The $91m fight to reconsider rent con­trol laws in Cal­i­for­nia

Irish Independent - Business Week - - TECHNOLOGY - Noah Buha­yar and Justina Vasquez

Cal­i­for­nia real es­tate de­vel­oper Bob Cham­pion did some­thing last year that he says put other builders “in a tizzy”: He agreed to im­pose rent con­trol on new apart­ments he’s plan­ning in Hol­ly­wood.

The project calls for tear­ing down an ex­ist­ing apart­ment com­plex to make way for a new res­i­den­tial tower, ho­tel, shops and restau­rants a block from the Capi­tol Records build­ing. Ten­ants or­gan­ised against it, so Cham­pion made a bold ges­ture to win over op­po­nents. In ad­di­tion to putting the whole de­vel­op­ment un­der rent con­trol, he agreed to help de­fray costs for dis­placed res­i­dents dur­ing con­struc­tion and let them re­turn to the new prop­erty at their pre­vi­ous rents. It was — as one ten­ant told a real es­tate blog last Novem­ber — “frankly be­yond our ex­pec­ta­tions”.

“I felt I needed to make a dra­matic enough state­ment to get po­lit­i­cal sup­port,” Cham­pion said. He was also mak­ing a cal­cu­lated de­ci­sion about fu­ture reg­u­la­tion. Rent con­trol — long pro­hib­ited on newer build­ings in Cal­i­for­nia — was likely to be al­lowed sooner rather than later, he said.

Next month, vot­ers in the most pop­u­lous US state will con­sider a bal­lot mea­sure that would usher in that change. Back­ers of Propo­si­tion 10 are seek­ing to give cities from Los An­ge­les to San Francisco new tools to ad­dress a widen­ing hous­ing cri­sis. The mea­sure would elim­i­nate a 1995 state law, the Costa-Hawkins Rental Hous­ing Act, that has long crimped lo­cal of­fi­cials’ abil­ity to limit how much rents in newer build­ings rise an­nu­ally and whether they can be re­set when a ten­ant va­cates a unit. Big land­lords in­clud­ing Es­sex Prop­erty Trust Inc. and Eq­uity Res­i­den­tial have poured in money to de­feat the ef­fort.

No other state faces a hous­ing short­age as deep and wide as Cal­i­for­nia. Fees, reg­u­la­tions and de­lays have pushed build­ing costs to among the high­est in the na­tion, and the state adds far fewer new units than it needs each year to meet de­mand. As a re­sult, me­dian home prices have dou­bled in since 2011, to al­most $600,000. Two in five house­holds in the state are con­sid­ered “cost-bur­dened”, pay­ing more than 30pc of their in­come on hous­ing. Home­less­ness is surg­ing.

The sit­u­a­tion has prompted sharp de­bate over what to do and dove­tailed with a re­newed na­tional con­ver­sa­tion over how best to help ren­ters at a time when hous­ing costs have sky­rock­eted and wages re­main stag­nant. In ad­di­tion to Prop 10, Cal­i­for­nia vot­ers will also get a chance to weigh in on whether to bor­row more money to build af­ford­able hous­ing.

The rent-con­trol mea­sure, how­ever, has proven to be es­pe­cially con­tentious — and a mag­net for po­lit­i­cal do­na­tions from com­pa­nies with a vested in­ter­est in keep­ing rent con­trol lim­ited. Pub­licly-traded real es­tate in­vest­ment trusts and other land­lords have helped raise $65.7m for groups that aim to de­feat Prop 10. Com­pa­nies af­fil­i­ated with Black­stone Group LP have given more than $5m to the ef­fort.

“We agree steps should be taken to ad­dress hous­ing af­ford­abil­ity in Cal­i­for­nia, but vir­tu­ally all in­de­pen­dent econ­o­mists agree this mea­sure ex­ac­er­bates Cal­i­for­nia’s ex­ist­ing short­age by dis­cour­ag­ing new con­struc­tion and re­duc­ing new in­vest­ment in af­ford­able hous­ing,” said Matt An­der­son, a Black­stone spokesman.

“Yes, rents are ex­pen­sive, but this is go­ing to make mat­ters worse,” said Steve Mav­iglio, a spokesman for the ‘no’ cam­paign. Ap­prov­ing Prop 10 would stymie new build­ing and be like “pour­ing gaso­line on the fire that is the hous­ing cri­sis”.

Pro­po­nents of the mea­sure had raised $25.6m. Al­most all that came from the AIDS Health­care Foun­da­tion, a non­profit run by Michael We­in­stein that bankrolled a pre­vi­ous, un­suc­cess­ful ef­fort to curb de­vel­op­ment in Los An­ge­les. They ar­gue that re­peal­ing Costa-Hawkins sim­ply gives lo­cal gov­ern­ments more flex­i­bil­ity.

“We’re not sug­gest­ing that ev­ery sin­gle com­mu­nity needs to have a rent-con­trol law on the books by Novem­ber 7, but that op­tion should at least be avail­able,” said Charly Nor­ton, a spokes­woman for the Yes on 10 cam­paign. “What works in Modesto may not work in LA.”

Be­sides, Cal­i­for­nia apart­ment land­lords have been able to en­joy decades of rent in­creases that have out­stripped in­fla­tion, said Zev Yaroslavsky, di­rec­tor of the LA Ini­tia­tive at the UCLA Luskin School of Pub­lic Af­fairs, who helped pass a rent-con­trol or­di­nance when he was a city coun­cil mem­ber in the 1970s. “Some­thing has to be done” to ad­dress hous­ing af­ford­abil­ity in the state, he said. “This is a hu­man cri­sis of un­prece­dented pro­por­tions.”

The mea­sure has di­vided prominent Democrats in the state. Los An­ge­les Mayor Eric Garcetti sup­ports it. But Lieu­tenant Gov­er­nor Gavin New­som, who’s lead­ing the race to re­place Gov­er­nor Jerry Brown, has op­posed it, say­ing he’d rather see re­forms to Costa-Hawkins.

Econ­o­mists have gen­er­ally agreed that rent con­trol is a dis­in­cen­tive to pro­vide more af­ford­able hous­ing. Re­search from the 1970s on­ward shows that the pol­icy “results in lost con­struc­tion”, said Chris Mayer, a pro­fes­sor at Columbia Uni­ver­sity. “It results in a lack of in­vest­ment for ex­ist­ing units be­cause there’s not re­turn on that. And it cre­ates a world of haves and have-nots.”

But the ex­treme sit­u­a­tion in Cal­i­for­nia and else­where has prompted some aca­demics to take an­other look at ways to keep low-in­come house­holds from be­ing priced out of their homes. Rent con­trol is a “blunt tool” to keep peo­ple from be­ing dis­placed, said Re­becca Di­a­mond, an

Pres­sure:

Two in five house­holds in Cal­i­for­nian cities such as San Francisco are pay­ing over 30pc of their monthly in­come on hous­ing econ­o­mist at Stan­ford Uni­ver­sity. Pro­vid­ing neigh­bour­hood-based tax cred­its to help peo­ple in­sure against ris­ing rents would be more ef­fec­tive, she said.

Vot­ers ap­pear poised to keep Costa-Hawkins in­tact — 48pc of peo­ple likely to par­tic­i­pate in the Novem­ber elec­tion said they’d op­pose the mea­sure, com­pared with 36pc who say they’d sup­port it, ac­cord­ing to a Septem­ber poll con­ducted by the Pub­lic Pol­icy In­sti­tute of Cal­i­for­nia. How­ever, a more gen­eral ques­tion about whether rent con­trol by lo­cal gov­ern­ments was a “good thing” earned far more sup­port. Even Cham­pion, the land­lord who em­braced rent con­trol to get his project ap­proved, is wor­ried by Prop 10 and has per­son­ally given money to de­feat it. He’s es­pe­cially con­cerned about the po­ten­tial for cities to curb how much land­lords can raise prices when ten­ants va­cate a unit.

If the mea­sure passes, he said he’d turn his Hol­ly­wood de­vel­op­ment — which is sup­posed to break ground next year — into con­dos, rather than rent-con­trolled rental units. He’d also ta­ble any fu­ture apart­ment de­vel­op­ments in the state. If Prop 10 fails, We­in­stein from the AIDS Health­care Foun­da­tion has vowed to put an­other mea­sure on the bal­lot to re­peal Costa-Hawkins, pos­si­bly in 2020. An ap­proach that still al­lows land­lords to boost rents when a ten­ant leaves a unit could also crop up in the leg­is­la­ture, Cham­pion said.

“Devel­op­ers wouldn’t be happy” if some­thing like that passed, he added. “But they’d live with it.”

(Bloomberg)

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