Costa Hawkins Has Saved Santa Monica Rental Housing

By Rosario Perry

A study of the City of Santa Monica’s residential rental housing market, including how the City’s April 10, 1979 rent control law has impacted it, shows beyond a doubt that Costa Hawkins has increased the quality and quantity of rental housing in our City.

Indeed without Costa Hawkins, rental housing in Santa Monica might have all but disappeared. A detailed explanation of the problem created by rent control would take a book. However, a short discussion of the Santa Monica story will show that Costa Hawkins has preserved rental housing in Santa Monica.

Rent Control came to Santa Monica on April 10, 1979. Prior to that time there was never a problem with rental housing shortages. Rents would fluctuate from time to time, as well as would vacancy rates within the city. Like all other commodities supply and demand played an important role in its cost and availability.

The shortages we experience today are a result of over regulation by City government. Rent control is just one of the regulations which create the shortage. The city has imposed zoning, building code and land use restrictions as well.

Rent control brought two major economic evils to our City: First, the owners could no longer adjust rents to cover the cost of maintaining their buildings, nor to raise rents to reflect the true value of their properties. Second, those owners who had lower than market rents on April 10, 1979 were punished and required to keep those rents at that level, regardless of vacancies and turnovers, until Costa Hawkins was passed.

These buildings with lower than market rents all belonged to the senior citizen mom and pop owners. They were the ones who normally lived on their properties and rented out units to supplement their retirement income. To these people the system was the most vicious. The larger corporate owners (prior to April 10, 1979) were consistently keeping their rents at market, and they did not suffer as great an economic burden as the smaller mom and pop owners.

Of all the many economic hardships rent control brings to residential rental housing, the four most wicked are (1) disincentive to build more rental housing, (2) disincentive to RENT units when they become vacant, (3) disincentive to make needed repairs and renovations in existing apartment buildings and, (4) most importantly of all, disincentive to continue in the residential rental housing market.

There are two reason rent control creates these four negative factors. First, rent control imposes a heavy governmental bureaucratic burden on housing providers which imposes mental and economic hardships on the housing providers; and Second, Santa Monica rent control prohibited the Housing Provider to increase rents when they obtained a vacancy. Costa Hawkins has brought needed relief from most (but not all) of these economic hardships.

In Santa Monica, from April 10, 1979 to Jan. 1, 1996 (the implementation date of Costa Hawkins) the typical apartment building was in a definite state of disrepair, and disintegration. Initially, the housing industry was not overly impacted. However, after just a few years, and beginning in the early 1980s, the City saw a market decrease in repairs and renovations to its rental housing stock.

This of course was due to the simple economic realities that with vacancy control, rents could not keep up with the cost of maintaining the rental housing stock, and there was no economic incentive for owners to renovate and repair their buildings to obtain market rate rents -- rents were controlled at levels 50 percent below market rate.

Most of the apartment buildings in Santa Monica were built in the late 1950s and throughout the 1960s. This was a time of little governmental restraint on construction. Some 35,000 rental units were built during this time. The City obtained the nickname of a “Bedroom Community” because there were so many rental units compared to the small amount of commercial business taking place.

Thus when rent control passed, the housing stock was already some 20 to 30 years old. Buildings were in desperate need of repair and renovation, but the rental stream was not there to pay for it.

Furthermore, the housing provider industry, primarily made up of mom and pop owners, were psychologically depressed and politically upset with the government system that stole management and control of their properties away from them.

The love and pride of ownership, once so strongly displayed by them, was buried in an anger amounting to almost a guerrilla warfare atmosphere. The last thing HP wanted to do was make a property wonderful for tenants who were steeling from them with highly reduced rents.

Furthermore, many owners simply stopped renting out units once they became vacant. Best estimates, based on ACTION IN SANTA MONICA members’ input, put the refusal-to-rent vacancy rate at approximately 5 to 8 percent. There were 32,500 registered units in Santa Monica when rent control passed, this meant that approximately 2,000 units were kept vacant, or kept for out of town family and friends to stay in, or for storage. This refusal-to-rent vacancy rate increased as time went on, as housing providers got more and more disgusted with the Rent Board bureaucracy.

Finally, absolutely no apartment buildings were constructed in Santa Monica after rent control passed, except for government sponsored ones which were heavily subsidized, and, as all things built by government, way over cost. Thus the average subsidized apartment unit built by the City’s affiliate groups were built at twice the cost per square foot as the condominiums being built by private parties during the same time periods. This disgraceful waste of funds is further besmirched when one recognizes that condominiums construction costs 20 to 25 percent more than market rate apartment buildings, because of their respective quality of finishes.

Like any good bureaucracy intent on economic meddling, the Rent Control Board did not sit still in the face of deteriorating housing stock. They passed regulations which made things worse. In response to the obvious reduction in maintenance, the Board passed the Chapter 4 set of regulations which allowed tenants to apply for rent decreases based on failure of owner to repair.

This only further incensed owners, led to greater animosity between tenants and housing providers and was a strong factor in housing providers increasing the number of units that were intentionally kept vacate. However, while it did lead to a few units being repaired, (i.e., those units where the tenants stepped forward to file complaints) when one considers that there were approximately 30,000 controlled units in the City in the early 1980s, one instantly sees that it could not do anything to stem the tide of disintegration.

The housing crisis was further worsened starting around 1986, when after seven long and horrid years of rent control, many mom and pop owners began giving up on owning rental housing and selling out to condominium developers.

The developers would buy the apartment buildings very cheaply because in the mid 1980s through the mid 1990s (prior to Costa Hawkins) the sale price of a rental property would be based on its annual rental income. The normal sales price during that time period was between seven to nine times gross rental income.

What this meant was that the lower the rents were (a policy the Rent Control Board religiously maintained to accomplish) the cheaper these rental properties were, and the quicker they were purchased, demolished and replaced with new condominium buildings. Thus the Board faced another disaster -- the loss of rental units altogether.

The problem got so bad that the Board itself sponsored a Rent Control amendment which initiated a limited vacancy decontrol system, so that the housing provider could obtain a rent increase upon vacancy to a below market rate rent, based on which section in the city the property was located.

The City Council amended the Board’s proposal, because they felt that the amount of increases were not HIGH enough. The council submitted its limited vacancy rent increase to the voters (since Santa Monica’s rent control law is a Charter Amendment any change must be approved by the Voters).

However since 55 percent of the voters are tenants in rent controlled units, the voters defeated the City Council’s proposed amendment. Thus the City was in the difficult position of not being able to implement a vacancy decontrol policy, and losing rental units at a tremendous rate. In 1994 there were approximately 28,000 rent controlled units, down from the April 10, 1979 count of 32,500.

Then along came Costa Hawkins. What Costa Hawkins did for Santa Monica can only be described as miraculous. First, by implementing a system of vacancy decontrol, those remaining owners could see the light at the end of the tunnel. The psychological effect was therapeutic.

Immediately, the value of apartment buildings increased from a factor of seven to nine times gross rental income to ten to 11 times gross rental income. This was based on the implication that rents would be going up to market in the future.

Remember, by nature the mom and pop owners in Santa Monica are very patient. Now that they could see that there would be economic relief ahead, they were willing to wait for it to arrive. With this increased price of apartments, the sale for demolition for condominium construction dramatically decreased. What the City could not do to stem the loss of units, the State legislature did through Costa Hawkins.

Second, the vacant units deliberately left vacant came on the market for rent. There were approximately 2,000 units which were rented between 1996 and the end of 1997 that were previously kept vacant. There would have been more released to rental use, except for the fact that Costa Hawkins only allowed a 15 percent increase over the controlled rent from 1996 through 1998.

Third, almost all the buildings in the city underwent renovation, as owners who anticipated renting units at market rates now sought to fix up their buildings so that they could attract the highest possible rents.

There was so much repair and renovation going on that the Board (in their bureaucratic wisdom) passed a regulation allowing tenants to apply for a rent decrease if there was too much noise, dust and disturbance based on renovation work. The entire city was going through a renaissance.

Everywhere one drove, there were buildings being painted, re-roofed, remodeled, landscaped, re-piped and rewired. Amenities were being added. These additions, while intended to benefit the soon-to-come market-rate tenant, actually benefited the existing low paying tenants as well.

Indeed a study done by the Rent control board shows that as of December 2003, of the 27,500 remaining controlled rental units, only 30 percent of them have gotten any Costa Hawkins rent increase since January 1, 1996. Thus the overwhelming majority of renters benefited by this waive of repairs has been the existing low-rent-paying tenants.

Fourth, Costa Hawkins has allowed minorities and families with children to move into Santa Monica. Pre-Costa Hawkins, the Santa Monica housing providers could only rent at the artificially low controlled rents. The typical housing provider would thus seek to rent to only one tenant, using a rental agreement which outlawed pets, and subtenants.

Thus even two and three-bedroom apartments were occupied by only one person. This negatively impacted surrounding cities in LA County, since Santa Monica’s population actually dropped from 92,000 in 1979 to 83,000 in 1996. The City of Santa Monica was not providing its share of housing.

However, after January 1, 1996 and especially after January 1, 1999 (when full vacancy decontrol became the rule) housing providers were renting units at the highest possible price, and that meant that minorities and families could literally pay for their right to live in Santa Monica. And they did. While vacancy control was the law in Santa Monica (pre-Costa Hawkins) the percentage of families and the percentage of minorities actually decreased from pre-rent controlled days. Now it is on the rise (after Costa Hawkins).

So in summation, what Costa Hawkins has brought to Santa Monica is a new lease on life for residential rental units; the rush to demolish to build condominiums is now over. Considering the high sales prices of condominiums today, had it not been for Costa Hawkins there would have been a considerably greater amount of rental units demolished. Only the higher value of apartment buildings, imposed by Costa Hawkins rent increases, has saved Santa Monica from a substantial loss of rental units.

In conclusion, we can clearly state that Costa Hawkins has done the following:

1. It has brought about substantial improvement in the quality and safety of the rental housing stock in Santa Monica;
2. It has allowed families and minorities to move back into Santa Monica;
3. It has stopped the eroding of the rental housing stock in Santa Monica; and
4. It has brought fairness of economic return on value to the mom and pop owners in our city.

The only thing which it has not done is to overcome the City’s concerted effort to discourage rental housing; there still are very few rental units being built in Santa Monica. Clearly the negative effects of rent control still linger to discourage even the bravest from building rental units.

However, we cannot expect Costa Hawkins to do it all. Someday, Santa Monica will have to admit that its antagonistic zoning and building laws must be changed if we are to have any substantial construction of rental housing units. Some day some statespersons will have to get elected to City government and throw out the city bureaucracy which seeks to enslave us all.

Rosario Perry is a local attorney who frequently represents building owners