The Importance of Protecting Costa-Hawkins: A Warning to Property Owners and Renters

By Chris Tipton  |   August 2024

If you own property or rent in California, you are undoubtedly aware of the critical importance of maintaining fair and sustainable rental housing in the Bay Area. This November, Proposition 33, the so-called “Justice For Renters Act”, will appear on the ballot to repeal the Costa-Hawkins Rental Housing Act. This act has been a cornerstone of California's rental housing policies for decades, and its repeal could have real consequences for rental property owners and renters alike. Therefore, it is essential to understand why protecting Costa-Hawkins is crucial for the future of our rental housing market and how the repeal could impact you directly.

The Costa-Hawkins Rental Housing Act, enacted in 1995, provides several key protections for rental property owners in California. First, it prohibits cities from imposing rent control on single-family homes and condominiums to provide an incentive for the average owner to add these units (especially if vacant) to the rental market. Second, it exempts new construction (post-1995) from rent control regulations to incentivize the construction of new homes. Third, and most importantly, Costa-Hawkins ensures the protection of vacancy decontrol, allowing rental housing providers to adjust the rent to market rate when a long-time renter vacates the property and more significant property remodels and updates are needed. These provisions create a balanced and predictable environment for the rental market and encourage investment in building and maintaining safe rental housing.

Michael Weinstein, president of the AIDS Healthcare Foundation, is the driving force behind the past two unsuccessful attempts to repeal the Costa-Hawkins Rental Housing Act. In 2023, the AIDS Healthcare Foundation (AHF) generated approximately $2 billion in revenue. The bulk of this revenue comes from their healthcare services, particularly through their participation in the exclusive 340B Drug Pricing Program, which allows AHF to purchase drugs at a significant discount and sell them at full price to insurers — a classic buy low and sell high tactic.

With millions to spend from his nonprofit foundation, Weinstein’s first effort was Proposition 10 in the November 2018 election. His foundation contributed around $23 million to the campaign, but it was defeated with 59.4% voting against it. On his second attempt, he spent approximately $40 million with Proposition 21 in the November 2020 election, which also failed with 59.9% of voters opposing the measure. Despite substantial campaigning, both initiatives did not garner the necessary support to pass, underscoring the fact that the majority of California voters want to protect Costa-Hawkins. With his third attempt in 2024, we should question Weinstein’s motives and intention behind these continued campaigns.

Weinstein has been significantly involved in residential real estate, particularly in the Los Angeles area. Critics have called for greater transparency in how AHF’s real estate operations are managed and how decisions are made and are calling for a clear separation between Weinstein’s personal financial interests and his nonprofit activities. This transparency is crucial for maintaining public trust and building credibility.

If Weinstein prevails and Costa-Hawkins is repealed, it would have devastating effects throughout the rental industry in California — devaluing housing in some areas by as much as 30%. The results would mirror the current scarcity of rental units (over 100k vacant units) in New York City where its similar 2019 rent control regulation has deterred investment and decreased housing quality that negatively impacts property values. Much like the millions in net proceeds generated by his AIDS Healthcare Foundations, Weinstein would benefit from the windfall and bonanza caused by the repeal of Costa-Hawkins, enabling him or other institutional investors to buy up properties from legacy owners at a discount and turbocharging gentrification and the eradication of below market rate housing — mostly in communities of color.

Proponents of Proposition 33 argue that repealing Costa-Hawkins will make housing more affordable by expanding rent control. However, the reality is quite the opposite. The repeal would lead to a significant reduction of new multi-unit housing starts (Oakland’s current trend) and in the availability of single-family home and condo rental properties, particularly those owned by small “Mom and Pop” or legacy owners. Here’s why:

Loss of Rental Units: Of the 1,618,223 single-family rentals in the state, less than 9% are owned by large corporations with ten or more properties. The majority are owned by regular folks or retirees. These individuals often offer below-market-rate housing to their renters. Repealing Costa-Hawkins would impose stringent rent and vacancy control measures on these small-scale owners, making it financially unviable for them to maintain their rental properties.

Decreases Affordability: The exodus of these small-scale owners from the rental market would exacerbate the already critical affordable housing shortage in California. This reduction in supply would drive up rents, contrary to the intended effect of rent control. The impact would not be limited to single-family homes but would also extend to condos. The loss of these rental units would severely constrain housing availability and affordability.

Lower Rental Quality, More Blight: Vacancy decontrol, a vital component of Costa-Hawkins, allows rental housing providers to reset the rent to market rate when a renter vacates. This provision ensures that rental properties economically viable and encourages property owners to invest in and maintain their properties. Repealing Costa-Hawkins would eliminate vacancy decontrol, leading to stagnant rents that do not reflect market conditions. This would discourage property maintenance and investment, ultimately resulting in deteriorating housing stock and a less desirable living environment for renters.

Discourages New Construction and ADUs: Rent control is a blunt tool that also discourages the development of new housing units and the addition of accessory dwelling units (ADUs). To address the housing crisis, California needs to incentivize the construction of new low-cost housing, streamline the permitting process, and encourage property owners to rent out their homes or open up extra rooms. Rent control policies hinder these efforts by creating a hostile environment for investment and development.

Rather than resorting to more ineffective rent and vacancy control policies, which have proven to be counterproductive, California should focus on proactive solutions that address both supply and affordability challenges in the rental market. Here are several strategies that can help achieve this goal:

• Streamline Permitting Process: Simplifying and expediting the permitting process for new construction can help increase the housing supply more rapidly.
• Tax Incentives: Providing tax incentives to property owners who invest in rental housing can encourage the development and maintenance of rental properties.
• Zoning Reforms: Reforming zoning laws to allow for higher-density housing and mixed-use developments can create more rental units in desirable locations.
• Public-Private Partnerships: Collaborating with private developers to create affordable housing projects can leverage both public and private resources.
• Renter Means Testing: Implementing means-tested rental assistance programs can ensure that help is directed to those who need it most without imposing blanket rent control measures.
• Low-Interest Loans and Grants: Offering low-interest loans and grants for the construction and maintenance of rental properties can make it financially viable for property owners to invest in their properties.
• Rent Guarantees: Providing rent guarantees to landlords can reduce the financial risks associated with renting to low-income tenants.
• Subsidies for Construction and Maintenance: Direct subsidies for the construction and maintenance of rental properties can help increase the housing supply and ensure that rental units are well-maintained.
• Investment in Infrastructure: Investing in public transportation and other infrastructure can make it more feasible to develop housing in underserved areas.
• Build-to-Rent Models and Land Banking: Encouraging build-to-rent models and land banking can create dedicated rental housing developments that address long-term rental needs.

Renters and property owners must recognize the importance of protecting Costa-Hawkins to ensure a stable and sustainable rental housing market in California. Repealing this crucial act through Proposition 33 would lead to a significant reduction in rental housing availability, discourage new construction, and ultimately harm both renters and owners. Instead, we should advocate for proactive solutions that address the underlying issues of housing supply and affordability. By voting NO on Prop 33 to protect Costa-Hawkins, we are safeguarding the future of rental housing in California and ensuring that vestments in rental properties remain viable and beneficial for all. Based on the past two campaigns, estimates to defeat Prop 33 top $80M. If you’d like to make a contribution to the campaign to protect Costa-Hawkins, scan the QR code. We are all in this together. To learn more, visit www.ebrha.com.

EBRHA: The Essential Resource to the Housing Community.