The Costa-Hawkins Rental Housing Act is a pivotal law in California that, as property managers, we have been discussing for decades. This law exempts certain kinds of residential rental homes from rent control ordinances. It also allows landlords to set any new rent on a rent-stabilized unit once that home becomes vacant and new tenants are being sought.
Even now, Costa Hawkins has an impact on how rental properties are managed in California, especially when it comes to the rents we set, the rents we raise, and the way we go about navigating rent control and evictions.
We’re taking a look at how Costa Hawkins has impacted rent control in our state, examining the before and the after landscape in California. This may help landlords and investors understand where we are in terms of how we establish rents, renewals, and navigate tenant protections.
History of Costa Hawkins in California
Costa Hawkins and its laws on rent control came into effect in California in 1995.
The legislature aimed to help landlords and rental property owners who were growing distressed at the number of local rent control laws that were being implemented across the state. Remember, California did not have a statewide rent control mandate at this point, but cities like Berkeley and Santa Monica were already implementing rent control laws or studying ways in which they could limit the amount of rental increases that were allowed.
In the 1990s, some cities were full into rent stabilization. Others were experimenting with what we called “moderate” rent control ordinances. These would restrict rental increases only on occupied units. Some of the stronger rent control laws in cities across the state actually restricted what could be charged in rent on a vacant unit.
In some states across the country, rent control in specific cities is prohibited. Florida’s state constitution, for example, does not allow states and municipalities to implement rent control laws. California is not one of those states, and never has been. Local rent control ordinances have long been allowed in California.
So, with many cities not only controlling rental increases on occupied units but also on vacant properties, two bills merged into one, giving us Costa Hawkins.
- State Assembly member Phil Hawkins introduced AB 1164, which wanted to streamline state housing laws and eliminate any of the statutes on the books that seemed out of date and unused.
- State Senator Jim Costa proposed SB 1257, which would have allowed landlords to establish the initial rental rate for a new tenant in a vacant home.
These bills were combined to become known as the Costa-Hawkins Rental Housing Act.
Here’s something interesting about the law that a lot of rental property owners may not know. When it was first enacted, Costa Hawkins allowed vacancy decontrol against subsequent tenants only when the lease prohibited the subletting of the property. There weren’t a lot of leases that had that provision, however. This led to an amendment to the law a year later, which acknowledged the rent control rights that subtenants could acquire. This got rid of the requirement that a lease would have to prohibit subletting.
As you can see, this law was complex right out of the gate.
The Costa Hawkins Condominium Loophole
With this law in place, landlords were able to avoid rent control laws on vacant properties and set market-driven rents on tenants moving into their rental homes.
In 2001, however, they recognized a loophole that had to be closed.
While single-family homes, condominiums, and new construction properties could be exempt from rent control laws, apartments in multifamily buildings were largely covered by rent control in a number of cities.
Costa Hawkins, however, had exempted rental units “separate” from the title to any other units.
So, apartment building owners were getting permits that would effectively convert their apartments to condominiums. They’d get the permit, but they wouldn’t complete the process of conversion.
This meant the buildings would essentially become condos, except that renters were living in them, not owner/occupants. This condo loophole was closed in 2001, with SB 985, which required that an owner would have to sell the condominium unit in order to get any protections against local limits on rental increases.
This is a law that tried very hard to balance the needs of landlords to continue being profitable and the needs of tenants who were feeling squeezed by unreasonable rental increases in their expensive cities.
It has often been seen as a law that’s unclear, easily misinterpreted, and difficult to work with. However, it’s withstood the test of time because it’s the best California has been able to do in terms of balancing the need for rent control with the interests of property owners.
Threats to Costa Hawkins and California Rent Control
Costa Hawkins was effective in setting guide posts for local rent control ordinances by cities and counties across California. Owners can establish their own rental rates on a vacant property, even in a city with strict rent control laws. A number of property types are exempt from those laws, too.
While the law seems to have accomplished what it set out to do, the housing landscape in California has changed dramatically since 1995. Even since 2001.
Enter The Tenant Protection Act of 2019, which delivered rent control statewide, effective January 1, 2020. In addition to establishing other restrictions on rents and eviction, this law caps annual rent increases on eligible properties at 5% plus the local inflation rate, never exceeding 10% of the existing rent. This applies mostly to multifamily units that are at least 15 years old.
Even with rent control in place statewide, rents are higher than they’ve ever been.
During the 2023/2024 legislative session, Costa Hawkins was looking at a lot of changes. There was an attempt to redefine “new housing,” which would have included a lot of units that are currently exempt under Costa Hawkins. This would have brought more rent control to more properties, and it also would have introduced chaotic “rolling dates” in the way that eligibility and exemption was determined. This would have brought a lot more properties in California into the rent control requirements.
Those amendments failed, however that doesn’t mean that new challenges to Costa Hawkins won’t be debated and discussed in upcoming legislative cycles.
In the upcoming election, California voters will be able to vote on the “Justice for Renters” initiative, which would completely repeal Costa Hawkins. This would repeal all regulations statewide that speak to rent control, meaning that local communities could have the right to stabilize rents in any way they see fit, which could include setting restrictions on what landlords could charge in rent for a vacant property. The state of California would not be able to regulate the right of any city or county to maintain, enact, or expand residential rent control laws. Local governments would have the authority to set rent control laws.
For obvious reasons, the Justice for Renters initiative is opposed by groups such as the California Apartment Association and other groups that protect the rights of rental property owners and small business people. Construction unions have also voiced their opposition to this law. There’s a fear among those constituencies that this law would halt new housing production, especially in California cities that might require affordable units be created before any other development could be approved.
Before Times: Pre-Costa Hawkins Challenges
One of the reasons that there is so much opposition to repealing Costa Hawkins is that before this law was in place, local governments had the freedom to enact rent control measures without any restriction or regulation. The idea was to protect tenants from rents rising to levels that were simply unaffordable. However, in many of those communities with the strictest rent control laws, there were unintended consequences that did far more damage than higher rents. There was a decline in the availability of housing. There was also a decline in the equality of existing rental homes. No one wanted to rent out the best properties and no one wanted to create new housing.
So, here’s where we are now. Costa Hawkins was again on the ballot in California in our most recent election. Officially known as the “Justice for Renters Act,” Proposition 33 was voted down by California residents who rejected its potential for extreme rent control.
If passed, Proposition 33 would have essentially repealed Costa Hawkins and allowed cities and counties to impose rent caps on nearly all types of housing, including single-family homes and newly constructed apartments. It would also have reinstated vacancy controls, keeping rent restrictions in place even during tenant turnover. This would have created a housing crisis, driving owners out of the California markets most in need of housing and halting new construction projects.
Navigating these laws and understanding what’s at stake can be a challenge, even for experienced landlords. We are here to help. We study these laws carefully and we keep our owners and investors informed.
If you have any questions about Costa Hawkins or you’d like to talk more about the value of professional management, please contact us at New Bridge Management. We serve Modesto, Turlock, Merced, Stockton, and the surrounding Stanislaus, Merced, and San Joaquin Counties.
