Libertarian paternalism comes to Alameda

If Council passes the proposed rent ordinance drafted by staff next week, Alameda will embark upon an experiment – unique among Bay Area cities – in “libertarian paternalism.”

Under this doctrine – the phrase was coined by Professors Richard Thaler and Cass Sunstein – the government gets people to act as it wants them to not by telling them what they must do (or not do) but by making it hard for them to do anything else.

Smoking is the classic example.  By making it more costly – through excise taxes – and more difficult – through restrictions on the places in which smoking is permitted – to indulge the habit, the government seeks to reduce the number of smokers without banning the activity altogether.  The reprobates are still “free” to smoke – if they’re willing to pay the costs and tolerate the inconvenience.

The rent ordinance to be considered by Council next Tuesday takes a similarly libertarian paternalistic approach.  Unlike other Bay Area cities, Alameda has not chosen to address the issues of “excessive” rent increases and “no-cause” evictions by prohibiting either practice.  Rather, it proposes to protect tenants by making it harder for landlords to engage in the conduct to which renters object.

We’ll start with “excessive” rent increases.

The simple way to deal with this issue would be to set a maximum allowable rent increase and prohibit landlords from raising annual rents above that amount.

This is the way other cities in the Bay Area do it.  Hayward and San Jose set a flat percentage cap (five percent and eight percent, respectively).  Berkeley, East Palo Alto, Los Gatos, Oakland, San Francisco, and San Jose all tie the permitted maximum increase to the annual increase in the Consumer Price Index.

This also was the way staff originally proposed that Alameda tackle the problem.  Two of the three draft ordinances presented to Council on January 5 prohibited landlords who own apartment buildings constructed before February 1995 (and thus were subject to rent control under the Costa-Hawkins Act) from raising rents more than eight percent over a 12‑month period.  (According to the staff report, this was the highest cap property owners would accept.  The Alameda Renters Coalition proposed a cap equal to 65 percent of the increase in CPI).

But it is not the way the ordinance turned out.  The concept of a maximum allowable rent increase is gone from the final version.  And we’re not sure exactly why.  At the January 5 meeting, Councilwoman Marilyn Ezzy Ashcraft declared that “a cap is necessary” and proposed five percent.  Councilman Daysog countered with a “cumulative” 12 percent over two years.  No one else on the dais bit at either proposal – but neither did anyone (except, maybe, for Vice Mayor Frank Matarrese) explicitly reject the idea of a cap.

The Council members’ post-midnight ramblings proved so opaque that staff sought further clarification at a later meeting.  “Staff received feedback that this topic [i.e., a rent cap] was not sufficiently discussed to conclude consensus had been reached” was how the February 2 staff report put it.

At the February 2 meeting, perhaps forgetting her own prior endorsement of a five percent limit, Councilwoman Ashcraft told her colleagues that “we didn’t really ever have a discussion about rent caps” at the earlier session.  Council then proceeded never really to have a discussion about rent caps at the February meeting, either.

Under the proposed ordinance to be considered next Tuesday, a landlord will be free to raise the rent as much as she wants – as long as she successfully jumps over a series of procedural hurdles.  If the landlord decides – there’s the libertarian part – not to jump over the hurdles, or if she misses one or another along the way, the goal of deterring “excessive rent increases” will have been achieved.

The first step in the process set up by the new law is ministerial:  Any landlord who wants to increase rents by more than five percent must serve the tenant with a written notice and file with the City both the notice and a written “request for review” by the Rent Review Advisory Committee.  The RRAC then will hold a hearing and “render a decision concerning the Rent Increase.”  (The ordinance does not say whether the decision is simply up or down on the proposed rent increase, or whether the RRAC can choose its own number).

Serving and filing the notice and filing the request won’t impose much of a burden on landlords who want to raise rents more than five percent.  For those landlords who rent out a single-family home or apartments in a building constructed after February 1995 (i.e., a property not subject to rent control under Costa-Hawkins), the only remaining impediment will be the hearing before the RRAC.

A landlord in this group would be foolish not to show up for the hearing.  Not appearing carries a penalty:  the rent increase is deemed “void.”  But appearing is riskless:  even if the RRAC “rules” against her, the landlord can simply ignore the RRAC’s decision and charge whatever rent she wants – and there is nothing the City intends to do about it.  (As is the case today, either party can ask Council to “review” the RRAC’s decision, but the most the elected officials can do is “issu[e] a letter, under the Mayor’s signature” setting forth their own “non-binding recommendation” about the rent increase).

According to the BAE Urban Economics report commissioned by staff, 24 percent of the total rental units in Alameda fall into the category of single-family homes or apartments in buildings constructed after February 1995.  (Another five percent are not subject to rent control under Costa-Hawkins for other reasons).  Our bet is that the process established by the proposed ordinance won’t deter many of the landlords in this group from raising rents by more than five percent if they so desire.  The hurdles just don’t seem high enough.  And we don’t buy the argument that an adverse RRAC decision or a nasty letter signed by the Mayor will shame a landlord into rescinding her rent increase.

For owners of the 71% of rental units that can be made subject to rent control, the process doesn’t necessarily end with the RRAC’s decision.  A landlord in this group whose proposed rent increase is “rejected” by the RRAC can petition for an administrative hearing before a “Rent Dispute Hearing Officer.” (A tenant who doesn’t agree with the RRAC decision has similar rights).  If the landlord can convince the hearing officer that the proposed rent increase is “reasonable under the circumstances,” it will stand unless the ruling is overturned by a judge.

(Previously, both staff and Council members had referred to this provision as “binding arbitration,” but Community Development Director Debbie Potter told Council on February 2 that that phrase would never again pass her lips.  Instead, she’d call it a “binding hearing” process.  Based on Ms. Potter’s comments before Council, someone in the City Attorney’s office apparently had advised her to eschew the original phrase because the word “arbitration” connotes “non-reviewable.”  This is nonsense.  Just ask any lawyer – we can give you a couple of names – who tries cases before Financial Industry Regulatory Association arbitration panels).

To what extent will having to go through these hearings deter owners of apartment buildings subject to rent control from raising rents more than five percent?  It’s anyone’s guess.

On the one hand, a landlord in this group will get two bites at the apple, one before the RRAC, another before a “hearing officer.”  And let’s be frank:  a landlord, especially one who owns a large complex, probably is better able to afford to string out the process than a tenant, who might simply throw in the towel if she loses at the RRAC – or even if she wins and the landlord petitions for an administrative hearing.

On the other hand, the determinations to be made at both the RRAC and the administrative hearing level are fuzzy.  The RRAC must decide what is “fair”; the hearing officer must rule on what is “reasonable.”  A rational landlord might very well balk at submitting to a system whose outcome depends on such seemingly subjective judgments.  It’s the same reason some corporate clients prefer to have their cases heard by a judge, who is bound to play by the legal rules, than by an arbitrator, who is not.

Now let’s turn to “no-cause” evictions.

This issue came to the fore in Alameda last November when the owner of a 33-unit apartment complex located at 470 Central Avenue served 60-day notices of termination on its tenants.  Absent any local ordinance to the contrary, such “no cause” evictions are perfectly legal under California law.  Moreover, the landlord contended that, since it intended to perform “substantial rehabilitation” at the property, they also were permitted even under the moratorium ordinance recently passed by Council.

The simple way to deal with the no-cause eviction problem would be to prohibit a landlord from evicting a tenant except for “just cause.”  The permissible reasons can be based on past conduct by the tenant – e.g., committing or permitting a nuisance – or intended future conduct by the landlord – e.g., moving into the unit for use as her own or her family members’ primary residence.  If none of these reasons exists – i.e., there is “no cause” – the landlord cannot evict a tenant using the 60-day notice procedure.

This is the way that many Bay Area cities have chosen to handle the issue.  Berkeley, East Palo Alto, Hayward, Oakland, and San Francisco all have enacted “just cause” ordinances, none of which allows “no cause” evictions.  And the California Supreme Court has held that such ordinances are not pre-empted by the state law authorizing evictions upon 30- or 60-days notice.

But it is not the way it will be done in Alameda.  When staff prepared the draft ordinances for Council in January, it gave the elected officials a choice:  they could accede to the demand by the tenants’ group, the Alameda Renters Coalition, for an ordinance requiring just cause (and thereby prohibiting no-cause evictions) – or they could accept a suggestion by the landlords’ group, Alamedans for Fair Rents, for an ordinance allowing no-cause evictions “subject to significant caveats,” specifically that the landlord provide “relocation assistance” to the evicted tenant and limit the rent it charged the new tenant.

At its January 5 meeting, Council chose the latter alternative, but again it’s not exactly clear why.  No Council member (again except, by implication, Vice Mayor Matarrese) spoke against an outright ban on no-cause evictions.  But Councilman Oddie, in perhaps the most cogent comments on the topic, argued that the draft ordinance based on the AFR suggestion represented a “de facto” ban.  “With the combination of the relocation expenses and the rules that you can’t increase your rent to the new tenant more than the old tenant,” he said, “you do have a financial disincentive to evict someone.”  When no one challenged Mr. Oddie, staff concluded that Council had “reached consensus” in favor of allowing no-cause evictions under the specified conditions.

The ordinance to be considered next Tuesday follows the libertarian paternalistic model.  It does not prohibit evictions except for “just cause.”  Indeed, a landlord still is free to evict a tenant for no cause by means of a 30-day or 60-day notice – as long as she is willing to compensate the tenant she wants to get rid of and to charge the new tenant less than the market might bear.  Moreover, if the landlord wants to “empty the building,” she must do so gradually over time.  If these conditions prove to be sufficiently onerous, the goal of deterring no-cause evictions will have been achieved.

Will the conditions imposed by the new law have the intended effect?  On this question – hang onto your hats – we find ourselves agreeing with Mr. Oddie, especially in the case of long-term tenants.

Under the proposed ordinance, the landlord must pay the tenant whom she wants to evict without cause “relocation assistance” equal to one month’s rent for every year the tenant has lived in the building up to a maximum of four years.  (The payment can be exchanged for additional time to move out).  She must also pay the tenant $1,500 in moving expenses.  The ordinance also provides that the landlord cannot charge the new tenant rent more than five percent greater than the rent the current tenant was paying.  (The City Attorney apparently has assured staff that applying this limitation to all rental units, even those covered by Costa-Hawkins, is “defensible.”  For our part, we’d be more comfortable with a legal opinion from outside counsel expert in landlord-tenant law).

The proposed ordinance thus presents the landlord with a straightforward economic decision:  Will the higher rent she can get from a new tenant be enough to cover the costs of evicting the current tenant?  Let’s do the math.

According to the BEA study, the median rent in Alameda is about $1,400 a month.  Under the proposed ordinance, a landlord who wants to evict a tenant without cause can charge the new tenant only $1,470 per month.

Now suppose that the existing tenant has lived in the building for four years.  The landlord will owe her $5,600 in “relocation assistance” plus $1,500 in moving expenses – a total of $7,100.  If the new rent remains at $1,470 per month, it will take 102 months – i.e., eight and a half years – for the landlord to recover her costs of evicting the current tenant.  We doubt that many landlords will find this prospect attractive.  Yet even if the landlord raises the rent five percent every year for the new tenant, it still will take nearly four years for her to recoup what she paid in relocation expenses.

Alternatively, suppose the current tenant has lived in the building for only a year.  In that case, it will take 42 months – i.e., three and a half years – for the landlord to recover her costs if she keeps the rent at $1,470 per month, and more than two years if she raises it by five percent every year.  Even that shorter period may be too long for many landlords to wait.

Like Councilman Oddie, we’d bet that a landlord whose intent is to pad its profits by replacing current tenants with higher-paying ones would think twice after having performed this analysis.  To that extent, the ordinance indeed will sock it to the infamous “greedy” landlords who, to quote Renewed Hope’s Laura Thomas, regard tenants and their families as “just fodder for the investor machine.”  (Of course, one could argue that, if these villains are the only targets, the ordinance amounts to overkill, since limiting the rent the landlord can charge the new tenant alone would have done the trick.  But such a limitation would do nothing for the evicted current tenants).

But the ordinance applies with equal force to all landlords, including so-called “mom-and-pop” landlords who, through an excess of sympathy or a lack of sophistication, are charging significantly below-market rents to their current tenants.  The latter group, of course, is the special concern of Councilman Tony Daysog, who pushed for exempting mom-and-pop landlords from the obligation to provide monetary relocation assistance.  These landlords generally “play fair,” Mr. Daysog argued, and they “can’t deal with the costs the way a 10-unit, 15-unit, or 20-unit apartment can.”

Only Vice Mayor Matarrese was persuaded.  Providing one anecdotal example, Councilman Oddie declared that mom-and-pop landlords can be “bad actors,” too.  Councilwoman Ashcraft readily (and predictably) agreed, and she pointed out that no other city exempted mom-and-pop landlords.  Not wanting to deny relocation assistance to any group of tenants, Mayor Spencer ended up breaking the tie and opposing the exemption.

If Mr. Daysog is correct, Mr. Oddie’s analysis of the impact of the ordinance on no-cause evictions becomes even more compelling.  A mom-and-pop landlord still will be free to terminate a tenancy without cause on 30- or 60-days notice.  But if she can’t afford to pay the relocation benefits, she never will exercise that right.  A tenant, especially a long-term tenant, will be able to stay in a below-market-rate unit in a mom-and-pop building virtually forever.

Unless, that is, the landlord submits a “Capital Improvement Plan” complying with a “policy” drafted by staff that Council also will be asked to approve next Tuesday.  We’ll leave discussion of that option for another day.  For now, it’s enough for us to urge tenant advocates to tip their hats to the libertarian paternalists at City Hall for coming up with an ordinance that’s likely to prevent no-cause evictions without actually prohibiting them.  Professors Thaler and Sunstein, at least, would be proud of our staff and Council.

Sources:

Richard H. Thaler & Cass R. Sunstein, “Libertarian Paternalism Is Not an Oxymoron” (University of Chicago Public Law & Legal Theory Working Paper No. 43, 2003): Thaler & Sunstein, Libertarian Paternalism Is Not An Oxymoron

Staff report for February 16, 2016 Council meeting: 2016-02-16 staff report

Draft rent ordinance: 2016-02-16 Ordinance – Rent

Previous staff reports:  2016-01-05 staff report re proposed ordinances2016-02-02 staff report re consensus

BAE Urban Economics 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.

2 Responses to Libertarian paternalism comes to Alameda

  1. BMac says:

    My distinct impression, watching the Jan. 5 meeting in person, was that the Mayor was the impetus for going w/ a “threshold” and not a cap. Oddie and Ashcraft wanted a 5% cap. Daysog wanted an 8-10% cap, and the Mayor wanted a 5% threshold for shifting the burden of proof, so to speak, onto the landlord. The question was who Oddie and Ashcraft would indulge in order to get a third vote on a number. They went with the Mayor.

    “A tenant, especially a long-term tenant, will be able to stay in a below-market-rate unit in a mom-and-pop building virtually forever.” If history is a guide, a landlord with the ability to raise rents 5% per year can make just about any long term tenant pay “market rate” over the long run. They just can’t get it in giant chunks during a boom like they could previously. It will be spread out, but they can keep rents market rate over time if they choose to.

  2. MP says:

    I assume the point about the hurdles (appearing for a non-binding RRAC hearing) to raising rents above 5% being not high enough in the draft ordinance for landlords of single family homes or post-1995 apartments is a general lament (directed towards Sacramento) rather than a call for a different ordinance. If it is a call for something different in the ordinance, what would it be and how would it be consistent with Costa Hawkins?

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