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Why Prop 10 Will Only Worsen California’s Housing Woes

Carrie Rossenfeld Government & Public Policy

Proposition 10 is on the ballot for Californians this November, and while on the surface it sounds like a great solution to the state’s housing-affordability problems, most experts are emphatically saying it’s anything but that.

Prop 10, which is now quite familiar to the housing, development, and general real estate communities in California, is not well known amongst voters, said panelists on “Vote No to Prop 10,” a recent webinar produced by Marcus & Millichap (M&M). This is worrisome because they may not realize what’s at stake if they vote for the initiative.

Essentially, Prop 10 would repeal the Costa-Hawkins Rental Housing Act, which was enacted in 1995 to to place limits on municipal rent-control ordinances. Without those limits in place, cities would have unchecked control over implementing rent-control policies — policies that could devastate those cities’ economies, put a chokehold on already-stifled affordable-housing development, deteriorate the quality of existing stock, deter potential landlords from adding to that much-needed stock, and even cause them to remove units from the market because they’re no longer financially viable, the panelists said.

Moderator John S. Sebree, first VP/national director of M&M’s national multi housing group, addressed the growing middle-class-housing crises nationwide and said the problem is even worse in California, which is hindered by excess developmental and environmental regulations. He said, far from solving the housing crisis, “a lot of what’s in Prop 10 “will make the problem much worse” and that it would only exacerbate the roadblocks to bringing units on line.

An example of excess environmental legislation is CEQA, which was put in place in 1970 by then-Governor Ronald Reagan, but has been “weaponized by anti-construction groups to tie up developments they don’t like in court,” said Damon Conklin, director of government affairs for the Sacramento Regional Builders Exchange.

Jim Lapides, VP, strategic communications, for the National Multifamily Housing Council, said that according to recent research from his organization, almost a third of an apartment project’s development costs are tied to regulations, and 25 percent of respondents surveyed said costs due to regulations make up 42 percent of their total development costs. Not to mention that regulations delay the start of construction — often by as much as 4.5 years, said Eudy — which is both expensive and counterproductive to delivering units.

Conklin said Costa-Hawkins provides affordability and predictability for the affordable-housing market, and threatening those protections would have “a chilling effect on the housing market and the commercial real estate industry.” John D. Eudy, EVP and chief investment officer–development for Essex Property Trust Inc., agreed, adding, “If that umbrella goes away … there is no incentive to produce the housing we’re so short on. Everyone will go to the sidelines” and stop developing.

Some of the other reasons that Prop 10 is not the answer, according to the panel, are:

• It would devalue homes and apartments, resulting in lost revenue for schools, in-home support services, and the most vulnerable members of society.
• Pension funds would suffer, affecting government employees including teachers and firefighters.
• Single-family homeowners who rent out their homes or rooms in their home would be subject to rent-control-board rules, which could cut into their income.
• Rent-control boards have broad powers and are not accountable to anyone, and their determinations about how much a property can rent for and to whom are binding and long lasting.

This panel is not an anomaly. The Urban Land Institute Orange County/Inland Empire District Council is hosting a panel discussion on Sept. 7 regarding the potential impact of Prop 10, entitled “Rent Control: What does it mean for the California economy?” Richard K. Green, Lusk chair in real estate and professor of the Price School of Public Policy and Marshall School of Business at the University of Southern California, will be speaking on the panel. He tells SoCal Real Estate that a number of Southern California communities would be subject to rent control if Costa-Hawkins was repealed, including Santa Ana and number of Los Angeles communities such as the City of Los Angeles, West Los Angeles, and Beverly Hills.

Richard Green | Courtesy a representative of ULI OC/IE

“If there was a possibility at any point that a community could impose rent control on a landlord, it would make the attractiveness of the building much less so,” Green says. “You would certainly see a reduction in the number of units delivered, as well as a conversion of rental units to condos.”

If the repeal goes through, it would require “hand-to-hand combat” on the part of the real estate community to “go city by city to convince them not to do [rent control],” Green says.

Green adds that reducing restrictions on rent control would also decrease the likelihood that those whom it purports to benefit — those of lesser income — would actually see those benefits. More likely, the wealthiest in society would be more likely to live in a rent-controlled building instead of “freeing up the unit for someone who really needs it. It’s pernicious. It’s not just kind of bad—it harms a lot of people whom it’s supposed to help.”

On the M&M panel, Conklin said Prop 10 is “financed by one or two people who put $1 million or $2 million together and threw it on the ballot.” In contrast, opponents of Prop 10 include “virtually all economists” and those of “all political stripes” who “understand the economics of it,” he added. “You have to get to the root of the problem and not address just he symptoms of the problem.”

Sebree said that candidates for California governor on both the Democrat and Republican sides are opposed to Proposition 1 and that “the only high-level politician supporting this is the mayor of Los Angeles.”

Eudy said Prop 10 is just bad policy and that to begin solving the state housing crisis, we need creative, out-of-the box solutions. He added that it’s important to bridge the gap on the affordable side and enact legislation like Proposition 1, the Veterans and Affordable Housing Bond Act of 2018, which is also on the November ballot and would “authorize $4 billion in general obligation bonds for housing-related programs and housing loans for veterans,” according an August 1 article by Ricardo Flores in the San Diego Union-Tribune.