David Harrington Harringtonsays if an owner has maintained rents at a market rate, theproperty will retain current value.

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SAN FRANCISCO—Last year, California joined Maryland, New Jersey,Oregon and New York as the only states with some form of rentcontrol. While the rent control law protects roughly 8 millionresidents who live in rental homes and apartments from tenants frombeing evicted without cause, there are issues that resulted fromthis legislation.

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In this exclusive, David Harrington, executivevice president and national director of multifamily for MatthewsReal Estate Investment Services, offered insights on how the rentcontrol law affects the value of properties that were previouslynot subject to any rent control law and what owners can do tomaximize value in their properties.

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GlobeSt.com: How does the rent control law affect thevalue of properties that were previously not subject to any rentcontrol law?

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Harrington: If an owner has maintained rents ata market rate, the property will maintain current value. However, many owners have allowed rents to remain at lower levelsand have not kept rents up with the market. We routinely see assetsthat were previously not subject to rent control have current rentlevels that are 25% to 50% below market rates. In some cases, wesee rents more than 50% below market. Before rent control, a newinvestor would have a much shorter horizon to capture the rentupside potential and thus were much more willing to pay a sellerfor part of that upside today in the purchase price. Given the newrent control laws, the timeline in which to move rents to marketlevels has stretched considerably in situations where the currentowner has allowed rents to remain low. Therefore, an investor isforced to build in additional capital costs to generate unitturnover and delay rent increase projections, both of which willhave a negative impact on the value of the asset.

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GlobeSt.com: What can owners do moving forward tomaximize value in their properties?

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Harrington: An owner needs to implement abusiness plan to focus on those tenants who are currently belowmarket rents. For many long-term owners, their long-term tenantsare typically far below market rents. In order to maximize value ina rent-control environment, it is critical to implement vigilantmanagement of a property. This means lawfully evicting tenants whenrent is not paid on time or if there are blatant violations of thelease terms. Long-term owners have often given lower paying units abreak on the date rent is paid or other lease violations. Thistolerant approach has typically been enacted in order to keep unitturnover to a minimum, which is exactly what has led to tenantswith rents significantly below today's market rates. Additionally,an owner must consistently increase rents by the maximum allowableincrease on an annual basis. Finally, as units turn, owners shouldtake the necessary steps to upgrade unit interiors that will allowthem to capture a top of the market rent.

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GlobeSt.com: Are you seeing owners move their capitalout of California and if so, what are some of the most popularalternatives for real estate investments?

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Harrington: Absolutely. We are seeing apartmentowners relocate capital to less regulated states as well as otherinvestment product types. Investors are inclined to move theirmoney to urban markets with growing populations that are lesslikely to have rent controls in the near future. Phoenix and LasVegas have been popular destinations lately and rightfully so, asthese two metros have seen the highest rent growth in the countryover the last 12 months. Additionally, markets such as Dallas andAtlanta are receiving continued interest due to the populationgrowth and strong employment fundamentals over a sustained periodof time. We are also seeing investors exchange into single tenantnet-leased properties which offer owners less hands-on managementand are not subject to the same state regulations.

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GlobeSt.com: Does rent control cause more harm than goodto the renters these laws are drafted to protect?

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Harrington: Ultimately yes, because wefrequently hear from landlords who were not regularly raising rentsthat they will now be increasing rents every year and for themaximum allowable amount. We also have heard that owners have lessincentive to consider upgrades to their assets now that rents arerestricted, and they have a reduced ability to recoup the costs ofcapital improvements.

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Lisa Brown

Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.