How Investors Are Preparing for Costa Hawkins

In November, Californian’s will vote on a measure that would repeal 1995 Costa Hawkins Rental Housing Act, which regulates rent control throughout the stay. If the repeal occurs, rent control could be expanded or added to new markets that don’t currently adopt rent control policies. Apartment investors are concerned about the measure, but there are ways to prepare. Universe Holdings, an active apartment investor in Southern California, has been looking at and buying rent control properties in California to hedge against the potential impact of expanded rent control.

“We recently bid on a $200 million asset in Alameda in Northern California, and the reason that we went after that property is that rent control that came into existence in that city two years ago,” Henry Manoucheri, CEO of Universe Holdings, tells GlobeSt.com. We figured that it couldn’t get any worse. In L.A. County where there is rent control, we have bought a number of rent control assets in the last two years believing that if Costa Hawkins did get repealed, it can’t get much worse on an asset that is already under rent control. That is really how we have shielded ourselves.”

The firm’s strategy to focus on rent control product isn’t solely driven by the potential Costa Hawkins repeal—they have owned and purchased rent control assets in the past—but the firm is interested in increasing its portfolio of rent controlled assets. However, they will only buy rent control properties in markets they know well. “We are buying rent control where we have bought rent control before, like the San Fernando Valley,” says Manoucheri. “We know that market very well, and we have more than 1,000 units there today. We understand that market and we know how to navigate through the restrictions. We have done the same thing in Hollywood and some parts of West L.A. Are we going to go to a rent control market somewhere else where we don’t understand it, like New York City? Chances are no. We feel there is less downside this way because there won’t be the surprise of rolling rents back if rent control does come to certain markets.”

In addition to purchasing rent control properties in California, Universe is also, like many investors, leaving the state to build a portfolio in non-rent control markets. “We have also now started to look at other Western markets, like Seattle and Salt Lake City and Denver,” explains Manoucheri. “We have also been looking on the East Coast and in the New Jersey market. We feel that if this threat is imminent, it is better for us to diversify our portfolio and be in markets where the potential for aggressive rent control doesn’t exist, at least not in the way that is does here. We are looking at deals and making offers in those markets, and we want to build a portfolio outside of California because of the possibility of this repeal coming back in some form or fashion.”

Universe Holdings is preparing for the repeal of Costa Hawkins, but it doesn’t think the repeal is likely. “It is possible that it will happen, but we don’t think it is probable,” says Manoucheri. “We are more cautious in chasing assets in cities where the political climate of the city is not as liberal and that is less vulnerable to this kind of setback.”