first-in-line unacceptable tenant who “meets” rental criteria is to begin numbering rental applications with the number 3. Another, and better, method is to create rental standards that are so stringent they keep less-than-desirable applicants from even thinking about applying.
Now in the courts is the “Fair Chance Housing Ordinance” that prohibits landlords from considering an applicant’s criminal record. The Pacific Legal Foundation described it as “Landlords can deny someone tenancy if they are on a sex offender registry for a crime committed as an adult, but only if they can prove to the Seattle Office for Civil Rights that they have a ‘legitimate business reason’ for doing so.” Deciding what a “legitimate business reason” is makes work for lawyers and judges.
Then there’s Oregon. Governor Kate Brown called SB 608 “a critical tool for stabilizing the rental market throughout the state of Oregon. It will provide immediate relief to Oregonians struggling to keep up with rising rents in a tight rental market.” Once more, landlords are being blamed for too few rentals that cost too much to rent. Ethan Blevins attorney for the Pacific Legal Foundation believes, “As housing costs have skyrocketed, blame has tended to be placed on landlords, rather than land-use and zoning regulations that have often been a key driver on housing affordability. From what I’ve observed, there is also a tendency to exaggerate the role of discrimination in landlords’ rental decisions.” Oregon is notorious for restrictive land-use regulations, but those certainly aren’t the fault of rental owners..
SB 608 reverses the prohibition for rent control in the Oregon Landlord Tenant Act and mostly prohibits no-cause evictions.
No-cause evictions have been a valuable tool for landlords who simply want a marginal or bad tenant out but don’t want the hassle of a legal eviction. The previous law made that possible with a 30-day, no-cause termination. The tenant had no recourse in court but just had to leave. That was a benefit to a tenant because with a court-ordered eviction, it appears on a credit report for any landlord to see when the tenant applies to live in a new place. Not so with a no-cause eviction. Only if the prospective landlord calls the old landlord and gets a straight answer would the truth come out.
Under the new law, only in the first year are no-cause evictions allowed. After the first year, landlords can end a month-to-month tenancy with a 90-day notice but only for a “qualifying landlord reason.” Those don’t include just because the tenant is an irritation or the landlord doesn’t want to go through a court-ordered eviction. Those “qualifying reasons” can include wanting to move into or have a family member move into a unit. It can also be because the landlord is selling the property to a person who plans to be an owner-occupant. Then, if the landlord takes possession for a “qualifying reason,” he or she has to pay the renter one-month’s rent when the notice is delivered.
As if that weren’t enough, rents can be increased no more than 7 percent a year plus the “yearly change in the consumer price index.” The law specifically exempts properties less than 15 years dating from their first occupancy certificate.
The law covers all rental properties, both apartments and single-family.
Saving California to last because there’s such a diverse situation to deal with. Individual cities sometimes have their own laws that negatively affect landlords. However, just discussing 2019 changes, as of August 1, 2019, the city of San Diego requires landlords to accept Section 8 vouchers and forbids stating that they do not participate in the Section 8 program.
Then AB 2343 extends the notice requirements to 10 days for nonpayment of rent and five days for a nuisance excluding Saturdays, Sundays, and legal holidays; that’s up from five days all around.
The state has had its share of emergencies in the past year and the legislature responded with AB 1919 that makes it a misdemeanor to raise the rent more than 10 percent after a state of emergency is declared. In addition, it would make it a misdemeanor to evict a tenant after the declaration of a state of emergency and rent or “offer to rent” at a higher rental price.
If a third-party pays the rent for a tenant, AB 2219 allows a landlord to require that the person paying the rent acknowledges in writing that they are not living in the property and that acceptance of the rent does not create a tenancy with that third party. That’s actually landlord friendly in that it keeps tenants from sneaking in people who have not been screened by the landlord.
The National Apartment Association in their white paper, “The High Cost of Rent Control,” reports that economist and housing-policy expert Dr. Anthony Downs wrote “the economic and social costs of rent control ‘almost always outweigh any perceived short-term benefits they provide.’” In addition, he found that rent control are both “unfair to owners of rental units and damaging to some of the very low income renters they are supposed to protect.” As I mentioned at the beginning, you can’t do just one thing. Passing a law will make those negatively affected by the law to do what they need to do to keep themselves afloat.
Attorney Ethan Blevins of the Pacific Legal Foundation says the biggest threats to landlords now are “Probably the resurgence of rent-control policies and the rise of draconian tenant screening restrictions, such as bans on criminal background checks.” Even more difficult is just keeping track of the changes in the laws that could result in fines and even jail for a misdemeanor.
How to deal with these gross attempts by state and local governments to damage the businesses of rental owners. Carefully drafted tighter rental standards and policies followed by meticulous screening including landlord references will go a long way toward ensuring that quality tenants rent a property. To avoid the business-killing restrictions, such as rent control and inability to evict bad tenants, the only workable solution is to sell rental properties to owner-occupants and buy other rental properties in states and cities that want responsible landlords to do business. The top landlord-friendly states as ranked by several websites are Texas, with Colorado, Arizona, Florida, Indiana, and Georgia also welcoming rental owners.
Written for Zip Reports where they provide applicant screening services. Visit their website.