Well, July 1st came and went, and Gov. Gavin Newsom did not renew his "state of emergency" pertaining to the tragic Los Angeles County wildfires.
You can argue whether a "state of emergency" exists anymore, or not – or whether the fires, 6 months later, are the biggest challenge facing L.A. County (!) – but the governor's failure to extend the emergency has a few real estate ramifications.
- First, the state "price gouging" law limiting rental prices is no longer automatically in effect in the multiple SoCal counties that were affected by the original emergency declaration.
- Second, individual counties may now declare their own "emergencies" in order to reinstate the "price gouging" law. As a knowledgeable reader of MBC, you know that L.A. County already has done that. We haven't heard of any other county doing so.
- Third, the governor's "exemption" for larger homes with no recent rental history in higher-priced ZIP codes like Manhattan Beach has also expired.
That last point is unfortunate. We warned about it before the 1st.
But stick with us here, as there's one weird trick we'll talk about below.
The governor did pointedly continue one post-fire policy, allowing people to remain in hotels or short-term rentals for longer than 30 days without becoming "tenants" (and gaining tenants' rights). The stated purpose of continuing that policy is to help people who need shelter due to displacement after the fires – just in a limited class of properties.
Where Things Stand Without 'Exemption'
In a sense, we're back to the state of the rules as of February 3, the day before the governor relaxed pricing regulations for some homes of 4BR or more in pricier areas.
This is basically bad news for property owners and potential tenants.
Some unknown universe of properties with no prior rental history now could be held off the market because it does not make economic sense to rent them at the harshly regulated rates provided for in the "price gouging" statute.
As a reminder, here are the max prices we've calculated, using the statute, for some Manhattan Beach homes:
Off the cuff, the maximum calculated prices for Manhattan Beach homes could be 40%-100% below market value, depending on home size, location and so forth. Gnarly.
Let's say someone is unaware of the rules, or tries to ignore them.
Soon after the fires, right as people were taking note of the "price gouging" rules, there were people reporting properties – and realtors – for charging too much for rent. It was apparently a fun way to engage in social activism from a computer, or whatever. Hundreds of owners and agents got nasty-grams from law enforcement leaders, and a couple were actually indicted. We directly heard from property owners who had signed "overpriced" leases who got complaints from their new tenants.
Are we really going back to all that, now, too?
Hope not. There are two ways to address the problem that the governor has left us.
That 'One Weird Trick'
If you'll keep in mind that this is a blog, and not your lawyer talking, let's discuss a loophole.
The "price gouging" statute (Penal Code Sec. 396) has one interesting limitation. The statute applies only to "rental housing with an initial lease term of no longer than one year." (Definition of "housing" in paragraph 10 of the section.)
Therefore, anyone who might want to price a property outside the constraints of the statute's price controls could, in theory, just advertise and sign a lease of more than 12 months.
So, if your property has a rental history, and you want to bump the price by more than the max of 10%, just go for a longer lease. If you have no rental history and want to set your own market price, ignoring the statute, same.
Initially, this seemed like an edgy interpretation of the law. By late January, we were being told that lawyers were blessing it. You could advertise any price and just require a longer lease. Voila!
The governor suspended this option, which we've called the "366-Day Loophole," in his February order that also created the "exemption" mentioned above.
But now the order that closed the loophole is gone. Ergo, the loophole seems to be back. (Again, we're not your lawyer, so please consult one if this is relevant to you.)
How About Some County Regs?
We could be back in the Wild West here with rental pricing and vigilante enforcers and uncertainty over which rules apply to what, who, when, how and where.
Or Los Angeles County could make a good-faith effort to fix this.
If the county supervisors are going to keep renewing the emergency and related rental price controls, why not make sensible exemptions, just like the governor did?
The source of the "problem" that caused the governor to create the "exemption" in February is a statute whose method for calculating rental property prices simply fails. It's a ludicrous formula, and it should be set aside.
We're encouraging real estate professionals to make the case to the county that some "exemptions" like the governor first had for certain ZIP codes should be copied and reinstated here, now at the county level. (And we'd like to see Hermosa 90254 on the exempt list, already!)
Since the county needs to renew the price controls every month, that's at least one opportunity per month to fix the issue.
What's that? You think the Supes don't give a rat about wealthy property owners and/or tenants? They might say "shove it?"
Well, property owners – those with lawyers – might just turn around and say "we don't need to follow your law at all," and systematically ignore it.
One thing we've noticed about governments: They like to regulate. They like to have some control.
So bring the property owners and the realtors to the table, and do something sensible here.
We're not going to argue for zero regulation of rental pricing here, just six months past the fires. Whatever one might really think, it's not a practical argument to make, when the county clearly wants price controls.
So it's time to talk about what can work to keep opening up inventory, but not "gouge" potential tenants.
Looking for some grown-ups.
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More Deep Dives on Emergency Price Controls
Some of our can't-miss prior articles on this topic:
"How Emergency Rent Limits Impact Manhattan Beach" (Jan. 30)
"Two Huge Changes Affect Local Rental Rates" (Feb. 4)
"Rental Price Controls Extended by LA County Action" (June 26)
