BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2007-2008 Regular Session
SB 1299 S
Senator Migden B
As Introduced
Hearing Date: April 29, 2008 1
Government Code 2
BCP:jd 9
9
SUBJECT
Residential Real Property: Price Control
DESCRIPTION
This bill would authorize a city, county, or a city and
county having a rental or lease price control system to
require a property owner, as specified, to replace the same
number of residential units that were demolished either on
the same property or at another location determined by the
property owner and the local entity, and make the
replacement residential units subject to the price control
that applied to the demolished units.
BACKGROUND
The Ellis Act was adopted in 1985 by SB 505 (Ellis, Chapter
1509, Statutes of 1985), following the California Supreme
Court's decision in Nash v. City of Santa Monica (1984) 37
Cal.3d 97, which upheld the power of a city, in the context
of a land use ordinance, to require a residential property
owner to obtain a removal permit under specified criteria
before the owner could demolish the rental property and
remove it from the rental marketplace.
SB 505 of 1985 preempted the ability of local governments
to adopt any local ordinance that prohibited rental
property owners from removing a rental property from the
marketplace, and specified certain procedures should a
property owner decide to exercise its "Ellis"rights. SB
505 also allowed local governments to require that if a
(more)
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rent control property is demolished, reconstructed, and
offered for rent within 5 years of withdrawal from the
market, that the newly constructed units be subject to rent
control at a price that provides a fair and reasonable
return on the newly constructed accommodations, as
specified.
With respect to the power of local governments to enact
rent control ordinances, the Legislature enacted the
Costa-Hawkins Rental Housing Act, in 1995. That Act
established "vacancy decontrol" by declaring that
notwithstanding any other provision of law, all residential
landlords may, except in specified situations, establish
the initial rental rate for a dwelling or unit. "The
effect of [that] provision was to permit landlords 'to
impose whatever rent they choose at the commencement of a
tenancy.' The Legislature was well aware, however, that
such vacancy decontrol gave landlords an incentive to evict
tenants that were paying rents below market rates.
Accordingly, the statute expressly preserves the authority
of local governments 'to regulate or monitor the grounds
for eviction.'" (Action Apartment Assn., Inc. v. City of
Santa Monica (2007) 41 Cal.4th 1232, 1238 (citations
omitted).) In studying the effects of both Ellis and
Costa-Hawkins on rental housing stock, a 2003 report by the
Santa Monica Rent Control Board on the impact of the Ellis
Act concluded:
Rental units withdrawn under the Ellis Act have, in
large part have been replaced by market rate
condominiums and rental units not affordable to low or
moderate income households. This activity accelerated
beginning in 1998 due to a combination of factors
including improved market conditions and city
ordinances conducive to residential development.
Additionally, since 1998, passage of the state
Costa-Hawkins Act and the future possibility of market
rents has prompted a surge in withdrawn units returning
to residential rental use.
In response to the reduction in residential rental units,
this bill would authorize local governments with a rental
or lease price control system to require that if
accommodations are demolished and replaced with residential
units, the property owner must replace the same number of
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residential units that were demolished either on the same
property or at another location determined by the property
owner and the local entity, and make the replacement
residential units subject to the price control that applied
to the demolished units.
CHANGES TO EXISTING LAW
Existing law generally prohibits public entities from
adopting any statute, ordinance, or regulation, or taking
any administrative action, to compel the owner of
residential real property to offer or continue to offer
residential property for rent or lease. (Gov. Code 7060
et seq.)
Existing law allows public entities to require a property
owner to notify the entity of an intention to withdraw
those accommodations from rent or lease, as specified.
Provided that the requirements are met, the accommodations
may not be withdrawn until 120 days after delivery of the
notice to the public entity, unless the tenant or lessee is
at least 62 years of age or disabled, lived in their
accommodations for at least one year prior to the notice,
in which case the date of withdrawal shall be one year
after the delivery of that notice to the public entity, as
specified. (Gov. Code 7060.4.)
Existing law provides that if accommodations are
demolished, and new accommodations are constructed on the
same property and offered for rent or lease within five
years of the date the accommodations were withdrawn from
rent or lease, the newly constructed accommodations shall
be subject to any system of controls on the price at which
they would be offered and on the basis of a fair and
reasonable return on the newly constructed accommodations,
notwithstanding any exemption from the system of controls
for newly constructed accommodations. (Gov. Code
7060.2(d).)
This bill would instead authorize a city, county, or a city
and county having a rental or lease price control system to
require that if the accommodations are demolished and
replaced with residential units on the same property, the
property owner must include the same number of residential
units on the property as were demolished and subject to
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price control or provide for that number of residential
units at another location determined by agreement between
the property owner and the city, county, or city and county
where the property is located.
This bill would further allow a city, county, or city and
county, to require that the replacement residential units
be subject to the price control or system of price control
that applied to the demolished accommodations.
COMMENT
1. Stated need for the bill
According to the author:
California's rental stock has been increasingly
taken off the market as landlords invoke an existing
state law, the Ellis Act, which allows them to evict
all tenants in a building as long as the property
owner does not re-rent the units.
In Los Angeles, more than 11,000 rental units have
been taken off the market through these means in the
last five years. Approximately, 4,000 units have
also been lost in San Francisco, Santa Monica, and
San Diego during that same time. Most of these
units were covered under local rent stabilization
laws, more commonly known as rent control.
Moreover, many of these evictions are initiated by
property speculators of older less expensive
buildings, who immediately evict all tenants,
demolish the building, and construct condominiums.
The steady loss of rent controlled units,
particularly in this state's urban area's, has been
devastating to the state's most vulnerable
populations. Numerous studies have concluded that a
viable rent control system must exist in order to
have a workforce and lower and middle income
families live in cities such as San Francisco and
Los Angeles.
Seniors are especially at risk of Ellis evictions,
because they tend to be long term tenants (and thus
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have lower rents); their buildings have been
targeted by speculators who plan to convert the
rental units into condos. Over 60% of buildings
that have been "Ellised" in San Francisco since 2000
have had a senior or disabled resident evicted.
To address that issue, the author states that this bill
would authorize a city, county, or a city and county
having a rental or lease price control system to require
a property owner, as specified, to replace the same
number of residential rental units that were demolished
either on the same property or at another location
determined by the property owner and the local entity,
and to make the replacement residential units subject to
the price control that applied to the demolished units.
2. Opposition's argument that the provisions of the bill
would prevent a property owner from going out of the
residential housing business, contrary to the Ellis Act
In Nash v. City of Santa Monica (1984) 37 Cal.3d 97, the
California Supreme Court upheld a Santa Monica rent
control ordinance that prohibited the removal of rental
units from the housing market by conversion or demolition
without a removal permit from the Santa Monica Rent
Control Board "despite the fact that its practical impact
was to compel the landlord of a rent-controlled apartment
to remain in the rental business." (Lincoln Place Tenants
Assn. v. City of Los Angeles (2007) 155 Cal.App.4th 425,
441.) In response to that decision, the Legislature
enacted SB 505 (Ellis, Chapter 1590, Statutes of 1985),
which expressly prohibited public entities from
compelling the owner of residential real property to
offer or continue to offer residential units for rent or
lease. SB 505 further codified the intent of the
Legislature to "supersede any holding or portion of any
holding in Nash v. City of Santa Monica, 37 Cal.3d 97 to
the extent that the holding, or portion of the holding,
conflicts with this chapter, so as to permit landlords to
go out of business."
By requiring a property owner to replace the same number
of residential units as were demolished (provided that
residential units are constructed on a demolished
property) and requiring those units to be rented at the
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same price control that applied to the demolished units,
the opposition maintains that this bill would "reverse
20-plus years of California statutory law regarding the
ability of an owner to go out of the residential housing
business . . . [and] authorize a local community to
require reinvestment or building in a losing business
venture regardless of personal or economic
circumstances." The California Apartment Association
further argues that "[a]lthough the purpose of the bill
is to ensure no net loss of rent controlled units, the
practical effect would be to make it virtually impossible
for owners to exit the rental business. At a time when
foreclosures are already sky-rocketing, a new restriction
that limits rental property owners' options will create
even greater problems."
In response, the author maintains that those provisions
are necessary to address the problem of property
speculators purchasing older, less expensive buildings,
evicting tenants, and demolishing the building to build
condominiums. The author's staff further notes that the
bill only authorizes local governments to enact these
provisions, thus, allowing each rent control jurisdiction
(of which there are 14) to decide whether the proposed
protections would be helpful in the community to preserve
rental housing stock.
From a public policy standpoint, it would be beneficial
to encourage the construction of reasonably priced rental
units that can meet the needs of low income individuals
displaced by the withdrawal of rent control units under
the Ellis Act. That housing stock is becoming
increasingly necessary as more and more former homeowners
lose their homes as a result of the current mortgage
foreclosure crisis. However, if an ordinance enacted
pursuant to this bill acts to discourage the construction
of housing units by making it undesirable to rebuild
reasonably priced residential units on the site of
demolished rent control buildings (see Comment 3), or act
to encourage the construction of commercial buildings
(see Comment 4), the unintended result could be the
further depletion of California's rental and housing
stock at a time when it is badly needed by California
residents, and a loss of new revenues to the local
property tax base.
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DOES THIS BILL HAVE THE UNINTENDED CONSEQUENCE OF
DISCOURAGING THE CONSTRUCTION OF AFFORDABLE HOUSING THAT
MAY BE NECESSARY TO MEET THE NEEDS OF LOW AND MIDDLE
INCOME INDIVIDUALS?
3. Opposition's concern about imposing rent control on new
construction
The opposition further expresses concern that the bill
would allow cities to impose rent control on new
construction. Specifically, the Apartment Association of
Greater Los Angeles (AAGLA) and the Santa Barbara Rental
Property Association (SBRPA) contend:
It is well settled policy that imposing rent
control restrictions on newly constructed units
will assure there are none. Even the most
stringent rent control communities recognized
that reality which was affirmed and enacted on a
statewide basis by the 1995 passage of the Costa
Hawkins Rental Housing Act.
The opposition further argues that this bill will only
exacerbate the current reduction in rental housing units,
and maintains that there is no time constraint on the
provisions of this bill - once a property has been
withdrawn and demolished pursuant to Ellis, any
construction of residential units on the property in the
future would trigger the requirement for an equal number
of residential units subject to rent control (although
the property owner may enter an agreement to provide
those same units at another location.)
In support of the need to subject new construction to
rent control, the author cites the Santa Monica Rent
Control Board's August 2003 report on the impact of the
Ellis Act which concluded that "[r]ental units
withdrawn under the Ellis Act have, in large part have
been replaced by market rate condominiums and rental
units not affordable to low or moderate income
households." That report additionally noted that since
1998, "passage of the state Costa-Hawkins Act and the
future possibility of market rents has prompted a surge
in withdrawn units returning to residential rental
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use."
4. Rent control ordinances enacted pursuant to this bill
may be challenged as a taking
Although there is no set formula or rule to determine
whether a regulation constitutes a taking, the Supreme
Court has articulated the following criteria for the
court to consider: "(1) 'the economic impact of the
regulation on the claimant;' (2) 'the extent to which the
regulation has interfered with distinct investment-backed
expectations;' and (3) 'the character of the governmental
action.'" (Connolly v. Pension Ben. Guaranty Corp. (1986)
475 U.S. 211, 225.) (Citations omitted.) Moreover, the
Supreme Court has held that no regulatory taking has
occurred as long as the government's action leaves an
economically viable use of the property. (See Penn Cent.
Transp. Co. v. New York City (1978) 438 U.S. 104; Lucas
v. S.C. Coastal Council (1992) 505 U.S. 1003.)
Once a building that contains rent control units has been
demolished, this bill would allow a city to require any
new residential construction on that site to include the
same number of units that were subject to rent control
and subject those replacement units to the same rent
control as the original units. If the city required
newly constructed residential rental units to be rented
at a price that effectively left no economically viable
use of the property, the ordinance would, in fact,
constitute a taking. This bill does not require that
residential units be built on the property, or if units
are actually built on the property, it does not limit the
total number of units that may be constructed (only the
number of price control units are dictated). Thus, if a
property owner demolishes an apartment building that
contains 50 units all subject to price control, this bill
would allow a city to require a subsequently built
apartment building to contain 50 units subject to the
same rent control as the prior building, but would not
prevent the owner from constructing a building with a
total of 100 units (only 50 of which would be rent
control). The bill also would not prevent the owner from
constructing a commercial building on the same lot that
may provide significant economic return to the property
owner, provided that the owner is able to receive
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approval for the construction of a commercial building on
a former residential lot. All of those uses, including
commercial, may constitute economically viable uses of
the property.
The author's staff notes that the bill provides a tool
for local rent control jurisdictions, but does not
require them to implement its provisions, and contends
that the bill would allow local governments to respond to
a natural disaster, such as an earthquake, that
demolishes all rent control buildings.
Support: California Alliance for Retired Americans (CARA)
Opposition: Valley Plaza Apartments; Pleasanton Glen
Apartment Homes; Apartment Association, CA
Southern Cities; Apartment Association of Orange
County; California Apartment Association;
Apartment Association of Greater Los Angeles
(AAGLA); Santa Barbara Rental Property
Association (SBRPA); Howard Jarvis Taxpayers
Association; Western Manufactured Housing
Communities Association (WMA); California
Association of Realtors
HISTORY
Source: San Francisco Tenants Union
Related Pending Legislation: None Known
Prior Legislation: SB 464 (Kuehl, 2007), would have limited
the ability of a rental property owner to
exercise its "Ellis Act" rights to cases
where the owner has owned the property for
at least three years. Died on the Senate
Inactive File.
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