Statewide Rent Regulations Hit California: AB-1482

Posted by: TheGuarantors on September 19, 2019

 

 

Key Details:

The California assembly recently passed AB-1482 with a 46-22 vote, and now the Governor just needs to decide whether or not to sign it into law. There’s a lot in there, but our focus is on the new and expanded “just cause” requirement. Short version? It just got harder to evict renters (for better or for worse).

Full disclosure: it just so happens that mitigating the costs of mistakes (and avoiding them in the first place) is what we do here at TheGuarantors. That being said, if you worry about what happens when you need to evict a renter, then please read on below for a little additional analysis and advice.

All of California? Yes, all of it

The law in its entirety can be found here, and suffice it to say, it’s the most far-reaching bill of its kind: 8 million California residents just had the terms of their leases rewritten by California lawmakers. The biggest change is the rent-control component, which at a high level, caps annual rent-increases at 5%. That’s obviously a big deal, but that’s not really our focus. 

A Just Cause

We’re risk experts, so the thing that caught our eye (and probably yours too, if you’re still reading) is the so-called just cause requirement. What’s the just cause requirement? We’re so glad that you asked. 

What it means is that landlords must show just cause in order to evict renters that have lived in a unit for at least a year. That sounds easy enough and, honestly, who would evict someone for “unjust” cause? 

But here’s where it gets tricky: previously, Landlords were able to terminate a renter’s tenancy for any reason—or no reason at all—just by sending a move-out notice. (That’s what is referred to as California's “no-fault” rental laws. AB-1482 means that no-fault laws are no-more.) In theory, a renter could try to challenge the notice, but it was a lot harder and the renter would have to come up with a reason why. 

Under the new Just-Cause rule, Landlords are the ones who need to come up with a reason—and they have to put those reasons in their notice to the renter. That’s a double-whammy: not only do landlords now need a reason to terminate a lease, but they have the burden of explaining themselves to their renters, which means it’s a lot easier for renters to put up a fight. 

The Bottom Line

No one ever likes to evict a renter, but if you do have to evict someone, you prefer it to be as quick and simple as possible. That provides predictability and keeps legal fees down, but it also allows you to put the unit back on the market (and re-rent it) sooner rather than later. The new just cause requirement does the opposite of “quick and simple as possible.”

According to Leslie McAdams, an attorney at Ferguson, Case, Orr and Patterson, and expert on California Landlord-Tenant law, the bill “turns every eviction into a potential legal battle. Renters can dispute the circumstances of the eviction, lawyers get involved, time drags on and costs will increase. Over time, legal precedent will help create a little more predictability around timing and process, but at the beginning, there will be a lot of uncertainty as these cases wind their way through the judicial system."

More simply, the cost of a lease-gone-bad just went up, and it’s not even clear by how much. It is going to be more expensive to evict a renter and it is going to take longer to get a new renter in the door. More cost + less rent = no bueno. 

What Can I Do About It?

There is obviously no single right answer, but you need to take some steps to (a) make it less likely that a lease will go bad and (b) get some insurance just in case in does. 

Increase approval standards

Only accepting renters with prime FICO scores (over 630) and strong debt to income ratios will reduce the likelihood of eviction, especially for the non-payment of rent. The downside here is that this is a cookie-cutter approach: it’s simple to apply, but it will exclude some quality renters. Also, raising approval standards will shrink the applicant pool. 

Take more security

Many owners have already started taking up to two months of security deposit as a stopgap for potential losses. With renters already strapped for liquid assets, this is not an ideal solution from a leasing perspective, but will provide some extra protection in the event of default.

Bring in 3rd party risk management

A third-party risk partner (like us for example) can help improve your frontend screening process, qualify more renterss from a broader pool of applicants, and provide backend protection in the event of a default. TheGuarantors' Dynamic Lease Guarantee protects landlords against the risk of default by covering rent payments that the renter fails to pay. It’s an insurance policy that guarantees rent—from as little as 3 months rent to as much as the full value of the lease, depending on the landlord’s risk tolerance. 

With a Dynamic Lease Guarantee, the cost of a potential eviction becomes our problem, instead of yours. Rather than turning applicants away because you’re unsure of the risk, you can qualify more renters, more quickly, with more confidence. Best of all, the Dynamic Lease Guarantee is dynamic—we use better data and modelling to efficiently price-to-risk, so that we can provide exactly the amount of protection you need, while offering the lowest possible cost to your renters. Risk is our thing and we innovate to make one-size-fits-all solutions a thing of the past. 

We’ve seen this before:

As a key partner to many major metro landlords, we’ve already seen how rent reform affects cities like New York.

Daniel Rivera, a Managing Director at Bridgeline Management, points out that, “With the passed legislation, our clients will have to alter their current business models to be successful. However, leasing activity will still remain strong as we have services like TheGuarantors that we can offer to protect us from these changes. It’s essential to have strategic alliances in such a dynamic political landscape.” 

We’re innovative, smart, and customer-focused

At TheGuarantors, we leverage a unique blend of expertise in data, real estate, insurance and technology to solve for risk in leasing. Our goal is to bring landlords and renters closer together by unlocking new insights and providing new solutions that make it easier for more renters to qualify with less risk to landlords. We deliver a seamless digital product, but we have real people too: people who speak multiple languages, pick up the phone, and are in it for the long run. 

Summary

Assuming the bill gets signed into law, AB-1482 is a brand new frontier, bringing the wild-west to . . . the wild-west(?) (Editor’s note: that was not a funny joke.) In all seriousness, though, it has taken a previously simple process of eviction, and made it a good deal more complicated—the full contours of which are yet to be determined. That means more risk for landlords, which inevitably will make life harder for renters too, as landlords tighten their screening and increase their demands for security. 

We’re biased, but at TheGuarantors we genuinely think we can do better than just “tighter screening and more security.” Reach out to a member of our team to learn more about how we can help you qualify more renters with less risk.