Alternatives to rent control

Democracy, Winston Churchill once told the House of Commons, is the worst form of government – except for all the others.

Can something similar be said about rent control?

We’ve heard a lot of arguments about why rent control isn’t the right solution to the problem of lower-income Alamedans not being able to find “affordable” housing in the City.  But if there aren’t any other ways to solve the City’s “rental crisis,” rent control may be the only option that those who endorse action by the government to stem rising rents can embrace.

There hasn’t been much public discussion about alternatives to rent control, other than the lengthy debate that led to the ordinance “strengthening” the Rent Review Advisory Committee, a step that even many of its original proponents now label ineffectual.  Today, the Merry-Go-Round will try to fill that gap.

Based on what we’ve heard, the alternative strategies a local government like Alameda’s might employ fall into three categories:

  • Requiring or encouraging private developers and property owners to increase the supply of “affordable” housing;
  • Building “affordable” housing projects itself, and
  • Providing benefits to tenants intended to defray their rental costs.

Before turning to these categories, we want to debunk what we regard as a shibboleth:  By promoting high-end residential development, the City can increase significantly the number of rental units available to lower-income tenants.

We know there are people who believe this.  Remember the debate over the Del Monte project with its 325 units of market-rate housing?  “I have never seen a time when there was enough affordable housing in Alameda for the people that need it,” one long-time housing advocate told Council.  “This proposal will go a long ways toward beginning to ease that problem.”

Similar sentiments have come from the dais.  For example, Councilman Jim Oddie opined last May that the rental crisis could be fixed only by “addressing the supply issue.”  And then he added:  “I encourage all of you here today who are suffering from this shortage to come out when we consider other projects like Site A and other projects that will help alleviate [sic] that supply.”

With due respect to the true believers, they’re deluding themselves.

The City has used both the stick and the carrot to induce private developers to include “affordable” housing in their projects.  The “inclusionary housing” ordinance mandates that new projects set aside at least 15% of the total units for very-low-, low- or moderate-income households.  The density-bonus ordinance allows a developer to build more market-rate units than the zoning otherwise would authorize if she agrees to include a specified percentage of very-low-, low- or moderate-income housing.  And the multi-family zoning overlay increases the density permitted on the 16 sites to which it applies.

(We’re using the HUD income definitions:  “very low” means household income no greater than 50% of the area median income; “low” means no greater than 80% of AMI, and “moderate” means between 81% and 95% of AMI.  According to the state Department of Housing and Community Development, the AMI for a four-person household in Alameda County in 2015 was $93,950).

When one looks at the data, the fact is that these ordinances have had, and are likely to have, little impact on the supply of “affordable” housing.

Last June, City Planner – sorry, Assistant Community Development Director – Andrew Thomas provided the Planning Board with a table identifying new residential development projects to be built during the 2015-2023 “planning period” (i.e., the time span covered by the most recent Housing Element).  The table showed eight projects adding a total of 1,835 new housing units.  (It did not include two additional private residential development projects still in the talking stages:  Encinal Terminals, and whatever the developer concocts to displace the local businesses operating at the Alameda Marina).

Unfortunately, not many of the new units that will become available in the next eight years will be rental units “affordable” by very-low-, low- or moderate-income households.  Here’s a chart based on the December staff report to Council from the Alameda Housing Authority (as augmented where necessary by information in the staff reports for the individual projects):

Summary of affordable housing projects

As the chart shows, the total number of new rental units for very-low- and low-income households added by the projects on Mr. Thomas’s list is . . . 233, of which 90 units are reserved for senior housing (59 units at Site A at Alameda Point and 31 at Del Monte).  An additional 72 moderate-income rental units are planned, all of which will be located at Site A and some of which, Joe Ernst of Alameda Point Partners told us, may become for-sale condos.

In addition, the eight residential development projects on Mr. Thomas’s list will add 14 new homes available for purchase by very-low- and low-income households and 49 new homes available for purchase by moderate-income households.

Now let’s put these numbers in perspective using the rent study commissioned by staff from Bay Area Economics.  According to the BAE report, 7,320 renter households in Alameda fall into the “low” income category or below.  “To the extent that these 7,320 renter households live in market-rate units,” the report states, “this group represents the population most affected by rapidly rising rents.”

Moreover, of those households in the two lowest income categories, 4,140 “face a housing cost burden” – i.e. they spend more than 30% of their income on housing.  For 2,975 of these households, the burden is even more “severe” – i.e., they spend more than 50% of their income on housing.

If you’re one of the 4,140 “extremely low-” or “very low-income” renters described by the report, and you believe that another 233 rental units (or 143 rental units if you’re not a senior) coming online in the next eight years is going to do you a lot of good, by all means join Mr. Oddie in singing the praises of new residential development.  For our part, we’ll hold the applause.

(We can’t leave this topic without noting our disagreement with the argument that high-end residential development will increase the supply of “affordable” housing because less expensive units will open up as renters or homeowners flock to the higher-priced models.  As our fellow progressive, San Francisco Supervisor David Campos, recently put it, “Free marketeers are claiming that if we build enough luxury housing it will eventually trickle down and turn into housing for the poor and middle class. This is the failed policy of Reaganomics at its worst.”)

Policies like those embodied in the inclusionary housing, density bonus, and multi-family overlay ordinances won’t result in a significant amount of new “affordable” housing units. But there are other actions the City could take to encourage property owners to increase the supply of “affordable” housing.  The only problem is they may not work, either.

Councilwoman Marilyn Ezzy Ashcraft floated two of the alternative ideas back in May, and staff had BAE check them out.

One proposal was that the City waive the transfer tax for the sale of rental property – provided that the new owner agreed to “hold down” rents for all or a subset of tenants (such as seniors).  No go, said the consultants:  although the waiver “may enable dedication of a rent limit matched to affordable levels, for a certain period of time,” it “is not likely to create enough incentive for a permanent unit restriction.”

Another was that the City loan money to current rental property owners to use for rehabilitating their buildings – again provided that the borrower agreed to “hold down” rents.  The City already has a small program, funded through a federal grant, providing similar loans on similar conditions to owners of buildings with a majority of low-income tenants.  Why not take the same approach on a grander scale?

Theoretically possible, said the consultants – but where was the money going to come from?  Perhaps still giddy from allocating the unexpected “surplus” in “reserves,” Ms. Ashcraft originally identified the General Fund as the source.  At the November Council meeting, staff suggested another possibility:  the so-called “boomerang funds” – i.e., the property “tax increment” payments that formerly went to the redevelopment agency but now flowed directly into the City’s coffers.  According to staff, the City can expect to receive $16 million in “boomerang funds” over the next 10 years, which could be used to set up a “housing trust fund” to offer loans (or to finance other housing-related programs).

The main problem with this idea is that it robs Peter to pay Paul.  The City already is counting on the “boomerang funds” — to the tune of $6.184 million through Fiscal Year 2019-20, Finance Director Elena Adair told us – as part of the General Fund revenue used to pay operating expenses.  If these funds were diverted into a separate loan or other housing program, the General Fund operating deficit – already forecast to total $13.7 million through FY 2019-20 – would worsen by a like amount.

If the City can’t induce developers or property owners to increase the supply of “affordable” housing, it always has the option of building such housing itself.

It’s been done in the past:  the Alameda Housing Authority has partnered with non-profit housing developers to build four apartment complexes designed for lower-income households, the most recent of which are Park Alameda (formerly The Islander Motel), which contains 62 studio apartments, and Jack Capon Villa, which provides 19 units for people with developmental disabilities and their families.  Moreover, one of the new projects on Mr. Thomas’s list is 2437 Eagle Avenue, where AHA plans to build 22 units for very-low- and low-income households on land acquired in the three-way swap with the Alameda Unified School District.

Unfortunately, 2437 Eagle Avenue is the only AHA-initiated “affordable” housing project in the pipeline in the next eight years.  (AHA also will own the Stargell Commons at Alameda Landing, the senior apartment building at Del Monte, and the two “Block 8” buildings at Site A, but we’ve already counted these projects as part of the private residential developments with which they’re associated).

And the situation may not get much better.  Although AHA is “constantly monitoring the real estate market for privately held property that it could acquire and convert . . . to permanent affordable housing,” City staff wrote in its November report, “this is very difficult in a strong market.”  Moreover, once AHA has located the property, there is still the matter of financing.  Proceeds from the sale of tax credits and a conventional mortgage are being used to pay the construction costs for 2437 Eagle Avenue, but the future availability of these tools is subject to market (and political) factors.

(AHA also expects this year to receive 13 acres of land – the “North Housing” site – from the Navy, on which it will develop a “90-unit permanent supportive housing project” for formerly homeless individuals and families, and perhaps veterans.  We didn’t include these 90 units in our “affordable” housing count because not all lower-income households are eligible tenants).

All of the suggestions we’ve been discussing have focused on increasing the supply of “affordable” housing.  But there is another way other than rent control to enable lower-income renters to afford to live in the City:  rent subsidies.

The so-called Section 8 program already provides vouchers for extremely low-, very-low-, and low-income households to use at privately owned rental properties.  According to the AHA website, the Authority owns and manages 572 units available to section 8 voucher holders in 12 different complexes in the City.  (Demand for the vouchers is so high that the waiting list is closed).

Under the section 8 program, the federal government pays the property owner the difference between the amount paid by the tenant and a “standard” amount set by the housing agency.  Perhaps City itself could get into the voucher business.  Or why not go even further and just have the City give money directly to lower-income tenants to pay a portion of their rent?

As it happens, the latter idea came up at two recent Council meetings.  At the November meeting at which Council passed the moratorium ordinance, Councilman Tony Daysog suggested using the so-called “boomerang” funds to provide direct subsidies to tenants – but he quickly dismissed his own suggestion because the amount of the subsidy would be too low.  Then, at last week’s marathon meeting, one of the landlord-side speakers, real-estate litigator Christopher Hanson, proposed assessing a Citywide utility tax to create a fund that would provide subsidies to tenants needing assistance with their rents.  “That way,” Mr. Hanson said, “it’s not the ownership interests that would be paying for that ability to stay housed in Alameda.  It’s all of us.”

Mr. Hanson’s proposal appeals to our small-d democrat side:  If ensuring that lower-income renters can afford to stay in Alameda is truly a valuable societal goal, why shouldn’t the community as a whole pay to achieve it?  And capital-D Democrats may like the idea as well:  Those who favor re-distribution of wealth, like our friend Bernie Sanders, should see merit in taxing the ownership class in order to confer benefits on the rental class.  (Hillary Clinton would need to find out what the focus groups say before she takes a position).

Of course, there are a variety of logistical problems with the proposal:  How high would the new tax need to be to create a large enough fund?  How much of a subsidy could the tenant apply for?  Moreover, the plan would need to limit, as the section 8 program does, the maximum rent it would subsidize.  Otherwise, it might give landlords an incentive to jack up rents, secure in the knowledge that they’d get their money from the City if the tenant herself couldn’t pay it.

Still, we’re not ready to dismiss the idea of a City-funded rent subsidy out-of-hand.  Just think of how much money the City could put into such a fund if the fire department downgraded a few of its recently promoted captains to firefighter status.

Thus far our checklist of alternatives to rent control.  A scholar in the field – say, someone at the Goldman School of Public Policy at Cal; A.J., are you reading? – probably could come up with a different and better list.  But if not, it appears to us that the strongest argument for rent control might not be that it’s a great idea; it’s that nothing else may work any better.

Sources:

June 6, 2015 staff report:  2015-06-16 staff report re North Housing

December 15, 2015 staff report:2015-12-15 staff report re AHA pipeline

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

November 4, 2015 staff report: 2015-11-04 staff report

January 5, 2016 staff report: 2016-01-05 staff report re proposed ordinances

 

About Robert Sullwold

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

10 Responses to Alternatives to rent control

  1. Erik Johnson says:

    I have to agree with the economists that have studied this. Want LESS rental housing? Rent control is the tool to use. This is a studied, settled issue in the profession. Those that disagree may want to pick up a book. Lets try and not shoot ourselves in the foot. The unintended consequences are legion.

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

    • Eric Strimling says:

      The problem with the economist’s studies, including Krugman, is that they assume a functioning free market. On the supply side they assume that is prices go people will build more housing. But we know this isn’t true. Zoning laws, our own Prop A for example, limit construction. NIMBYism creates more limits. The fluctuating cost of capital distorts the housing market even though the fluctuations are influenced by many different non-market forces, most especially government. So, if government has such a large effect on the supply of housing, why is it not appropriate for government to to use regulation to counter that effect?

      On the demand side the economists assume that the customer can choose to leave when the price goes up. Like choosing to eat oranges if the price of apples is too high, or switching to Lucky’s when Nob Hill is just too expensive. But housing isn’t like that. Where a person lives has to do with many more factors than price. Schools, proximity to jobs, quality of life, etc. If your kid is in the middle of a school year, or just has a half-dozen close friends in the neighborhood, is a parent just going to move due to a 20% rent increase? No, they will cut back on all other spending. Also, the cost of moving is enormous. Time spent looking, the stress of reweighing all of the different factors, not to mention first, last, and security deposit all given in cash to the new landlord. So the demand curve is artificially inelastic.

      The result is artificially high rents and artificially poor tenants. The tenants deciding to give over all of their disposable cash to stay in their home means reduced economic activity for the city. Without government regulation to counter these distortions we end up with what we have- societal disruption and upheaval.

      • David says:

        Measure A has not limited construction since 1979, when the state density bonus law was enacted.

        Since that law was enacted, any developer that was willing to provide affordable housing could side-step the restrictions of Measure A by demanding waivers from the City of Alameda, and build multifamily housing, as long as it included affordable housing alongside market rate housing.

        The law provides for developers to do this, even without enabling local ordinances. (City of Alameda did not have one until 2010 or so.)

        Nobody ever applied until Francis Collins did re: the Boatworks project, at which point the City of Alameda fought him court over it.

        It’s a fallacy to say that Measure A limits the creation of affordable housing, because law has been on the books since 1979 that overrides it.

        http://www.allenmatkins.com/~/media/Files/Attorney%20Written%20Articles/2012/01/thedensitybonuslaw.ashx

  2. Steve Gerstle says:

    Building more expensive housing that is out of the reach of many is not the answer. Alameda has the lowest minimum wage in the State. Wages need to support basic needs. It is ironic that those who work in Oakland are better able to afford Alameda housing than those who work in Alameda. Increasing the local minimum wage so that workers can afford local housing would be a good step. Also, removing as much housing as possible from the market system through coops and limited equity housing should be explored. Everyone needs a place to live. As it is now, homeless in Alameda are camping where they can. I can think of no more explosive situation than a population without housing or a means of affording housing. There is only so much people are willing to tolerate before they rebel.

    Homelessness in Alameda is not a new story and it has not always ended well.
    http://www.haddadandsherwin.com/articles/homeless_man_murder_by_cop.pdf

  3. nyborn2013 says:

    As I read through Roberts blog, I am once again impressed with his research and detail, though what strikes me is that we need to focus on controlling the amount of people we allow in to Alameda. Not by wage earnings or size of family, but simply define a population “tipping point” and plan city development with that number in mind. We have enough homes and apartments, we simply have too many people.

  4. Steve Gerstle says:

    Displacement is taking place in Alameda, particularly, in the East End.
    http://www.urbandisplacement.org/map#

    Ironically, access to good public transit may be a factor in that displacement.
    “Neighborhoods with rail stations, historic housing stock, and rising housing prices are especially at risk of losing low-income households.”
    I would be curious to find out how much improved public transit is contributing to the displacement of lower income people to communities with minimal public transit.

    • David says:

      Steve,

      I think the detailed spreadsheet and methodology needs some further investigation on this point.

      What we know on the ground re: Alameda is that the East End has traditionally consisted of large single family homes at high values, and few rentals. Who, exactly, is getting displaced?

  5. BMac says:

    We have an apocalyptic raw shortage of housing units in the region. We have local governments who, on behalf of incumbent property owners, fight tooth and nail to prevent competition in the market place (supply) in the name of preservation and neighborhood character.

    It is no surprise that the trickle of units being built in each municipality go for high prices. Only when the potential payoff is high enough to overcome the massive financial and regulatory hurdles do projects move forward. New things built in the USA are always expensive. That is how it works. The lesson our author takes, like Supervisor Campos in SF, is that when seeing a bucket of water thrown on an engulfed house fail to put out the fire, stop trying to put water on the fire. When, the lesson should be: get more buckets!

    As for creating a new tax that applies to everyone (struggling renters included) in order to provide subsidies for market rate rentals, it is neither progressive, nor a solution. It would be a regressive tax that further inflates rents and transfers even more taxpayer money to incumbent landowners.

    If we are not going to build our way out of the problem (which is the only real solution to a raw shortage), then I prefer the option that taxes landlords via rent stabilization. Even if some relatively well off renters benefit from the economic inefficiencies of rent control, their position is still likely to be much less favorable than the landlord whose 6 unit victorian has to survive an extra year before the scalloped siding gets replaced.

    • David says:

      If it’s a societal problem, all of society should contribute.

      If it’s those wealthy high-tech company employees are driving up rents in uncontrolled properties, then renters should pay the tax.

      Everyone essentially subsidizes the folks on the next lower socio-economic rung. Except for those on the very bottom.

      Of course, nationalizing all rental housing and eminent-domaining it from the hands of private property owners, for the government to run, to provide housing as a right, is an option too.

      • BMac says:

        Rather than nationalizing housing (too late, some would say, thanks to Fannie and Freddie), much more efficient outcomes would be reached by having regional, state and federal governments limit how much municipalities can restrict private property rights through zoning. Market forces are a great tool, given the proper regulatory framework.

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