A Tale of Two Cities: The Unjustness of Santa Ana’s Rent Stabilization Ordinance
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he 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 for increases under 10%, or a 60-day notice for an increase of 10%. 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 to the free market economy upon which our nation is founded, it 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
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Apartment News
(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 examine two 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 property 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
www.aaoc.com
June 2022
BY MERCEDES SHAFFER, INVESTING IN THE OC
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 due to the rent cap. If this trend were to continue for another five 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 five-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 Two Cities — continued on page 28
