A Tale of Two Cities: The Unjustness of Santa Ana’s Rent Stabilization Ordinance
By Mercedes Shaffer l Published in AAOC Magazine (Article on P 26)
The Bureau of Labor Statistics has announced the 12-month adjustment in the Consumer Price Index for the Anaheim Region has been set at 7.9%. This means that all rental properties in Orange County that are subject to statewide rent control can raise the rent to the maximum allowable 10% rent increase after providing a 30-day notice to tenants.
There is one city that is the exception to the 10% allowable rent increase – Santa Ana.
The city of Santa Ana, which is comprised of over 50% renters, is the first in Orange County to enact a 3% rent cap or 80 % of inflation, whichever is less, on all buildings constructed in 1995 or earlier. In addition to this Rent Stabilization Ordinance (RSO) being another blow against the free market economy on which our nation is founded, this makes it such that housing provider’s rental income in Santa Ana will not be able to keep pace with inflation, even though their expenses are rising significantly.
The Rising Cost Of Property Ownership
With the new policy, providing rental housing won’t pencil out. A sustainable business needs revenues to exceed operating expenses and while property owners in Santa Ana can’t raise the rent more than 3%, their property taxes will increase by 2% and their upkeep and maintenance expenses (landscaping, termite and pest control, property management fees, routine maintenance fees and general upkeep) will go up at the same rate as inflation. Landlords are held to a rigorous standard for providing safe housing, so the property owners will be sliding backwards financially to cover the cost of upkeep and compliance. This will force many owners to defer maintenance, or even sell.
The Decrease in Cash Flow and Property Valuation
Santa Ana’s RSO significantly diminishes the cash flow that an owner can receive compared to every other city in Orange County, and because rental income plays a large role in determining the value of property, it also diminishes the rental property valuation.
As an example, let’s take 2 Fourplexes, one in Santa Ana and one in Anaheim. They both started out with equal rental income ($10,000 total per month for the past 12 months), but beginning July 1st. all the rents for the property in Santa Ana went up by 3% and all the rents for the one in Anaheim went up by 10%. The property in Anaheim would receive $8,400 more that year in income.
In addition, if by the end of the year they both decided to sell their properties using a 20x GRM (annual income multiplied by 20), the property in Santa Ana would be worth $168,000 less than the one in Anaheim. GRM is a common formula that investors use to determine the value of a property and the one in Santa Ana would be much less desirable as an investment due to the lower rental income, as well as due to the lower projected future income as a result of the rent caps.
If this trend were to continue for another 5 years, the person with the property in Santa Ana will make a total of $214,920 less in rental income by the end of the 5-year period, and their property would be worth $1,367,040 less if they wanted to sell it! That is A LOT of money for a property owner to lose out on if they happen to own in Santa Ana and is a big deterrent for buyers considering investment in the city.
Petitioning the Bill
Landlords can petition for exemption from the local ordinance for many different reasons including “the need for repairs caused by circumstances other than ordinary wear and tear, “ changes in reasonable operating and maintenance expenses” and “changes in the Consumer Price Index.”
Unfortunately, if you would like to be considered for exemption, you will also have to pay all associated costs for city employees to review your petition including if the city deems it necessary to employ outside experts to analyze your Fair Return Petition. The city manager will determine the fee on a case-by-case basis and the property owner must pay this prior to the city reviewing their petition.
It seems incredibly unjust that the property owner, who pays property taxes to the city, and therefore provides the revenue that pays the city employee’s wages, now has to personally pay for the city employees to review their “Fair And Reasonable Return” petition.
Discrimination Against Rental Property Owners
The Rent Stabilization Ordinance unfairly targets property ownership in Santa Ana as a business. The city claims to stand up for equal opportunity and non-discrimination, yet this law blatantly discriminates against the rental housing industry. Grocery stores, gas stations, car dealerships, hair salons…none of these essential businesses are forced to cap price increases to a maximum of 3% per year. This goes against the fundamentals of capitalism.
We stand together or we fall apart! Petition For What You Deserve
Even though it is cumbersome and unjust, property owners in Santa Ana have every right to receive a fair return on their investment and should petition the 3% RSO. The City of Santa Ana’s website has a copy of the Fair Return Petition that you can download and fill out. In addition, even if you don’t own property in Santa Ana, I recommend writing each council member and expressing why this ordinance is unjust and discriminatory.
If you have questions or comments I can be reached by phone or text at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit my website at www.InvestingInTheOC.com. Mercedes Shaffer is a real estate agent with Pacific Sotheby's International Realty and specializes in helping clients buy and sell residential and multifamily rental properties and perform 1031 Exchanges. DRE 02114448.