[image_credit]MinnPost photo by Corey Anderson[/image_credit]
As an attorney and president of the Housing Justice Center and former staffer at the Minnesota Housing Finance Agency, I understand the finer points and legal implications of public policy as well as the complexity of housing development.
Unfortunately, Bill Lindeke’s Cityscape commentary earlier this month was a theoretical thought exercise masquerading as journalism and a disservice to honest public dialogue about this critical issue. His fundamental understanding of the policy is flawed, and his arguments — as he readily admits — are mostly conjecture. He entirely overlooks the real displacement experienced by renters who are Black, Indigenous and People of Color (BIPOC) by privileging the hollow threats of landlords that, unless they have the unfettered ability to raise rents, they will not operate housing in the city of St. Paul.
The Keep St. Paul Home campaign continues a decades-long legacy of community-based organizations working directly with tenants most impacted by housing and economic injustice. In keeping with this tradition, we collaborated with renters, homeowners, landlords and researchers across the region to create a rent stabilization proposal that protects all St. Paulites, addressing the loopholes that have limited the effectiveness of rent stabilization policies around the country.
3% for racial justice
The Keep St. Paul Home rent stabilization policy caps annual rent increases at 3%, a number chosen specifically to advance racial justice in our city. According to research from the University of Minnesota’s Center for Urban and Regional Affairs, median rent increases in Minneapolis have been below 3% annually for the past 20 years. Minneapolis is the closest relevant comparison for St. Paul’s rental market, and this percentage means the policy won’t impact the vast majority of property owners.
Unfortunately, when we disaggregate the data, we learn that low-wealth, BIPOC renters are the most likely to experience egregious rent spikes well above 3%. Overall, BIPOC households saw a cumulative rent increase of 32% over the past two decades, while white households saw a cumulative increase of just 18%. This policy is meant to protect BIPOC renters first and foremost — in doing so, it benefits us all by reducing the many impacts of housing instability.
As Lindeke himself notes, if this ordinance had been in place for the past 20 years, median rents would be where they are today — however, we would have been able to protect our most vulnerable community members from displacement and homelessness.
Lindeke mixes percentages in ways that easily confuse the average resident. For instance, what if inflation increases or property taxes spike? Due to the basic principle of proportionality, it’s more complicated than simply comparing numbers one-to-one. For example, an increase of 5% in property taxes for the landlord does not result in an identical 5% increase in the total costs for the landlord. According to the Minnesota Department of Revenue, property taxes constitute 15.5% of rent in St. Paul — meaning any increase in property tax only impacts that relevant portion of the total operating costs.
Inflation has very little to do with the two factors that most heavily influence how much rent costs and how much someone can pay: the property owner’s mortgage and the renter’s wages. When a tenant pays the rent, it covers many things — mortgage, property taxes, insurance, maintenance, capital improvement and investor profits. But the mortgage is by far the largest piece of that pie, and it’s immune from inflation by nature of what an amortized mortgage is: a loan with a predictable interest rate.
Vacancy control is key
Vacancy control limits rent increases between tenants, eliminating the potential for predatory investing in rental housing. Without vacancy control, corporate landlords have a clear economic incentive to force out current renters in order to jack up the rent for future tenants. This undermines our local mom-and-pop property owners by fueling outside speculators coming into our market because they know they can make a quick buck by sending our neighbors packing.
Lindeke makes an odd argument against vacancy control, citing Shane Phillips, who speculates that landlords would screen their tenants through racial and ethnic biases, if they can’t raise rents as much as they want. This is misguided analysis at best, and a red herring at worst — today, landlords already make decisions based on credit, income, rental history and criminal history. Lindeke’s reasoning assumes that landlords intentionally discriminate through rent increases, and if we remove their ability to do that, they’ll use alternative mechanisms to discriminate. Even as someone who invokes the federal Fair Housing Act in my work almost every day, I am less inclined to assume discriminatory intent. But the fact of the matter is that discriminatory screening practices are already a pervasive issue in the rental market, and stabilizing rents will not create or exacerbate forms of discrimination.
Contrary to Lindeke’s fear-mongering, rent stabilization will address one of the most significant barriers faced by renters: cost. Without creating reasonable guardrails for landlords, we are choosing to discriminate against low-wealth renters, or workers whose wages have stagnated, every day. And without vacancy control, we would bleed out affordability whenever someone moves out.
New construction included
Whether you rent a $1,500 per month “affordable micro-unit” built in 2020 or a $1,500 one-bedroom built in 1920, no one should be subjected to price gouging. That’s why our policy applies to every residential building in St. Paul, including new construction.
The landlord lobby and its messengers perpetuate the myth that rent stabilization would halt new development. But there’s little evidence to suggest this is the case.
Lindeke makes a paternalistic argument on behalf of developers. According to his logic, rent stabilization will make it so they can’t plan for the future. I know a thing or two about financing development from reviewing and approving hundreds of pro-formas at Minnesota Housing. When a developer explores financing options, they create a pro-forma that projects costs and income for a minimum of 15 years, and build in a number of reserves and contingencies including any vacancy loss and maintenance reserves.
[image_caption]Margaret Kaplan[/image_caption]
The fact of the matter is, new construction development should have predictable costs from the outset, allowing landlords to set rents in a manner that creates a healthy return on their investment. If it doesn’t, it’s a risky investment that we don’t want in our city.
And, once again, our policy is not a rent freeze or a rent ceiling. New developers can charge as much as they want; they are simply prohibited from spiking rents once a tenant moves in and calls that place home. Whether you’re a lender or a renter, stability and predictability are essential.
Adaptable to the needs of St. Paul
Lindeke also breathlessly announces that our policy would be “the strictest in the world,” locking St. Paul into a system that can’t adapt to changing circumstances. The opposite is true. It is a strong ordinance — and purposely so — but it is not inflexible. It allows for exceptions and, like all city ordinances, can be amended to address the needs of our community.
We can’t predict every conceivable outcome from this policy. But we also can’t be complicit with the status quo, endlessly ruminating while our neighbors are exploited and priced out. The lives of everyone in St. Paul will be impacted by this vote, whether we rent or own our homes. But those of us who are white, who are homeowners or stably housed, must recognize the urgency to take meaningful action now, and act according to the real impacts — not fear mongering and catastrophizing — of our deeply researched, community-informed policy.
Every week I hear from tenants who have been displaced by price gouging, and every week I have to tell them it’s perfectly legal. In November, St. Paul voters can be at the forefront of smart, measured and, yes, innovative public policy to bring these practices to an end. When we vote yes for rent stabilization, we can start to tackle this complex issue together and Keep St. Paul Home for everyone.
Margaret Kaplan is president of the Housing Justice Center, a St. Paul-based organization. She lives in St. Paul.
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I’m no expert, but I would point out a couple of things–in regards to vacancy control, one of the biggest evictors in Minneapolis is the city of Mpls public housing, my point being is that they have no agenda to evict for money. Also when comparing races of renters, could it be those who live in newer building with higher rents, have lower raises given less repairs. This also would go back to the need to improved education and higher paying jobs for non Caucasians. Property taxes also have been going up rapidly which impacts a mortgage payment. How do you define non wealthy? Other studies show that those in the middle tend to pay the costs as rents are then raised upon moving in.
YOU buy a house and rent it out. YOU charge what YOU would like. I as a landlord should have the same right. The market will leave me with an empty house if I charge too much. It is MY house, not yours. You want to undersell, go ahead. I choose to sell at what the market bears.
I appreciate the detailed response. My biggest problem with the HENS policy remains its effects on new construction, which as I pointed out, is unprecedented. I have yet to hear anyone offer up an example of another comparable city that applies strict rent control to new construction.
The reason that almost no cities in the world apply rent control to new construction is that doing so greatly increases the risks for financing new housing. This happens because a rent cap removes the flexibility that developers often need to lease out buildings.
Here’s an example: a developer has borrowed millions to build housing on a vacant lot. It takes a couple of years to do land acquisition, planning, approval, and construction. When you’re finally done with your building, they want to quickly lease it out, sell it off, and repay the loan.
If everything is going smoothly in the economy, maybe a 3% cap works out just fine. But what if something happens? There’s a significant chance that, during that time, there will be a recession or a COVID pandemic or something unexpected that forces demand down for new apartments.
In that case, there’s a lot of wiggling around with rents. Sometimes you discount units quite a bit to fill up the building, perhaps you knock off two months of the rent when someone moves in. This happens all the time, and there are many examples of these discounts on the market right now, because 2020-21 is the perfect example of the kind of unpredictable event I am talking about.
From the lender’s perspective, they need to have the flexibility to raise the rents back to their original levels when the economy recovers — say, if workers return to downtown, or if COVID gets better — especially if and when they have a vacant apartment. These rent swings are much larger than 3%, often in the range of 10% or more. For developers leasing out new buildings, not having flexibility to move rents around is a problem. Again, the key problem here is that the rent cap adds significant risk to the loan, blocking financing in the city for new housing construction.
The same problems around apply around inflation. As the HENS website states, “according to local research, 3% is actually more than the annual median rent increase over the past 20 years. Three percent annual growth is more than enough to adjust to growing needs, and parallels or sits well below historic consumer price indexes.”
Well, things change. There’s a reason every other rent control program in the world uses the consumer price index (or, alternately, a floating rate set by an annual board) to fix rent caps. If you look at New York City’s rent stabilization program (which has effective vacancy decontrol and only applies to buildings built before 1974), their board meets sets annual rates depending on lots of factors. They have gone over 3% many times, most recently in 2013, 2011, 2008, etc. Even Federally subsidized housing programs set rent increases according to economic factors like inflation. For example, each year HUD sets a rental increase rate adjusted for the CPI; it will likely be over 5% this year.
I fail to understand how a firm cap is more predictable than one based on the CPI, and I think this another example of how the HENS policy increases risk for housing financing. When you add up all these restrictions on building new homes, the city will be digging itself into a hole by worsening the housing shortage , making things harder for renters at all income levels to find a home.
When it comes to vacancy decontrol, I’ll admit it’s a complex issue. I did not do its justice in my 1,400 word piece. I would love to see other reporting and discussion about how policy might work. At minimum, I don’t think it’s a change you can take lightly.
For example, Saint Paul currently has two programs designed to keep affordable housing in place while encouraging landlords to invest. One of them, the 4D program, gives landlords big breaks on taxes for 10 years if the rents fall within 50-60% of median income with a landlord’s promise not to raise rents by more than 3% per year for a decade. Another one, the rental rehab program for small buildings, funds up to $40,000 in major repairs at a 0% interest rate for 10 years, with a commitment not to raise rents by more than 3% per year. Both policies are designed to minimize the kinds of disinvestment problems that have accompanied rent control in the past, which is something that the HENS proposal does not do.
That’s only scratching the surface of the pros and cons of vacancy decontrol vs. vacancy control. The other issue I raised, where a shortage would further empower landlord discrimination, seems like the kind of unexpected consequence that has plagued rent control programs in the past. I would love to learn more about this, and think this policy detail should be the focus of public conversations in the city.
That’s one thing that’s frustrated me about this entire process: people are often talking past each other, particularly around the critical differences between rent stabilization and rent control which I laid out in my original article. That kind of transparency is where I find the HENS campaign to fall short. On the website and lawn signs, and even in this response, there’s no mention of the term “rent control” when discussing this policy.
Any yet, by any definition, this is a strict rent control proposal. For example, compare this approach to the nearly identical campaigns for rent control Minneapolis (https://mpls4rentcontrol.org/) and Seattle (https://www.seattle.gov/council/meet-the-council/kshama-sawant/rent-strike/rent-control/why-rent-control), which offer nearly identical policy details as the HENS measure. In both cases, the key policy provisions are laid out clearly on the website and the terminology around their rent control policy is straight-forward.
Looking at the HENS campaign, by contrast, a reader could spend an hour on the website without realizing the proposal would be the strictest rent control ordinance in the country, and one of the only ones in the world that applies to new construction. When making detailed public policy by ballot measure, bypassing the usual public processes that we associate with broad housing decisions, it’s important to be clear about what we are discussing.
That’s why this proposal puts people, like myself, who support both rent stabilization and building ample amounts of housing, into an impossible position. I would love to see a flexible rent stabilization policy that did not worsen the housing shortage, which has recently become the worst in the nation. Given the huge need, the last thing we should be doing is making it far more difficult to build new homes in St. Paul.
Man… at the time I didn’t think Lindeke’s article was THAT bad, but Ms. Kaplan certainly manages to poke a lot of holes in it. Oddly enough, Kaplan’s criticisms don’t really come into focus until Lindeke attempts to respond to them here, then his pretense of “balance” disintegrates behind a barrage of spurious claims in support of the ownership class.
Lindeke’s complaint about everyone talking past each other would have more impact if didn’t appear towards the end of his endeavor to talk past Ms. Kaplan’s critique. All Lindeke does here is recirculate the spurious claims he alluded to in his original article… claims that Kaplan has clearly debunked. To wit:
Regarding new construction: The idea that this proposal turns currently stable and predictable economic calculations into chaos is simply facile. New construction, developments, etc. have ALWAYS been subject to a variety of hazards. I’m sure Lindeke doesn’t need a tour of empty lots, partially built and abandoned projects, and abandoned development proposals that litter MPLS and St. Paul not mention the State and the Metro area. From Calhoun Square to the Nicollet Mall, and from Two Harbors to St. Peter we have decaying “coming soon” signs and projects that never materialized, rent control didn’t produce those outcomes. You pay your money you take your chances in market economies, rent control doesn’t create “new” hazards for developers. As Ms. Kaplan point out, HENS might actually reduce risk by controlling excessive speculation.
To the extent HENS could become an additional hazard, it’s just one of many potential hazards developers can and should plan for, as Kaplan points out… planning isn’t a “bad” thing. Sure, crap happens, but again: developers can seek exceptions if need be, and ordinances can be changed. If you’ve got millions invested in a project, don’t tell me having to file some paperwork with the city is a deal-breaker.
And finally, Ms. Kaplan points out the fact the 3% cap only applies to rent once the owners start renting… they can establish whatever rent they want or need to upon completion of the project, if they’ve had cost over-runs they can adjust rent accordingly. What they won’t be able to do is lowball the rent, and then jack it up once people have moved in.
As for recovering from recession level rent decreases, Lindeke assumes that the first and only people who are entitled to recover their lost income are landlords, regardless whether or not their tenants have recovered THEIR lost income. This is a goofy assumption. Recessions affect everyone, stable recoveries benefit everyone even if that prevents gouging. The impulse to prioritize landlord incomes and their recoveries above those of their tenants reveals bias Lindeke denies.
I’m a little surprised to see Lindeke champion a Consumer Price Index rent cap so forcefully. I’ll let Ms. Kaplan explain if she should chose but the CPI doesn’t target housing costs, “housing” is just one item in “basket” of goods that the fed uses to monitor CPI, and CPI analysis doesn’t typically weigh the effects of one basket item on the others. These costs are also averaged out across urban areas and averages can be misleading metrics. The 3% that HENS proposes is targeted at housing costs and analysis. By breaking out housing costs from the other items in the CPI basket you can get a more reliable factor.
Finally, Mr. Lindeke’s selective concern for vacancy control strikes me as little disingenuous. If you aren’t worried about vacancy control when developers and landlords are using it to raise rents and rake in profits, I don’t know why it’s suddenly a big giant issue when policy makers try to use it to stabilize rents or make/keep housing affordable? This isn’t a vacancy control vs. not vacancy control scenario, this is balanced vacancy control that seeks to work for both landlords/builders and renters/buyers.
Paul: Ms. Kaplan writes that “the only thing that matters to commercial lenders is the ability of the borrower to repay the mortgage.” That’s correct, and the rent control proposal makes that repayment much more risky for the reasons I explained. Importantly, it so only in St. Paul, which would be the only city in the nation to have this kind of policy aimed at new housing. It’s quite naive to think that rent control for new housing will not reduce the housing supply. I think it will cut down the rate of new housing built in the city by a significant amount, at least half. That’s why this plan is fatally flawed. Once you make reduce the housing supply in the city, you create a cascade of problems that will, in my opinion, outweighs the benefits of reducing the rate of rent increases to 3%.
As for “talking past” one another — I am thinking here about the campaign in general. If you want to pass the strictest rent control policy in the country, at the very least you should treat the voters with some respect and call your plan “rent control.” That’s a first step toward having an open policy discussion.
How much “more” risk this ordinance would actually introduce has not really been established. Given all of the other multiple risks associated with development projects, it’s not clear at all that a stable and predictable cap on rent increases will have the effect you keep claiming.
Ms. Kaplan is claiming that this cap will introduce stability and predictability into the development models and business plans, and she explains how they got to 3%. You’re not actually responding to that claim… you’re just saying: “No it won’t”.
You seem to be assuming that gouging renters after they’ve moved in and signed rental agreements is the ONLY way property owners can manage unforeseen revenue challenges. You also seem to be assuming that a predictable 3% increase can’t be factored into project designs and plans. And of course the assumption that you (or anyone else) can predict with absolute certainty that a never before seen or attempted policy can only decrease available housing is exactly the kind conjecture pretending to be certainty that Ms. Kaplan describes.
Basically you’re just assuming that anything the affects the current business model has to have a negative effect. Listen, if you don’t like THIS model, show a rent control model or regime that you DO like… and it has to be one that actually works.
There are many examples of rent stablization policies that work to achieve more stability for renters. None of them apply to new housing and almost none of them have vacancy control The reason I wrote my column in the first place is that this proposal diverges from nearly every precedent. Why do you think it would “work”?
The reason nobody applies rent control to new housing because it reduces the housing supply and leads to a cascade of problems. Council Members Prince, Tolbert, Yang, and Brendmoen all said as much in the recent Pioneer Press article (https://www.twincities.com/?s=rent+control&orderby=date&order=desc). These are the same folks that recently voted unanimously for a strong tenant protections package, so they’re hardly members of the “landlord lobby”, as the HENS website terms dissenters. The fact that these diverse Saint Paul elected officials, with long histories working on solving the complex problems of the housing crisis, agree with me and are not sold on the arguments laid out in this piece, should be revealing about which is the more reasonable point of view.
This is the most dishonest thing I have ever read on Minnpost. The baseless attacks on Bill Lindeke’s well-researched piece are just pathetic. But when your worldview is defined by the fight against evil landlords, facts don’t matter. Economics don’t matter. Take away the ideological bent, and the arguments here are right out of MAGA world.
Of course rent control is going to limit new construction. That is why nobody is else does it. Anywhere. Despite the characterization of Lindeke as being a fear mongerer, he actually supports rent control in its more reasonable form. The Twin Cities have the worst housing shortage in the nation, and this disastrous measure will exacerbate that problem.
Ultimately, it won’t be the landlords hurt by this. It will be the renters. You will see here what rent control does elsewhere in tight housing markets. Rental properties will be taken off the market and sold as single family homes or condos, which don’t have the same limitations and are in high demand. Mom and pop landlords will increasingly sell out to big companies. Units will shut down for awhile, fixed up, and sold at much higher rents. Because the costs to a a landlord in the real world are far more than a mortgage and property taxes, you will see a flood of exceptions to the limits being brought and granted. And of course, there will be less housing built, which is the real problem in the first place.
I don’t know Bill, but I have heard him speak and have been reading his work for years. He is one of the most intelligent, reasonable people around. The language used to describe him in the piece reveals as much about the people pushing rent control as their dishonest arguments do.
“This is the most dishonest thing I have ever read on Minnpost. The baseless attacks on Bill Lindeke’s well-researched piece are just pathetic. ”
If I had a dollar for every time Mr. Terry called an article he disagrees with: “dishonest” I could buy a couple of dozen pizzas.
Mr. Terry, before you cast aspersions upon someone else’s honesty I suggest you reveal your own interest in this subject matter… or are we still pretending that you’re just a spectator with a strong belief in supply and demand? At least Ms. Kaplan has revealed her affiliations.
I know some people think that a world where someone other than landed gentry has a say in policy is an affront to all that is right and reasonable in this world, but that’s hardly an empirical point of view. I don’t see anyone referring to landlords as evil beings, but the facts of the ongoing affordable housing crises are obvious and undeniable. You guys had decades to fix this but all you did was protect your own prosperity. Surely you didn’t think that would last forever? You need no be evil, but you people need a place to live, you’re supposed to be providing that right?
Just curious, why just rent, why not car prices, food prices, insurance, day care, medical deductibles, you know everything across the spectrum? Why just rent?
Because they can – there is much more regulation of housing than the other things you mention. If they could throw economics out the window and put price caps on the rest, they probably would.
Thanks Pat, what I thought, no rationale, no logic, we can so lets do it. Not, lets find a way for these folks to increase their skill sets and make more money.
It’s important to remember that the failure to comprehend a rationale doesn’t always mean there is no rationale… it can simply mean that the rationale is beyond one’s comprehension. Failures in comprehension can easily emerge among those who approach a subject with a misguided sense of expertise or ideological myopia. As a general rule, when people show up with simplistic models that pretend to resolve extremely complex problems (i.e. “it’s just basic economics), you’re in the presence of someone who’s overestimating their powers of comprehension and expertise. As a general rule, I tend not to assume that the simplistic minds among us are the experts in the room… but that’s just me.
Sure Pat… when landlords raise rents “just because they can” it’s the natural order of things. But when democratic societies exercise the levers of government just because they can… oh the horror.
Wouldn’t an additional rental subsidy of say $100-$200 per month, actual cash in the tenant’s pocket, help more than a $30 cap on $1,000 monthly rent?
We have programs that subsidize rents, Section 8 etc. This proposal compliments those, it doesn’t replace them. Furthermore, you DO realize that you’re proposing a policy/solution that costs taxpayers 300% more than the rent control would cost landlords right?
A genuine question as I consider St Paul’s proposal- how does rent stabilization/control differ from California’s proposition 13?
In my mind, pros for both are more stability for people living in areas that see huge increases in property values/rent. This is a big plus for neighborhoods.
One negative that I have heard on Prop 13 is that it affects schools and funding. When schools and funding are affected, it is generally those with limited resources who suffer the most, not the more affluent. I can see the same being true of landlords and maintenance.
I don’t know how Prop 13 affects potential new residents, though I know despite Prop 13, much of California remains seemingly unaffordable. I question whether this may be true with rent stabilization as well, given similar arguments used for and against with Prop 13 and rent stabilization.
But, I am sure that there is actual information on how they differ and why one would deliver different results than the other, or why they might be actually alike and how that might be positive. That is the information that I am looking for.
Interesting question
Prop 13 limits property tax increases due to increasing property to 2 percent annually. That resets, however, when property is sold. Since property values have increased so much, people who have been in their homes a long time pay far less in property taxes.
That makes their homes more affordable, but it doesn’t affect people looking for housing. It doesn’t keep housing prices down. And it certainly has reduced funding for schools and other taxpayer funded things.
This doesn’t affect property taxes or funding – it only affects rents. It will benefit people who are already in rental housing. It will hurt people who are looking for rental housing, as less will be built and as has happened in other places with rent control, housing will be removed from the rental market.
Margaret Kaplan, like other social justice warriors, appears concerned with only one side of the equation, i.e. the renter. I suspect rental property owners would gladly accept a cap of 3% annual increase if property taxes, maintenance costs, energy costs, water & sewer fees, land values, building costs, interest rates, legal fees, etc. are also capped to 3% annual increase. Since they will not be capped and since the Biden administration wants to eliminate 1031 exchanges, the net result of a one sided rent control proposal and Biden tax increase proposals will be condo conversions and eventually less rental property.
Beware of the unintended consequences of this proposal. I own a home with two rental units. For the last 10+ years I have rented out one of these units to a retired woman who is a marvelous tenant. It has been years since I raised her rent, so she is currently paying ~$800/month below the current market rent.
I do not have any intention of raising her rent as long as she is living in the unit. However, if this proposal is enacted, I will never be able to raise the rent back to the market rate after my current tenant moves out. I have a draconian choice: 1. Do I raise my current tenant’s rent to market level before this proposal becomes effective, or 2. Do I leave the rent where it is and loose out on $800-$1,000 / month on income for ever into the future? What do you think I am going to do????
I have lived in St Paul since the early 70s, and have had rental properties the entire time. I will never buy or build another rental property in the City until this anti-landlord attitude ends, regardless of whether or not this proposal passes. The left wing progressives are destroying the City and are chasing all of the small business people who rebuilt our neighborhoods over the last 50 years out of town. This is not going to end well for renters, nor for the ability 0f the City to raise the tax revenue that it desperately needs to build affordable housing.
The proposals that have been circulating in Minneapolis on Rent Control want to go back a year to baseline rents to prevent anyone from making any kind of market correction as the new baseline. I don’t know if that’s part of the super-aggressive St. Paul plan or not but at least one of the Twin cities wants to see you stuck at that -$800 mark for a long time…
So Mike… you’ve got all this rental income but you’re not making a living? You’re sitting on all this rental property at a loss? If you’re making money without raising rents aren’t you proving Ms. Kaplan’s point?
The idea that balancing interests can only be seen as an attack on your interests (i.e. hostility) is probably an expression of privilege rather than an economic analysis.
This idea reminds me of the cola that my union negotiates for me every couple of years. Makes a lot of sense, but I have some sympathy for the rentier side whose costs may be unconstrained.
Mr Lindeke, who I don’t know outside of his prolific local writing, did a very good job analyzing the proposal, including independent benchmarking research with policy experts outside our area, and came away with a thoughtful conclusion about the proposals shortcomings. He supports rent control with more conventional limits – I ‘m not a supporter at all, but his approach was reasoned for someone in his position who supports a traditional approach to rent control. And this is the great irony – he in general would agree with the premise but takes issue with the serious flaws in this specific proposal and for that gets vilified vs thanked for the thoughtful analysis.
In contrast to Bills writing, this piece betrays the authors weak arguments by peppering it with slights and insults to Mr Lindeke instead of facts. For example, this author says there is little data to suggest rent control on new construction will limit new projects – well ignoring the fact that the reason there is no data is that no one does this, anywhere, ever. Thus prediction is warranted.. But for her, the lack of precedent means it probably wont happen, ignoring experts elsewhere. She then goes on to demean the prior author with throw-away comments about “breathless” writing, “masquerading as journalism”, “fear mongering” “paternalistic” – Here’s some advice Ms Kaplan -when you need to resort to these types of insults you’re showing that the argument you are trying to make is weaker than you would like – there have been plenty of rebuttal pieces in this publication that make a compelling argument without attempting to character assassinate the previous writer.
Some things don’t belong on the ballot. This vote will come down to renters versus rental property owners, and which side do you think is in the majority? People who don’t have a dog in this fight will vote their ideology (private property rights versus government control over all things).
It would be like if we put on the ballot whether Bill Gates’ wealth should be confiscated and used for the “common good” or whether Margaret Kaplan should be able to keep her law license. These kind of ballot initiatives give democracy a bad name.
Akin to a sheep and two wolves voting on the menu
Ms. Kaplan is too much the advocate to see the potential pitfalls in her own proposal. The most striking illustration of this problem is her use of the term “price gouging” without providing a definition, an example, or any data on its frequency.
Yes, property taxes are only one factor in rents. Others include city assessments, utilities, insurance, and labor costs, to name only a few. Let me offer an example of my own. If I own a fourplex valued at $400,000 containing four two-bedroom units and rent each of them for $1200 per month I receive $4,800 per month or $57,600 per year. 3% of that is $1,726 per year or $144 per month.
This hypothetical is based on a property currently listed for sale. This property’s taxes increased by $833 between 2019 and 2020. That’s just under half of the available $1,726 per year. (It is entirely likely that most residential properties of all types will face substantial assessments in the coming years for street repairs and replacement. How will those be addressed? )
It has hot water heating, which indicates to me that the landlord likely pays for the heat. Natural gas prices are projected to spike in the coming months, with the costs being passed along to consumers. Insurance costs recently jumped. Add in some unexpected maintenance costs and you will easily exceed the 3% cap. So, what will the process be to obtain permission to recover those excess costs? If legal assistance is required, will a landlord be permitted to recover that cost, which is considered a normal operating expense for tax purposes? If a landlord opts not to file for an increase in year one, does the landlord waive the right to seek an increase for those costs in a subsequent year?
One item Ms. Kaplan seems to ignore is the concept of return on investment. If a landlord’s operating costs increase, the landlord reasonably expects a return on that investment beyond the landlord’s actual costs. This becomes an even greater problem when you consider capital improvements that may be necessary or desirable. Who decides whether and in what fashion these are recoverable through increased rents? Using what criteria? Again, it’s not only a question of recovering one’s capital expenditure but of earning a reasonable rate of return on that expenditure.
I am not a landlord and, frankly, would not become a landlord in St. Paul today, even without the issue of rent control. I’ve watched the hurdles increase for rental property over the years to the point that the average person simply cannot fully grasp them. (A family member learned this the hard way when he was compelled to rent out his home following the collapse of the market in the last decade.)
Last thoughts:
This proposal will require City staff to micromanage the economics of rental properties, at an as yet undetermined cost to the City.
With all due respect to Ms.Kaplan, her law degree does not make her an expert in economics any more than mine does me.
Ms. Kaplan presents her comments from her public policy and housing advocacy chair. Mine come from over thirty years of rental property ownership (and from almost forty years of managing Twin Cities suburbs; now retired).
When I purchased my first property I did so “knowing” all about housing because I had been involved in housing development and project financing working on the public sector side. Building and owning housing projects looked easy and I saw it as a way to supplement my income. I just about lost my shirt.
I found that I knew nothing about actually running the business of housing. Yes, it is a business, not a social enterprise.
Operating privately held housing (as opposed to non-profit or governmental housing) involves the challenge of providing value to the marketplace that effectively competes with other housing choices at a price accepted by the market (tenant prospects). Included is hoping that persons choosing the product will pay for the product, that the product is safe, secure, well maintained and continues to be realized as a good value over time.
There are many opportunities to upset business plans and the operating statement. Included is inability to plan for revenue losses such as what has occurred to many rental owners during the COVID eviction moratorium period during which some renters have not complied with their side of the contract and have failed to pay for the product they have received. Included also is increases on the expense side due to costs of utilities, taxes, maintenance, etc.
During the past 18 months our costs have far exceeded revenue due to expense increases across the board including significant capital expense. Some improvements were unplanned, such as a roof replacement. Others were planned remodels to update our apartments and improve our product offerings.
The rent stabilization proposal interferes with our business model. Our approach has been to maintain very modest rents during a single tenancy and to catch up closer to the market with turnovers. The reason for this approach is to encourage long tenancies as our tenants recognize that they are receiving a high quality product at a cost well below what they would pay elsewhere in the market. Some of our current rents, as a result, are 30% below market. We are perfectly fine with this as the long tenancies are worth it to us and we know that when the apartment turns over we will set new rents closer to the market. We also know that we may have to remodel or update the apartment in certain cases with new kitchens, or updated baths or the like. With rent stabilization, as proposed, updating may no longer be a reasonable approach as we will not be able to recover the revenue necessary to cover these expenses. And, as everyone should appreciate, when revenues are outpaced by expenses the business is not sustainable.
The apparent assumption from the housing advocates is that if they can put the hammer down on corporate profiteering by predatory landlords all will be right with the world. The issue is that their definition of the problem is very seldom the case. Most St. Paul rental property owners own only a few properties and they are doing their best to provide a good product for their valued tenants. If adopted, this proposal will negatively impact these property owners and by extension the persons who rent from them. The conversation and rent stabilization proposal ignores this.
I’ve read both articles, and as a lifelong tenant I think there’s value and insight from each piece. I will say the last paragraph of your comment resonates with me. I’ve rented from all types – from the huge corporations who own 100+ properties all the way down to the average guy who owns 1-4 properties.
The abuse of the system from corporate landlords is rampant, and they should be regulated and reigned in. However, I agree with you that this proposal will negatively impact the average property owners who operate just a few buildings. Lumping them in with corporate entities is unfair, and while the proposed regulations may help solve problems on one end of the rental spectrum, they will create new problems on the other end.
There has to be a way to do this that benefits everyone across the board.
Mr. Davidson,
I think it’s important to keep in mind the fact that THIS proposal is about stabilizing rent prices, it’s not designed to address landlord abuses and other nefarious owner activities and rental related problems. Hence the differences between large and small scale landlords may not be as significant as you’re assuming. As Kaplan points out, the 3% cap represents a profitable increase for the vast majority of landlords and only controls excessive (gouging) that has mostly affected BIPOC and lower income people. It doesn’t really matter how many properties a gouging landlord owns does it? I know there have been a lot of comments here but I don’t think we’ve seen anyone claim that 3% kills them. People are complaining about HENS messing with their business models as if business models are some kind of civil right no one has any business interfering with ( Remember this was the primary complaint the Confederate States lodged prior to launching the Civil War). But after complaining about their business models they go on to imagine scenarios they might resolve with rent increases greater than 3% as if rent increases are the ONLY possible option they could ever have to salvage their business models.
Another thing to keep in mind is the fact that landlords have thus far been free to raise rents as much as they want for decades. This freedom doesn’t put “smaller” companies at a disadvantage, on the contrary gentrification and rent increases have benefited everyone, not just big corporate landlords. Sure, the last couple of years have hit some landlords hard, but no much more so than many of the tenants. And many of the claims you’re seeing here are more than a little suspect. For instance someone said that their rents are currently “30%” below market… and these are the same people who complain about a backlog of evictions that’s breaking their backs. Well… if they have such a huge backlog of evictions emerging from unaffordable rents… how can they claim that their rents are too low? Doesn’t this backlog tell us that the rents are too high? The point being; beware of “market rate” claims because frequently they’re based on excessively high prices during bubbles, and the entire real estate industry is notorious for it’s deliberate and persistent promotion of price bubbles. There’s a whole lot of wiggle room for anyone who wants to talk about market rates. When you hear these complaints you have to wonder if these guys are referring to some REAL established rate of some kind, or are they just wishing they could charge more and make more money? Business people large and small frequently wish they could make more money… no matter how much they currently make.
The big complaint that seems to be dominating the thread here is that this rent control proposal threatens landlord/owner/developer incomes and revenue in one way or another.
The idea that all real estate commerce is existentially threatened by this proposal is simply daft and dishonest. If you actually believe this it’s hard to believe you can be making a living currently in this business sector.
And it’s important to remember that with around 20,000 homeless, and as many or more people facing evictions and housing insecurity due to unaffordable housing costs… we’re not all here on this earth to make landlords and developers wealthy… affordable housing isn’t just a “market” problem or adjustment.
If you’re a business person who assumes that you’re entitled to guaranteed levels of profit and revenue regardless of social, political, and economic realities in the community… you’re the kind of business person who may well go broke. You want to make the big money by taking the big risks… but you don’t want to take the risks? OK then. Profits are privatized but risks and costs are socialized… where have we seen that before? Whatever.
I didn’t see Ms. Kaplan suggest this but my wife and I were discussing this subject and proposal this morning and her reaction was: “Well, if rent increases in St. Paul or MPLS actually were capped at 3% I think there’d be a rush into those cities rental units”. I hadn’t thought of that but yeah, one of the most disconcerting aspects of being a renter was inability to predict how much our rent would increase from year to year. I don’t know why that kind of predictability would repel rather than attract renters? And I don’t why the low vacancy rates emerging from that influx of renters would be a “bad” thing for landlords? One could even describe this a function of supply and demand.
Someone wanted a definition of: “gouging”. It’s not difficult to establish this and anyone in the industry would know this. Basically when average industry wide average increases are around 3%, anything higher than say 5% or 6% would be gouging. Certainly 10% to 17% easily qualifies.
You can say: “Well what about repairs, or improvements, or recessions?” Sure but if you’ve let repairs and upgrades deteriorate to the point where you have to try to gouge our tenants to pay for them you’re business model is the problem, not the rent. Furthermore, big rent increases are only a necessity if you refuse to consider other types of financing or assistance. It’s simply facile and disingenuous for all of these property owners to keep claiming that the ONLY source of financing they can imagine is raising rents more than 3%.
People want to complain about government “involvement” but most of us who support HENS would also support programs to help landlords in genuine financial distress with programs that would help them update and improve their properties. This is why this who promote this narrative of division i.e. Landlords vs. Tenants are being dishonest.
Obviously advocates of affordable house can see the problems created by vacant buildings abandoned by bankrupt landlords. The mission here is to make/keep rents affordable and stabilize the market, obviously driving landlords out of business doesn’t solve that problem. The idea that a community would work towards affordable housing but completely ignore the plight of genuinely distressed landlords is a weird and dysfunctional concept of community.
It’s like the old saying: “The class war is over… the wealthy won.” We’re not trying to start a new war here, we’re just make sure people have roofs over their heads.
The ordinance requires the city to create a process to regulate the cap. Part of the reason I’m voting no on the ordinance is because it forces the city to create an as yet undefined and unfunded regulatory department. I have no idea if the city is capable of implementing the new process by May 1, 2022 when the ordinance would be effective.
Bill Lindeke in his article, mentioned that Oakland has a department that regulates housing. I looked it up and it’s paid for (all or in part, I wasn’t quite sure) by landlords and some of the fee can be passed down to renters. Is that what will happen in St. Paul if the ordinance is passed? Who is going to pay for it?
On another point, I would like to see actual data from St. Paul on how many people are forced out of their homes because of rent spikes. I see a lot of anecdotes, but no hard data. I’m not saying I doubt it happens, but if there was more detailed information perhaps a better solution than just a blanket cap could actually be devised.
The extent to which an ordinance like this creates a new bureaucracy is a reasonable question. But assumption among small “guvment” ideologues that any and all additional services and management can only be inefficient or irrational is facile assumption. This ordinance doesn’t create a department that actually determines or calculates rent increases for every landlord in the city. I might just add a new responsibility to an existing department, and the resources needed to meet that new responsibility may or may not be significant. For instance, on the cheap side this might be just another type of complaint renters can file if their rent increase exceed 3%, that’s simple math. Unless you assume that dozens of landlords will violate the ordinance existing inspectors may well be able to cope violations.
How this enforcement get financed is also a reasonable question, but again, let’s not assume we’re adding a ton of money to the budget, the cost may or may not be significant.
I’m not small government and I didn’t assume or say it would be a ton of money added to the budget. I said I have no idea if the city could implement it by the effective date and I would like to know who will pay for it. Oakland is one possible model.
Did you read the ordinance? It’s the number of applications for >3% by landlords that will require resources, not complaints by renters, although those will also have to be addressed. Your “cheap side” model is not an option.
Sec 193A.05 Reasonable Return on Investment.
(a) The city shall establish a process by which landlords can request exceptions to the limitation on
rent increases based on the right to a reasonable return on investment. Rationale for deviations from
the limitation on rent increases must take into account the following factors:
(1) Increases or decreases in property taxes
(2) Unavoidable increases or any decreases in maintenance and operating expenses
(3) The cost of planned or completed capital improvements to the rental unit (as
distinguished from ordinary repair, replacement and maintenance) where such capital
improvements are necessary to bring the property into compliance or maintain compliance
with applicable local code requirements affecting health and safety, and where such capital
improvement costs are properly amortized over the life of the improvement
(4) Increases or decreases in the number of tenants occupying the rental unit, living space,
furniture, furnishings; equipment, or other housing services provided, or occupancy rules
(5) Substantial deterioration of the rental unit other than as a result of normal wear and tear
(6) Failure on the part of the Landlord to provide adequate housing services, or to comply
substantially with applicable state rental housing laws, local housing, health and safety
codes, or the rental agreement
(7) The pattern of recent rent increases or decreases
(b) It is the intent of this chapter that exception to limitation on rent increases be made only when
the Landlord demonstrates that such adjustments are necessary to provide the landlord with a fair
return on investment.
(c) The city will not grant an exception to the limitation on rent increases for any unit where the
landlord has failed to bring the rental unit into compliance with the implied warranty of habitability.
Mr. Subera, yes I can read… thank you.
I didn’t accuse you of being a small guvmint aficionado, I simply mention that mentality because it frequently emerges in conversations like this.
I think you rule out my “cheap” option a little to readily and maybe prematurely. If you look at all the items you listed in your comment you can see that most of them may simply require an inspection, i.e. show us the repairs, upgrades, furniture, space etc. The city already has inspectors, they don’t necessarily need to hire more of them to meet this demand. Inspectors are on salary, they don’t get paid per inspection, and property owners pay for inspections so this could be handled and financed like any other inspection permit. Sure, in the beginning we could expect a flood of inspection requests, but that’s not unprecedented, inspection departments deal with that every time a big storm damages a lot properties. And there’s no reason to assume that such inspection would have to done immediately… inspectors could have plenty of time to conduct these inspections. None of these exceptions are the kind that suddenly materialize without warning… property owners are typically well aware of the condition of their property, and they plan for these changes in advance.
I think you’re assuming that the city would have to do some kind of financial audit, or enter into some kind of negotiation with landlords who apply for exceptions… it doesn’t necessarily have to be administered that way. You could keep it simple; when you apply for a permit to build something or modify your property you have to include a cost estimate, inspectors are already familiar with these costs so they don’t have to audit the project.
Sure, you would have some additional start-up and training costs, but once this is up and running it could self-sustaining.
Given the importance and complexity (illustrated by the Lindeke/Kapan debate) of this proposal, why is Mayor Carter silent? This is either a good idea or a bad one. If good, he should support; if bad, oppose. Our mayor can be eloquent and persuasive, and I have no doubt of his sincere interest in the welfare of our city. His refusal, so far anyway, to add his voice and his thoughts to this matter of great public importance is disappointing. It doesn’t look like leadership.