How Will New Rent Control Ordinances Impact Property Quality?

Property quality could be in trouble as local municipalities pass rent control ordinances. Cities like Inglewood and Glendale in the Greater L.A. area have passed rent control ordinances in response to rapidly rising rents. While there is debate about how this could impact future investment in these markets, owners of existing properties could choose to defer property improvements that would bring in higher rents.

“New rent control ordinances could prevent owners from completing rehabilitation of properties that were built prior to 1995, which are the very properties that are in need of rehabilitation, because a typical rehab project requires that units be vacated as leases expire,” Jennifer A. Bojorquez, a real estate finance attorney at Troutman Sanders, tells GlobeSt.com. “If tenants cannot be evicted for any reason but criminal activity, then there will be little unit turnover. Also, owners will be prevented from increasing rents following completion of a rehab project, which is typically the primary driver for completing the rehabilitation in the first instance.”

Declining property quality is one outcome. Owners could also face default if they can’t meet rent increases required by their financing structure. “If owners are unable to achieve the economic benchmarks required by lenders and investors as a result of implementation of rent control during the rehabilitation process, then those owners risk losing their projects to foreclosure,” says Bojorquez. “At the very least, rehabilitation projects would likely remain uncompleted, and owners could lose their return on investment.”

Of course, these ordinances could also impact future investment. The challenge is knowing which cities will adopt rent control. Bojorquez’s advice to investors looking to purchase a property in Southern California: proceed with caution. “If a rent control ordinance is not already in place, be sure to have a good grasp on the conversations occurring at the local level to determine if rent control is imminent,” she says. “Owners should also consider whether there’s a housing shortage in the subject market, whether rents in the market have increased by an above-average rate in recent months and years and whether a significant portion of the market is comprised of rental property. If these conditions exist, there is a better chance of rent control implementation on units constructed before 1995.  If rehabilitation of an older rental project is contemplated in a city that does not yet have rent control or eviction limitations, consider vacating the premises in its entirety in advance of commencement of rehabilitation.”