Barring a political pirouette, the St. Paul City Council will tweak the city’s controversial rent stabilization policy next week. Led by Council Member Chris Tolbert, the changes add exceptions to rent increase limits for new apartments, craft new rules around vacant ones and clarify the role of inflation in setting rents.
When the news of the amendments broke, some advocates who had spent the preceding year campaigning for the city’s ordinance were outraged. Passed in November with 53% of the vote, the ordinance gave St. Paul the strictest rent stabilization rules in the country. The slate of changes from the City Council moves the city’s policy into closer alignment with rent stabilization policies in other cities and states.
I’m here to assure you that the proposed changes are not bad news for renters because the on-the-ground reality is more complicated than the campaign rhetoric. Housing policy is not a zero-sum game with opposing sides, winners, and losers. Essentially, the amendments keep the good parts of the ballot ordinance (even adding some new benefits, like just cause eviction protections) while shedding the provisions that have already caused disinvestment in St. Paul housing. I believe the policy changes, passed by a mostly 4-3 City Council majority, will lead to more flexible approach that will help people stay in their homes.
Just what is a “reasonable rate of return”
To get caught up to speed: Back in June of 2021, a coalition of progressive advocacy groups gathered enough signatures to get a rent stabilization policy on the ballot in Saint Paul. Thanks to a 1984 state law designed to protect landlords, a ballot measure is the only way a Minnesota city like Minneapolis or St. Paul can enact any form of rent control.
Unlike with the Minneapolis referendum, the St. Paul ordinance appeared on the ballot already-written, with the caveat that the City Council could not change the language for at least a year after Election Day. This was important because, while rent stabilization policies are becoming more common in cities and states in the U.S. over the last few years, the specifics of the St. Paul ordinance made it the strictest in the country.
After a combative 2021 campaign season, voters approved the ordinance by a six-point margin. City regulators laid out new implementation rules in the spring, and it officially went into effect in early May of 2022.
Almost from the beginning of this year-long process, a gulf emerged between promise and reality, the campaign slogans and fine print details. For example, most people voting on the ordinance likely saw the 3% cap to rent increases and took it at face value. But tucked in the middle of the ballot language was a reference to “the right of a reasonable return on investment,” and people who weren’t housing attorneys (myself included) hadn’t any idea what that meant.
It turns out that, in a country with strong property rights like the United States, this phrase has legally specific meaning. When city staff released its 19-page implementation process in the spring, the details meant that the 3% number had about as much teeth as the speed limit sign on Interstate 35E.
All kinds of justifications for rent increases make an appearance in the rules, including both capital expenses – e.g. painting, plumbing, planting, foundations, doorknobs, appliances, and more – and the general inflation rate, which continues to be high. The result is that landlords with good accounting or litigation chops can easily raise rents up to 8% in a year without even notifying either the city or their tenants they have exceeded the limit in the ordinance. This means that, for all practical purposes, rent increases can match the consumer price index (CPI), with higher hikes permitted depending on a list of specifics.
The legalistic bait-and-switch between the symbolic and actual rent caps has the added effect of being opaque and confusing, likely to alienate anyone who’s not into computing interest on an amortized investment, using the average rate from Freddie Mac over the last thirty years plus two percent. In practice, this bureaucratic approach benefits large institutional landlords like Dominium Apartments, which develops and manages hundreds of apartments around Saint Paul. Earlier this summer, it made headlines by raising St. Paul apartment rents at a blanket 7.9% rate, which seems within their allowable rights under the policy — that’s around $100 a month on a hypothetical $1,200 monthly rent.
Striking a balance
Meanwhile, the more transparent effect of the city’s strict rent control regime has been playing out much as I predicted a year ago. Depending on how and when you tally the housing data, St. Paul has seen a housing construction a decline somewhere in the 35% to 75% range. This is during a year when housing construction around the country has been rising sharply.
(For a useful explainer of exactly why rent control prevents new construction, check out this accessible discussion put together by the Minneapolis Federal Reserve and the local chapter of the Urban Land Institute. Housing researchers from University of California Berkeley, who have a lot of experience with rent control, go over the details of how these policies affect investment patterns and housing markets.)
The obvious solution has always been to pass an exemption for new construction, and the City Council proposal sets a rolling exemption window for twenty years, meaning that apartments in a building built today would enter the city’s rent control system in 2042. That might seem like a long time, but given that the alternative is no new rent controlled apartments, it’s an infinitely better outcome.
The debate about new construction that unfolded last week at the council chambers was a lot of sturm und drang over an issue where there’s mostly consensus. Whether the exemption should be 15 or 20 or 30 years is a marginal difference, and the truth is that only bankers, pension fund managers, and other housing investors really know where the sweet spot lies. To my eyes, the proposed 20-year window seems like a good compromise in a city like St. Paul, which has long struggled to attract housing investments.
Council Member Prince changes the conversation
The other big change to the city’s policy came from Council Member Jane Prince, the Council’s veteran voice and one of its two attorneys. Thanks to Prince’s amendment, and after some last-minute back and forth, city leaders seem to have settled on a vacancy decontrol provision that will allow for larger rent increases — the consumer price index plus 8% — when an apartment becomes vacant.
The criticism of vacancy decontrol, as laid passionately out by Council Member Nelsie Yang during last week’s meeting, is that it could incentivize landlords to coercively remove tenants in order to increase rents. But, at least if you believe that city regulators can be effective, Prince’s amendment solves that problem because it includes a just cause eviction provision. This is critical because, thanks to a 2021 lawsuit, just cause protections currently don’t exist in St. Paul.
I believe Prince’s stronger vacancy decontrol is an elegant maneuver that refocuses the city’s policy on keeping people stable in their homes. It should cut down on landlords automatically raising rents on long-time tenants, while offering protections against forced eviction and incentivizing investment in St. Paul’s aging housing stock. While I would have preferred the simplicity of Prince’s initial proposal, even the watered-down compromise should cut the complexity of the rent stabilization policy, hopefully minimizing the stream of litigious rent hearings coming to City Hall.
Avoiding California housing politics
Admittedly, this remains confusing. “I was promised affordable housing,” read one woman’s sign at a recent demonstration before a City Council meeting, of one many ongoing housing rallies that have been pushing for meaningful solutions to the city’s housing crisis.
Unfortunately, that was never a promise that the city was going to be able to keep with a tool like rent control, a policy that has repeatedly proven ineffective in a country predicated on private market housing. Instead, thanks to the City Council amendments, the end result of this long process is that the city will have a strong rent stabilization policy that focuses on renter stability, a more achievable goal. Hopefully the folks on the rent stabilization work group in Minneapolis are taking notes.
The other big takeaway is that ballot measures are a terrible way to make decisions. They have to be written in such a way to appeal to a wide audience, while also holding up in court. To do all that, and also craft a good policy, becomes an almost impossible task, albeit one forced on renters’ advocates by Minnesota’s onerous state law.
But make no mistake, this was a hot mess. There have been a lot of unintended consequences over the last year, most notably the preemptive rent increases in the spring, and thousands of apartments that have gone unbuilt across the city. The experience clarifies why initiative and referendum has been such a disaster in California, and let’s hope that St. Paul doesn’t go through anything like this again.
The story doesn’t end here. There are plenty of lawsuits to come, and surely future councils will continue to tweak the city’s policy to smooth out any bumps. But in the meantime, it’s a relief to see that a realistic housing policy will be on the books, helping renters stay in their homes without triggering an avalanche of disinvestment.