There is no denying San Francisco is in the midst of a housing crisis as it is during every economic boom. Housing programs such as Section 8 and public housing help lower income residents and wealthy residents remain unaffected, but the middle class suffers.
It is time for us to look at Rent Control to see if it is really benefiting tenants as intended or, as economists have argued for years, it is actually making the housing market worse.
As I see it, there are five reasons we should reevaluate Rent Control immediately.
1) The Ability to Rent at Market Rate Doesn’t Necessarily Mean Market Rents
Landlords of multi-unit properties tend to gouge new tenants on rents because they know they are going to get tied into an agreement that can last years with minute rent increases. Landlords’ costs in the form of water, garbage, electricity and maintenance increase much more than the allowable annual rent increases dictated by the Rent Board. If there is no tenant turnover, eventually landlords’ costs exceed their income.
All my clients who own single-family homes, condos or apartments that are exempt from Rent Control are currently accepting below market rents. In some cases, they are asking $1,000 less than the market would dictate. Why would they leave money on the table each month? For some, having a great tenant with a on-time payment history who cares for the property is worth more than an increased rent that may cause a good tenant to move out. These clients take comfort in the fact that, should they meet tough financial times, they have the option of raising rents.
Landlords with rent controlled units do not have this luxury. Therefore, they must raise rents as much as possible each year in order to cover increased expenses that aren’t covered by rent control.
2) Less Ellis Act and Owner Move In Evictions
Eventually, landlords realize the only way to end the cycle of limited or negative profits is to go out of the rental business by Ellis Acting a building, selling to someone who may Ellis Act it, or moving into a unit themselves. The reason landlords enact the Ellis Act or move in to a property is because they are frustrated with rent control laws and need a way to increase the rents to cover their ever increasing expenses. Proponents of Rent Control argue that it allows tenants to stay in their apartments.
However, this is not a 100% guarantee, and we are creating an environment where landlords are incentivized to get tenants to move. Therefore Ellis Act evictions, buyouts and OMI’s have become common place.
This argument is further supported by the many tenants in non-Rent Controlled jurisdictions who live in their rental units for many years without threat of eviction.
3) More Units on the Market
There are an estimated 30,000 units in the city that sit vacant because these landlords do not want to deal with the intricacies of Rent Control.
Also, there are tenants whose apartments no longer serve them or their families, who remain in place due to the low rents. Without rent control, these tenants would be incentivized to move out of the area to better schools or larger homes, or closer to family support.
There are also tenants who could afford to buy a home, perhaps not in the City, but maybe in the East Bay, South Bay or Peninsula, but Rent Control takes away their home ownership incentive. I also have tenants who already own homes in these areas who rent them out for their own profit, while their own San Francisco rent is subsidized by a landlord.
Tenants, who fear losing their Rent Controlled housing, may also skip career moves that may benefit them in the long-term if the job happens to be out of the area.
The end of Rent Control would cause people to move out of the area, or buy homes, so there would be less tenants competing for the same number of units.
4) Low Rents = Low Property Taxes
Many non-property owners do not realize that property taxes are based on property values, which, when it comes to investment properties, are dictated by the income a property generates. By increasing rents, you increase a property’s value and, consequently, its tax basis. This generates more income for the county to provide assistance to tenants who actually need it, as opposed to landlords’ rent subsidization for tenants who earn more than landlords, but still benefit from Rent Control. More landlord income means more state income tax revenue to further support affordable housing programs.
5) Rent Control Turns Even the Most Amicable Landlord-Tenant Relationships Sour
Properties degrade; finishes go out of style, appliances break, bills increase. Even in the most amicable relationships, the owner is always hoping a long-term tenant relocates. The Rent Board’s process of getting a passthrough approved is arduous and creates tension between landlords and tenants, making for a stressful living situation for tenants.
It is hard to do a full-kitchen remodel when a tenant is living in a unit. I have clients that will not add amenities to a tenant’s apartment or building, such as parking or laundry because making the tenant’s life too comfortable may discourage them from ever leaving.
Tenants don’t understand that no matter how good a tenant they are, it is not in the landlord’s best interests that they stay.
While property owners may be tired of this fight, I feel the demographic and political environments are ripe for change.
Many of the new tech workers have brought wealth to the area and the dream of one day owning their own homes. Since many of them come from areas without Rent Control, the concept is foreign to them. Before they get accustomed to their below market rents and disincentivized to own a home, we need to tap into them politically to get them to vote for landlord-friendly legislation.
It always amazes me how few tenants ask if a property is under Rent Control before signing a lease. This tells me that they are not thinking they need Rent Control to survive in San Francisco. They benefit from it, but aren’t yet living in San Francisco because of it. We need to tap them while their apartments are still close to market rent and before they have become accustomed to the benefits of Rent Control.
California as a whole has shown their unwillingness to give more control to tenants with the quashing of SB 1439 (Leno) and Levin vs. San Francisco. Boston did away with rent control in 1994 by state referendum. While in Cambridge, the Massachusetts county that had rent control, voters did not vote for eradication of Rent Control, the state as a whole did. I believe the political climate in California is such that we can have the same success.