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Why Big Apartment Landlords Want to Beat Rent Control in California

Commercial Poperty Firms Spend Millions to Defeat Ballot Measure Amid Fears.

Major U.S. commercial property owners, including apartment landlords with large holdings in California, have contributed at least $60 million toward defeating a state ballot measure that would let cities and counties expand or enact rent control, a movement that could spread to other states grappling with a shortage of affordable housing.

Private equity giant Blackstone Group, developers and publicly traded apartment owners lead the list of campaign donors opposing Proposition 10, an initiative on California's Nov. 6 ballot that would repeal the Costa-Hawkins Rental Housing Act, a state law preventing cities and counties from imposing new rent control laws on residential rentals, including apartments, single-family homes and condominiums built after 1995 or that were previously exempt.

Proposition 10 sponsors, including the state's Democratic Party, labor unions and nonprofit housing developers, argue that housing costs have spiraled beyond the reach of families with modest incomes. Landlords and other opponents counter that capping rents will stifle development of new rental stock, with the unintended consequence of making housing even less affordable in California, the most-populous and among the costliest states. Through Oct. 11, entities related to Blackstone Group, a heavy investor in apartments and single-family rentals, had contributed at least $10 million to the "No on Prop. 10" campaign. Chicago-based apartment real estate investment trust Equity Residential Trust contributed $3.7 million, Essex Property Trust donated $2.4 million and AvalonBay Communities kicked in $1.5 million. All three real estate investment trusts have a high concentration of apartment properties in the Golden State.

Wall Street analysts have become concerned as the campaign enters its final weeks. SunTrust downgraded Equity Residential's shares in August, in part because of its exposure to California rental property. Alexander Goldfarb, an equity analyst for Sandler O'Neill, said he expects the prospect of rent control to dominate the upcoming quarterly earnings discussions with Essex Property Trust, which derives more than 80 percent of its income from its California properties. "Affordability issues will exasperate and with net operating income growth potential severely curtailed, new development would precipitously decline, worsening the housing crisis in California," Goldfarb said.

Analysts also say that depending on the outcome of the election, rent control measures could spread across the country. Goldfarb expects apartment real estate investment trusts to discuss the potential for stricter rent control measures in New York, including rent increases following renovations, should Democrats gain the majority in the New York Senate next month.

"We are seeing other municipalities across the country talk about rent control given affordability issues, with modest wage growth in the recovery," Bank of America Merrill Lynch analysts Juan Sanabria and Jeffrey Spector said in a recent analysis of Proposition 10. In California, the long-term impact of the initiative would probably be reduced housing supply given the restrictions on rent growth for developers, they added.

"Prop. 10 wouldn’t solve affordability issues and may actually exacerbate the problem," the analysts said, noting that the measure could have a positive effect for landlords in the long run. Less construction could possibly increase property values over time if landlords are able to reset rents to market rates once renters move out, as they are often allowed to do even in rent-controlled buildings.

Apartment landlords could also opt to convert apartments into shorter-term rentals or condominiums to skirt rent control, Sanabria and Spector said. They note that Essex already has prepared a contingency plan to convert apartments to condos.

William Bernfeld, a real estate attorney with law firm Akerman LLP, said his conversations with multifamily real estate brokers said just the presence of the measure on the ballot has prompted some apartment owners, who were planning to hold onto their real estate, to sell their multifamily properties.

"Last year, if an apartment building was priced right, there were one to 10 offers," Bernfeld said. "Now, there’s one to three offers. Historically, investors have paid a premium for non-rent-control buildings."

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