Demystifying Rent Control – 7 Myths and 7 Facts

Demystifying Rent Control

Rent control can help solve California’s housing affordability and homelessness crisis by decreasing displacement and protecting the rights and dignity of working families, the elderly, and long-term tenants. To demystify rent control in California, here are seven rent control myths followed by seven anti-poverty tenant protection ordinances cities can implement.

By Parisa Ijadi-Maghsoodi / San Diego UrbDeZine / February 22, 2018 

Articles and studies from newspapers to academic journals warn the public against the havoc and devastation caused by rent control ordinances. However, it is not tenants and community based organizations that are funding these articles and studies, it is real estate investors, developers, and corporate apartment owner associations. For decades, tenants and community based organizations across California have worked tirelessly to enact rent control ordinances to decrease displacement and protect the rights and dignity of working families, the elderly, and long-term tenants. Tenant advocates continue to direct their limited resources to local initiatives and ballot measures, not to fund studies, articles, and lawsuits.

Myth 1: Rent control is illegal.
Fact: Rent control is legal and an effective tool to address housing affordability.

California state law does not prohibit the enactment of new rent control ordinances.  Since 1976, California courts have upheld rent control ordinances. When a rent control ordinance is challenged, courts analyze the ordinance to determine if it is “reasonably calculated to eliminate excessive rents and at the same time provide landlords with a just and reasonable return on their property.”[1]

Since 2016, rent control ordinances have been successfully enacted in Richmond and Mountain View, and rent control campaigns are underway in Long Beach, Glendale, Santa Cruz, Pasadena, San Diego, Inglewood, Sacramento, Santa Rosa, and Concord.[2]

Despite the clear legal standard, investors, real estate developers, and corporate apartment owner associations file lawsuits each year challenging the constitutionality of rent control ordinances. In 2016 and 2017, the California Apartment Association[3] filed challenges to new rent control ordinances in Richmond and Mountain View.[4] In an attempt to avoid a decrease in profits, property owners sought a restraining order to prevent the new Richmond ordinance from going into effect. The court denied the restraining order, holding that the harm the corporate apartment owners associations alleged – possible lost profits – was not sufficient. The California Apartment Association dismissed its remaining case against Richmond’s rent control ordinance. Both lawsuits were unsuccessful. Tenants in both cities are benefiting from rent control ordinances while corporate apartment owners and their investors continue to receive a fair return on investment.

Tenants and community based organizations across California are effectively utilizing rent control against increasing housing instability caused by the lack of affordable housing and the loss of redevelopment agencies, and to prevent tenant displacement posed by new commercial and corporate development in cities like Inglewood.[5]

Myth 2: Rent control decreases the housing stock by disincentivizing new housing construction.
Fact: Rent control has no impact on new construction because it does not apply to new construction.

State law prohibits rent control ordinances from applying to new housing units and requires rent control ordinances include vacancy decontrol.[6] Rent control does not disincentivize new housing construction because new construction is not covered by rent control. Arguments against rent control on grounds that it disincentivizes building are legally inaccurate, misleading, and meritless. Nevertheless, real estate investors, developers, and corporate apartment owner associations continue to propagate this argument. The enactment and enforcement of rent control ordinances have no impact on development. In fact, the law banning vacancy control and rent control from applying to new construction, the 1995 Costa Hawkins Rental Housing Act, was a political compromise reached by the wealthy developers and investors who continue to propagate the myth that rent control has a chilling effect on new development.

While rent control does not have a chilling effect on new construction, it does have a chilling effect on the ability of real estate investors, developers, and corporate apartment owner associations to gouge hard working families, the elderly, and others who rely on the rental market. Rent control allows corporate apartment owners and their investors to receive a fair return on investment, not a windfall in profits.

In cities that enacted rent control in the 1970s and 1980s, units constructed over the last thirty to forty years have been exempt from rent control, and cities with more recently enacted rent control ordinances exempt units constructed in the last 20 years:

• Los Angeles exempted from rent control are structures built after 1978 (L.A.M.C. Section 151.28)
• San Francisco exempts structures built after 1979 (S.F. Administrative Code Ch. 37A)
• Berkeley exempts units built after 1980 (B.M.C. Section 13.76.050)
• Richmond exempts units constructed after 1995 (R.M.C. Section 11.100.070)
• Mountain View exempts units constructed after 1995 (C.S.F.R.A. Section 1720)
• East Palo Alto exempts units constructed after 1988 (E.P.A. Mun. Code Ch. 14.04)
• Oakland exempts units constructed after 1983 (O.M.C. Section 8.22.070)

Myth 3: Rent control causes the rental stock to decrease because rent control units will be converted to condominiums.
Fact: Ordinances restricting condominium conversions protect the stock of rental units under rent control.

The loss of all rental units through condominium conversions is not the inevitable, impending consequence of rent control, despite the argument put forth by real estate investors, developers, and corporate apartment owner associations.

Cities have the power to enact ordinances restricting condominium conversions. Limiting condominium conversions effectively prevents the removal of rental units under rent control from the rental market. Cities across the State of California have enacted and enforced condominium conversion ordinances to maintain a stock of rental units.[7] These ordinances effectively recognize the need of century-old apartment complex owners to sell units when the cost of maintaining or upgrading an entire apartment complex becomes unsustainable, while protecting the rental housing stock.

Note that there is no standard definition of a condominium conversion.[8] Despite the common use of the phrase, converting a rental unit to a condominium is not a simple, overnight process that has the power to decimate the rental housing stock the moment a rent control ordinance is enacted. Instead, to convert a multi-unit rental complex into individually owned condominiums, a complex legal process must be followed. In addition to abiding by local ordinances, the process requires, at a minimum, providing tenants with notice of certain protections including the right to purchase, obtaining state approval to market residential units, a recording of a declaration of conditions, covenants, and restrictions, a recording of the subdivision or parcel map for purposes of creating a condominium, a recording of the condominium plan, and the conveyance of the unit.[9]

Myth 4: Rent control hurts tenants.
Fact: Rent control helps tenants.

Rent control studies are funded by real estate developments, investors, and corporate apartment owner associations, and their own data supports the effectiveness of rent control.

A recent rent control study released in October 2017 found that rent control in San Francisco caused a $2.1 billion net benefit to tenants with tenants aged 40-65 benefiting most from rent control.[10] The study which is a Working Paper of the NBER Real Estate Institute, incorporated in 1920 with $116 million in assets and 2017 corporate sponsors AIG, ExxonMobil, Goldman Sachs, Vanguard, and JP Morgan Chase, concluded that rent control destroys rental housing stock and causes gentrification.[11] Another study, prepared for the California Apartment Association, concluded that rent control laws make low-income residents worse off and argue for a free market approach to addressing the growing housing affordability crisis.[12]

The NBER study focused on San Francisco’s limited rent control ordinance which is applicable to apartment units constructed before 1980. In its analysis, the authors found that as of 2017, more of the half-century old units under rent control had been converted to condominiums than the newly constructed units not under rent control, resulting in a $5 billion loss to the rental housing market. However, not only were all of the units under rent control built more than a half-century ago, each unit was part of an apartment complex, adding to the cost of maintenance and upgrades, and increasing the likelihood of condominium conversion. If the age of the buildings under rent control were accounted for in the context of conversions, the tenant gain would be greater than $7.1 billion, creating a net gain to tenants of more than $2.1 billion.

Building upon this finding, the authors conclude that the characteristic of rent control, rather than the characteristic of building age or the need for a stronger condominium conversion ordinance, was the factor that caused the condominium conversions. Since condominium conversions can lead to displacement and gentrification, the authors took their findings a step further, and declared that rent control was the cause of gentrification in San Francisco. However, the lack of affordable units is the factor at play in displacement, not local rent control ordinances. Without rent control, low-income, long-term tenants would have been displaced sooner and in greater numbers.[13]

Myth 5: Rent control is not needed, building market rate units will solve the housing crisis.
Fact: Building market rate units without effective tenant protection ordinances exacerbates the housing crisis.

Underlying anti-rent control sentiments is the premise that the housing crisis will be solved on its own through the free market system. For example, the NBER study held that any rent set by a rent control ordinance was “below market rent,” the free market’s reliance on supply and demand would lead to fair market rents, and rent control “forc[es] landlords to provide insurance against rent increases,” while the Beacon study held that rent control created “artificially low rents.”[14] Real estate investors, developers, and corporate apartment owner associations argue that if rent control were removed, the free market would lead to fair market rents that were both affordable to tenants and allowed for fair market returns to landlords. However, increasing the supply by infusing the market with market rate rentals does not lead to affordability. In fact, it worsens the affordability crisis and exacerbates displacement of low-income, long-term tenants.[15]

In the early 2000s, New York City changed its housing policies changed from a rent-regulated system to a system intent on letting the free market fix its affordable housing and homelessness problem. Building market rate housing was not only ineffective at solving the housing crisis, it further exacerbated the crisis. The construction of market rate housing led to an influx of higher-income renters, and effectively displaced working families and low-income renters.[16] Affordable housing must not only be part of the solution, it must be the primary focus if cities are truly intent on solving housing instability, avoid displacement, and reducing homelessness.

Corporate apartment owner associations, investors, and real estate developers profit from investing in property, allowing the property to gain value, and selling or leasing the property. Those profiting from the housing market, generally individuals who have obtained property through the generational transfer of wealth, are not receiving a fair return on investment, they are receiving a windfall in profits. Tenants are always at a disadvantage in the housing market, and rent control works to protect tenants by ensuring property owners receive a fair return on investment sufficient to effectively maintain units, instead of a windfall.

Myth 6: Rent control incentivizes tenants to remain tenants, rather than become homeowners invested in their communities.
Fact: Society has traditionally favored homeowners over tenants primarily because homeowners intend to reside in and better their community, and rent control furthers these goals.

In the current housing climate, tenants that would have become home owners one or two decades ago are remaining tenants because they cannot afford to buy. Just as homeowners feel inclined to improve their communities, long-term tenants participate in their communities, enroll their children in local schools, and work to improve the health and safety of their neighborhoods. Rent control stabilizes communities, furthers long-term tenant participation by removing the risk that these tenants will be priced out of their units. Rent control is an effective tool to achieve the societal goal of community involvement that has been traditionally attributed only to homeowners.

Myth 7: Rent control causes units to go into disarray.
Fact: Rent control improves the quality of the rental housing stock.

Landlords are legally obligated to maintain rental units, and rent control furthers tenants’ abilities to assert their legal rights.
Rent control furthers tenants’ abilities to assert their existing legal rights. Landlords are legally responsible for maintaining rental units, repairing conditions in a timely manner, and complying with state and local building codes.[17] A local rent control ordinance allows tenants to assert their rights by petitioning for a decrease in rent if a landlord has failed to repair a condition, provide a legally required service, or correct a housing code violation. This is in addition to the rights and remedies a tenant has under state law.

Tenant Protections Beyond Rent Control

In addition to rent control, cities may take steps to enact ordinances to mitigate the risks of homelessness, stabilize housing, and ensure landlords are receiving a fair return on investment, not a windfall in profits from unscrupulous, harmful rental practices. The following are versions of anti-poverty tenant protection ordinances enacted throughout the state.

• Enact an ordinance that discourages landlords from failing to perform repairs, under-maintaining units, and using related tactics to pressure tenants to move out in order to set higher initial rents, by making the failure to comply with the warranty of a habitability a defense to good cause eviction.
• Enact an emergency ordinance applicable to all renters in units constructed before a statutorily mandated date, reducing rent to the rate in place three years ago for all tenants living in their units for two or more years, and for renters who moved into their units less than two years ago, reducing rent to the amount charged when the tenant first moved into the unit.
• Enact an ordinance mandating that landlords who evict tenants for the purpose of allowing the landlord or relatives of the landlord to move into the unit to pay each tenant $20,000.
• Enact an emergency ordinance banning landlords from evicting tenants for the purpose of allowing the landlord or relatives of the landlord to move into the unit if the tenant has lived in the unit for two or more years and is a member of a vulnerable population, including being elderly, having a disability, or having a child with a disability.
• Enact an ordinance requiring that landlords who wish to sell their rental unit first offer ownership to the tenant at a rate reduced pursuant to a statutorily mandated amount developed to preserve the stock of rental units and mitigate adverse economic and health impacts associated with a tenant’s forced relocation.
• Enact an emergency ordinance preventing landlords who wish to evict tenants with minor children to delay eviction until the end of the academic year.
• Enact an ordinances restricting condominium conversions that requires owners pay tenants’ moving expenses, limits the annual number of conversions based on the vacancy rate, requires a portion of converted units be sold below market rates, provide existing tenants with sale price discounts, mandate payment of a fee to an affordable housing trust fund, and require one for one replacement of converted units.

Landlord and housing providers in violation of these ordinances should be assessed a statutory penalty for each instance of harassment, and tenants shall be able to seek statutory damages and attorney’s fees.

Footnotes

[1]Birkenfeld v. Berkeley, 17 Cal. 3d 129, 165 (1976).
[2]A New Housing-Rights Movement Has the Real-Estate Industry Running Scared, Jimmy Tobias, The Nation (Jan. 9, 2018).
[3]An industry group that represents more than 50,000 property owners across the state.
[4]California Apartment Association v. City of Richmond, Contra Costa County Superior Court, Case No. MSC17-00005 filed January 5, 2017; California Apartment Association v. City of Mountain View, Santa Clara County Superior Court, Case No. 16CV304253 filed December 21, 2016.
[5]Housing activists in Inglewood, Pasadena latest to pursue rent control, Josie Huang, Southern California Public Radio (Nov. 17, 2017).
[6]California Government Code Section 1954.50 et seq.
[7]City of Alameda – A.M.C. Section 30-8; City of Lafayette – L.M.C. Section 6-3201; City of Larkspur – L.M.C. Chapter 18.38; City of San Carlos – S.C.M.C. Section 17.48.020;  City of Los Angeles – L.A.M.C. Sections 151.09.A.10 and 151.22-151.28; Addressing Displacement in the Bay Area, Association of Bay Area Governments White Paper (August 2015); Housing Element Policy Best Practices: Anti-Displacement – Condo Conversion Requirements, Joshua Hugg, California Department of Housing and Community Development (Feb. 21, 2014).
[8]The Subdivision Map Act, California Government Code Sections 66410 et seq.,uses the term but does not define the term while Civ. Code Section 1351 defines condominium as an estate in real property that consists of an undivided interest in common in apportion of real property coupled with a separate interest in a space called a unit.
[9]California Government Code Sections 66410 et seq., 66427.1 and 66452.19.
[10]The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, Rebecca Diamond, Timothy McQuade, Franklin Qian, Stanford University and NBER (Oct. 11, 2017) (The monetary benefit rent control provided to tenants was $2,200 to $6,600 a year, with a cumulative benefit of $7.1 billion. Losses to the declining rental housing market was $5 billion, allowing for the $2.1 billion net benefit to tenants. If the age of the buildings were accounted for, the gain would be much greater than $2.1 billion.).
[11]Id., see also NBER Corporate, Corporate Foundations and Individual Supporters: Fiscal Year 2017  (http://www.nber.org/ CorporateSupporters2017.pdf).
[12]An Analysis of Rent Control Ordinances in California, Christopher Thornberg, Jordan Levine, Dustrin Schradre, Eric Meux, Beacon Economics (January 2016).
[13]Solving the Housing Affordability Crisis, Jeff Bellisario, Micah Weinberg, Ph.D., Camila Mena, Lanwei Yang, Ph.C., Bay Area Council Economic Institute (October 2016).
[14]The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, Rebecca Diamond, Timothy McQuade, Franklin Qian, Stanford University and NBER (Oct. 11, 2017); An Analysis of Rent Control Ordinances in California, Christopher Thornberg, Jordan Levine, Dustrin Schradre, Eric Meux, Beacon Economics (January 2016).
[15]Zoned Out of the City: New York City’s Tale of Race and Displacement, Tom Angotti, Poverty & Race Research Action Council (January-March 2017).
[16]Analyzing the Mayor’s Housing Plan – Part 3, Association for Neighborhood & Housing Development (Jun. 12, 2014).
[17]California Civil Code Sections 1929, 1941.2; California Health Safety Code Sections 17920.3, 17920.10.