Bernie’s Law

So is the Alameda City Council ever going to enact a rent control ordinance?

Well, after watching the video of the seven-and-a-half hour special meeting held last Wednesday, we confess that your guess is as good as ours (or anyone else’s).

In the wee hours of Thursday morning, Council directed staff to prepare an amendment to existing law to require a landlord who wants to raise rents by 8% or more to submit a request to the Rent Review Advisory Committee, which will then conduct some sort of hearing.  But, as is the case now, the RRAC will not have the authority to rule on whether the proposed rent increase is permissible, only to “recommend” whether it is.  If “mediation” by the RRAC fails, some sort of “binding arbitration” procedure will be set up to decide whether the landlord actually gets to charge what it wants.

As with other post-midnight decisions by the current and former Council, this outcome lacked both clarity and simplicity.  Let’s assume, for the sake of argument, that rent control is a good idea.  Surely, there must be a way to write a clear and simple ordinance that would penalize the greediest – i.e., those landlords who impose the most “egregious” rent increases – and protect the neediest – i.e., those tenants who can least afford to bear those increases.

The Merry-Go-Round thinks there is.  So we offer for your consideration what we’ll call “Bernie’s Law”:

  1. No landlord owning a building containing 50 or more rental units shall raise rents by more than the annual increase in the Consumer Price Index.
  2. No tenant who is age 65 or older shall have his or her rent increased by more than the annual increase in the Social Security cost-of-living adjustment (which is also based on the CPI).
  3. Any landlord who believes that the foregoing provisions deny him or her a fair return on investment shall have the right to an evidentiary hearing and a decision by a neutral party. (We need to include this provision to make the law constitutional).

Bernie Sanders photoWe call our ordinance “Bernie’s Law” in honor of Vermont Senator and Democratic presidential candidate Bernie Sanders.  (Whom did you think we meant – Bernie Madoff?)  The Senator goes after the Big Guys – the “billionaires and corporate leaders, on Wall Street and elsewhere, whose policies and greed are destroying the middle class of America” – and looks after the Old Folks – the senior citizens whose interests he believes the major parties, including his own, have ignored.

So does our ordinance.

The first part of Bernie’s Law imposes rent control on the landlords who own the largest apartment buildings in the City.  Our reason is not simply a Sanders-inspired desire to stick it to the fat cats or even adherence to our own mission statement to afflict the comfortable.  Rather, we’ve chosen this group because they purportedly are the ones responsible for inflicting the most pain on Alameda tenants.

Or so, at least, the speakers at Wednesday’s Council meeting – on and off the dais – claimed.

The anecdotal evidence distinguished between what the speakers called “mom-and-pop” landlords – we, of course, would never use such a heteronormative term – who own buildings with only a handful of rental units, and the corporations and investment partnerships who own large apartment complexes.  The former seldom raise rents, and then only modestly.  The latter routinely sock tenants with annual rent increases of 10% or more.

Councilman Tony Daysog made this distinction most explicitly.  “To me, the problem is out-of-town landlords charging excessive rents,” Mr. Daysog said in his prepared remarks.  Based on what he heard during his town hall meetings, the Councilman concluded that local “mom-and-pop” landlords don’t raise rents every year, and, when they do, they’re content with 4-to-8% rent increases.  By contrast, “the out-of-town landlords have gone off the deep end in charging excessive rent increases.”

Councilwoman Marilyn Ezzy Ashcraft expressed a similar sentiment.  She had “hounded” landlords and their representatives for information on rent increases, she said.  Based on this fact-gathering effort, she concluded that small landlords had “really tried to keep tenant burdens down.”

Not surprisingly, the landlords who spoke during the public comment period, primarily local owners of rental properties, corroborated the two Council members’ opinions.  And so did even some tenants.  “Maybe it isn’t the small mom-and-pops [who are imposing “excessive” rent increases],” Catherine Pauling of the Alameda Renters Coalition told Council.  “I thank them for what they’re doing.  But the large complexes are coming in with 50% rent increases, 30%, higher.”

Ordinarily, we would hesitate to propose any legislation in reliance solely on anecdotal evidence.  But, in this case, we don’t have to.

After months of dallying, Council authorized staff last May to hire a consulting firm to prepare a report on the state of the local rental market.  Staff picked a nationally prominent outfit – “I just got back from New York City working on a project for the mayor,” the firm’s spokesman (and founder) told Council in listing her credentials – to do the job.  Most of the data in the report came straight out of the American Community Survey published by the U.S. Census Bureau, which is available online to anyone.  But there were a couple of interesting slides based on data from a company called “real ANSWERS,” which the report described as a “private vendor that tracks rents for 50+ unit rental projects.”

According to this source, there are 20 apartment buildings containing more than 50 units in Alameda.  These buildings account for 2,157 of the 16,518 rental units in the City.  Only four of them are owned by Alamedans; the rest are owned by out-of-towners.  And here’s the key statistic:  for these large apartment buildings, average market-rate unit rents rose from $1,412 to $2,152 per month from 2011 through the 3rd quarter of 2015.  This represents a 52% jump in just over four years, “far outpacing the rate of inflation (less than 6% between 2011 and 2015).”

So maybe Council members Daysog and Ashcraft and the public speakers are right:  it is the owners of large apartment buildings who’ve raised rents the most.  If so, they’re the perfect target for Bernie’s Law.

(One technical note:  We’ve chosen to tie the permitted rent increases to increases in CPI rather than to set a fixed percentage.  This is the way it’s done in cities such as San Francisco and Berkeley.  We prefer this approach to a fixed percentage, since who knows what the “fair” percentage is?  If the theory is to allow rents to rise in order to cover increases in costs, CPI strikes us as the best measure to use).

We realize that, by imposing rent control only on the owners of the largest buildings, we’re giving everyone else a pass.  This group includes not just the “mom-and-pop” landlords but also the landlords owning mid-size buildings.  Unfortunately, the City’s consultants didn’t find any data breaking down rent increases for buildings containing fewer than 50 units.  Absent such data, we’ve chosen to make Bernie’s Law under-inclusive.  Like the politicians, we’ll just have to trust mom and pop and their siblings who own smaller buildings not to get greedy.

Even though the first part of Bernie’s Law covers only the largest apartment buildings, it still would benefit a significant number of tenants.  Under the Costa-Hawkins Act, not all rental units are subject to rent control.  Community Development Director Debbie Potter told us that, of the 2,157 rental units in buildings with more than 50 units, she estimated that as many as 564 units consist of subsidized housing exempt from Costa-Hawkins.  Subtract the latter from the former and you get 1,593 units to which the first part of Bernie’s Law would apply.  If buildings with 20-49 units are made subject to the ordinance, too, add another 2,550 units to the number being protected.

The second part of Bernie’s Law shifts the focus from landlords to tenants.  The renters who spoke Wednesday included people from, as they used to say, all walks of life who told stories of being unable to afford annual rent increases in any significant amount.  In coming up with Bernie’s Law, we sought to identify, if we could, the group who could tolerate these increases the least – and thus who would benefit the most from a rent control ordinance.

Our choice – which we hope Bernie would approve – is people age 65 or over.  According to the consultants’ report, of the 16,518 “renter households” in Alameda, 3,057 had a householder over age 65 (and 1,345 with a householder over age 75).  Of this total, nearly half fell into the “extremely low,” “very low,” or “low” income categories.  Most significantly, the report found that 610 of the senior households with very-low income were spending more than 50% of their income on housing (and another 225 were spending between 30% and 50%).  For these “cost-burdened” seniors, the current rent represents a challenge; a significant rent increase would result in a catastrophe.

Although only a few speakers addressed the issue Wednesday, the plight of senior renters hasn’t escaped notice.  Indeed, the very first time Council discussed the “rental crisis” two years ago, Audrey Lord-Hausman, chair of the Commission on Disability Issues, identified the “large, underlying problem” of “how to provide for the increasing need for affordable and accessible housing for those with disabilities and the society’s aging population.”  She implored the politicians to “embrace the challenge of exploring how to implement some types of caps on rent increases so that those aging in place and those who have disabilities and limited incomes are not forced out of our community due to exorbitant rent increases.”

The second part of Bernie’s Law accepts (on Council’s behalf) Ms. Lord-Hausman’s challenge.  If seniors who depend on Social Security to pay their bills don’t get an increase this year in their monthly checks, they won’t get a rent increase, either.  This doesn’t make it any easier for them to bear their existing housing cost burden – but it ensures that the situation won’t get any worse.

Like the first part of Bernie’s Law, this part is under-inclusive, since it doesn’t help all “cost-burdened” renters.  (The consultants’ report estimates that there are a total of 1,200 very-low income households spending more than 50% of their income on housing).  But one can defend treating seniors differently than other renters feeling the squeeze.  A young or middle-aged household usually has the option, unpalatable as it is, of moving out if the landlord raises the rent to an unaffordable level.  A household consisting of one or two seniors on a paltry fixed income may have nowhere to go.

(We note that this part of Bernie’s Law also is over-inclusive, since it gives the same benefits to all renters over 65 regardless of their income.  But we’re willing to admit even well-off seniors into the fold in order to be able to pick a simple criterion that gives a break to many of those who truly need it).

We began with the assumption that, as a policy matter, rent control is a legitimate means of achieving a valid objective.  This assumption is open to debate.  The staff report presented to Council set forth the policy arguments, pro and con, for rent control, and the negative case shouldn’t be dismissed cavalierly.  It may well be true, as several of the landlords who spoke Wednesday contended, that rent control creates a disincentive for landlords to maintain, repair, and improve their properties.  If so, we are troubled by the prospect that the large apartment building owners subject to Bernie’s Law would use it as excuse to let their buildings run down.

Moreover, as a Jeffersonian democrat, we’re congenitally uncomfortable with governmental intrusions into private affairs.  But we’re also realists.  The politicians act at their peril when they refuse to use the power of government to redress the grievances of their constituents.  The issue then becomes how to exercise that power most effectively.

To us, a phenomenon like the “rent crisis” calls for bright-line rules.  Forget about turning City Attorney Janet Kern loose to draft an opaque “rent stabilization” ordinance.  (We know she can do it).  Instead, adopt standards that are clear, simple, and easy to administer so that people can adjust their conduct accordingly.  Bernie’s Law may not be flawless.  But we suggest it’s far better than a muddled process that lets “mediators” and “arbitrators” make up the rules as they go along.

If I’m a real estate investor considering buying a large apartment building, tell me I’ll only be able to raise rents by the annual CPI increase, and I can do the math to see if the deal works for me.  Tell me I can raise rents by the amount a mediator believes, or an arbitrator determines, is “fair,” and I’ll pass.

By the same token, if I’m a tenant looking for a place to live, tell me my rent will be capped if I move into a large apartment building or if I’m 65 or older, and I can make an informed judgment.  Tell me that my rent will depend on the result of “binding” arbitration, and I’ll throw up my hands and go back to Craig’s List.

Any bets on what our City staff and Council will end up doing?

Sources:

Staff report: 2015-11-04 staff report

Rent study: 2015-11-04 Ex. 1 to staff report – rent study

 

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in City Council, Housing and tagged , , , , , , , , . Bookmark the permalink.

11 Responses to Bernie’s Law

  1. Very well conceived as usual. We think you should run for Mayor.

  2. Impartial observer says:

    I think fifty is too high. Know someone in a 33 unit building in town just bought by an out of town group, large increases are coming they have been told. They were first told 30-40 percent but backed off that when they were told of current rent control climate. So approx ten percent hike came with another coming soon. People have already started trying to move, a couple even out of state. Displacing 33 inhabitants all at once is too many. Twenty – twenty five units seems more reasonable and would provide stability to more middle and low income earners.

  3. dave says:

    Make sure the law has a CPI cap on legal fees as well, it’s only fair…

  4. Paul S Foreman says:

    I agree with Impartial Observer that 50 is too high. The consultant should have investigated the rent situation in smaller rental properties, not the “mom and pops”, but maybe ten or more units. If there are too many to check, then go to 15 or 20, then make a cut off for rent control at any level that is supported by the data.

    I do like your minimalist approach. I have been writing to Council to take an incremental approach to serve as a shot across the bow to landlords who are raising rents indiscrimately. If they don’t restrain themselves strict rent control will follow. I agree that arbitration is a very bad idea, another full employment program for attorney’s, and it will discourage investment in rental properties.

    I am suprised that you did not comment on Council’s bad judgement in passing a moratorium ordinance that. does not halt all rental increases. Frank Mattarrese was the only Councilmember who understood that leaving the door open to any increases would encourage landlords to raise their rents in the next 65 days to avoid whatever form of rent control Council will eventually enact. I have already heard of landlords who intend to do just that.! This is yet another example of a fatigued Council making big decisions in the a.m. hours after unreasonably long meetings.This special meeting should have been a two day affair, with no moratorium decision until the second meeting. Council has played with this for months, a day or two longer delay may have led to a much better decision.

  5. Erik Johnson says:

    The issue of a sustainable apartment stock in Alameda is a major concern and has several major inputs. Not all are fun to write about or to read about. A human interest story is easier for all of us to absorb, both in print or in a City Council meeting. We are at an inflection point with Alameda’s worn 1960’s buildings. They are needing large investments in order to keep them standing.

    We apparently do not count as local owners as our tax bills go directly to our CPA in San Francisco. All six of the over 50 unit buildings we are responsible for are owned by separate partnerships. Most formed here some thirty years ago by 35 or less limited partners, primarily Alameda residents. This was retirement planning for us. We are getting up there in age now with our oldest partner in her late 90s still living in the center of Alameda. We suffered through more than a decade of negative cash flow in rehabilitating these buildings.

    Looking back at these buildings over ten years we see rents increased at an annual average of 2.61%. Some year rents go up, some they go down. CPI increased at an annual average of 2.5%.

    Expenses are rising far faster. Our Property Taxes increased over ten years at an annual average of 3.6%. Our insurance went up 58% this year alone due to ballooning construction costs. Seismic retrofits are a huge cost.

    Economists as a profession across the political spectrum have studied rent control very intensively over many years. These studies show it destroys housing and is bad for renters, homeowners, and communities in general.

    From the left, Progressive, Nobel Prize winner Paul Krugman:

    http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-affair.html

    Extracts:
    “The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.”

    “But people literally don’t want to know.”

    “So now you know why economists are useless: when they actually do understand something, people don’t want to hear about it.”
    ______________________________________________________________________
    And if you have the interest, yes economists do agree. This from the Econ Journal Watch.
    The most comprehensive meta-study I have seen:
    http://econjwatch.org/articles/rent-control-do-economists-agree

  6. Steve Gerstle says:

    The study that the City commissioned noted the income disparity between renters and homeowners in Alameda. Is there similar data that shows the relative incomes of renters and landlords in Alameda?

  7. MP says:

    Thank you for your blog. I really enjoy it and you are my shadow City Attorney, whether or not I agree with all the policy recommendations (mostly, I do).

    Simplicity and clarity are good. Politically, your solution would also, for now, create relatively fewer losers in an opposition populated, so the news suggests, by those who either deserve it the most (the mega-complex owners) or those who we might feel more justified in asking to hold off on rent increases (those that rent to seniors). The across the board over-65 provision would be also be easier to administer than individualized means testing.

    I understand the desire to do something in the face of a very tough situation. I think something should be done. Some people, however, seek a permanent solution to what is partly a long term Bay Area fact (it’s expensive here) but that, most recently, has developed into a true crisis for a lot of people. A 50% rent increase over one year, without a place to land in this market would of course be a crisis for most people, not just the particularly vulnerable, especially assuming they are in the best apartments they could afford when they moved in. We can surely do something to protect against such an abrupt upsetting of peoples’ expectations about their living arrangements. At some point a measure to address a crisis can become a long term mechanism, with hard-wired constituencies and bureaucracies, for enforcing peoples’ desire (those lucky enough to be in a rent controlled unit, but not others) to live in a great location at their own chosen price. So how does a Jeffersonian take appropriate action to deal with the present crisis without creating a long term privileged class of tenants who pay less for more than those who will have to pay more for less (e.g., the single, rent controlled tenant versus the roommates who are competing for the scarcer vacancy)?

  8. Impartial observer says:

    As to the cost of repairs, we all know interest rates have been at historic lows and rental property has tax benefits, is depreciated over many years. So that is no excuse for instant and extreme rent increases.

    • David says:

      Interest rates have very little to do with the cost of repairs. Any money – the principal – borrowed to make repairs needs to be paid back – the rent is the revenue stream with which to do that.

      If housing is a right, as many people argue, those tax benefits are the price paid by society to private enterprise for fulfilling that right, which, apparently, government is unable to fulfill.

      Further, landlords cannot withhold ‘normal wear and tear’ costs from security deposits – that normal wear and tear is covered by depreciation.

      Note also that depreciation is a non-cash expense – it doesn’t throw-off cash to pay this month’s bills.

      Why is nobody proposing solutions for government to provide, to supply this basic right?

      e.g.

      o Expansion of Section 8 housing to higher income levels.
      o City of Alameda to undertake programs to pull more landlords into Section 8.
      o City of Alameda to finance and construct more housing for mid-level incomes.
      o Direct subsidy to finance construction for mid-level incomes. (BAE suggestion)
      o Low Income Housing Tax Credits (BAE suggestion)
      o Transfer tax waiver in exchange for affordable units (BAE suggestion)

  9. David says:

    If you’re a homeowner and think the rental issue isn’t going to affect you… keep reading… all the way to the bottom…

    How many people who advocate limiting rent increases to CPI have have actually looked at the components of the index? Not many, I’ll bet.

    The CPI – the C stands for Consumer – includes pretty much none of the cost inputs a landlord deals with, whether they be mom & pop or corporate.

    http://www.bls.gov/dolfaq/bls_ques3.htm

    It doesn’t include, using Alameda for an example, the school parcel tax, or the tax bond approved last year that doubled that line item on property tax bills. It doesn’t include sewer rates and other surcharges and taxes. It doesn’t include labor costs. It doesn’t reflect the cost to maintain a building.

    By limiting rent increases to CPI, what you are saying is that you want to limit rent increases to ‘ability to pay’ rather than reflect the actual costs of providing the housing. The result is a distortion of the market – why do you think so many SF and Oakland property owners have switched to AirBnB?

    Further, limiting rent increases to CPI is circular – one of the components of the index is…. the cost of rent!

    To compound matters, rent control will distort voting patterns as well. There are some 17,000 rental households in Alameda. Imagine how those people will vote every time there’s a new bond or tax on the ballot? When they know they can vote in favor of the tax but are protected from feeling its full impacts.

    If you’re a homeowner, how do you feel about the prospect of a large block of voters who can vote to increase your taxes while benefiting from government protection against those same taxes?

  10. AK says:

    Your proposal leaves out owners of multiple smaller rental units, for example a housing provider who owns 10 separate properties that each have 10 or less units.

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