RENT CONTROL in the Crry of BERKELEY, II78TO 1994
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RENT CONTROL IN THE CrrY OF BERKELEY, II78TO 1994: A Background Report Planning & DevelopmentDeparment City of Berkeley 2ll8 Mitvia Street,Suite 300 Berkeley,CA947M lvlay 27, 1998 CTTY OF BERKELEY Mayor Shirley Dean City Council Polly Armstrong Margaret Breland Linda lvlaio Betty Olds Maudelie Shtek Dona Spring Dianne Woolley Kriss Worthington Ptanning Commission Laurie Capitelli, Chair Henry Boverhuis 7åLdaBronstein CharlesDeBose fvfary Ann McC¡mant Ped¡o Noguera Gene Poschman SusaoWe,ngraf Rob Wrenn City ll{anager JamesKeene Planning & Devetopment l)epartuent Gil Kelley, Direcror Ikre,lr llæey-Owens, lvfanager,Advance planning Division StephenE. Barton, Ph-D., AICP, Senior planner, project staff Intens Craig Broussard,University of California at Berkeley Fred collins, san Francisco state universþ Zina Markevicius, Universþ of California at Berkeþ In 1994 the interns collecædthe building permit daø and did the data enry aad preliminary analysis for the mainte,nancesardy re,portedin Sectiõn VII. This repon benSned greaþ from the many peopte who had done previous reports and gave helpful æplanations of their worþ includíng Ken Ba¿r, Glen Elder, ¡onn Crzenster;n,Neil Mþer, Myron Moslrovi¿' Dot¡id Mundsøcþ Michaet St-John, and Marian Volfe. None of them ït¿ve ary responsibility þr thefndings or conclusiora of this report. E)GCUTTVE SUMMARY Purposeand Method of the Study \ This report providesinformation on rental housing and on the Rent StabilizationProgram, one of the Clty of Berkeley'slargest housing programs, for use by its citizensas they revisethe HousingElement of the GeneralPIan. The rent stabilizationordinance currently regulates21,000 of the 25,000rental units in the City, with about 19,@0units currently registeredand 2,0ffi units temporarilyexempt The reportevaluates the benefitsand costsof Berkeley's rent control systembefore and after the major rent increasesof January 1992, using a combinationof historical and comparativedata from the Census,the Rent StabilizationProgram and other sources.In order to determinettre effectsof rent controlsduring the strong rent control period, the report provides detailed comparisonsof changesin Berkeleyand in neighboring cities, comparingchanges in censustracts in Norttr Berkeley with changesin similar tractsin neighboring South-EastAlbany and comparing changesin censustracts in South Berkeley with changesin similar tracts in neighboringNorrh Oakland. The Purposesof Rent Control Rent control in Berkeleyhas two main purposes.First, it is intendedo provide tenantswith security and stability in their homes, similar to tfiat enjoyed by homeowners,by protecting them ftom rapid rent increasesand unfair evictions. Second,it is intendedto shield tenantsas a g¡oup from the economicharm resulting from rising urban land values. The systemis intendedparticularly to help low-income people, minorities, students,the disabtedand the elderly, all of whom are more likely to be at a disadvantagein the housingmarket. Context: Berkeley and the Bay Area, 1960 - 1990 Berkeley has a diverse housing stock of single-family housesand apartrnentbuildings, small and large. This mix has not changedvery much since the mid-1970's, when wo decadesof rapid growth in aparftnenrhousing cÍìmeto an end. As the suppty of housing failed to keep up with the needin Berkeley and in the Bay Area, home prices increaseddramatically in the 1980's.Rents in the Bay Area also increaseddramatically, and more than hatf of all units affordableto very low-incomehouseholds were lost to rent increases.Rents in Berkeley, under rent control, increasedmore slowly until 1992. History Berkeley had rent cont¡ols during and shortly after World Wa¡ II and again during hesident Nixon's 1g7l-72 wageand price freeze.A 1972initiative measureto continuerent contrcl was ruledunconstitu- tional becauseit had no provision for across-the-boardrent increasesto cover operatingcost increases. In November1978, a year after passageof the Proposition13 property-taxroll-back, Berkeley voters passedan initiative that temporarily reducedrents to provide rentersa property tax rebaæ.A June 1980 initiative then establishedpermanent rent controls. Across-the-boardrent increasesto cover operatingcost increasesallowed rents to increaseby about 62 percent from 1980 to 1991,almost the sameas the Bay Area's 60 percentinflæion in non-housingitems during the sameperiod and substantiallybelow the 107 percentincrease in Bay Area rents.The courts upheld ttre constiurtionalltyof this rent control system,but even$ally required the addition of across-the-boardinfl,ation adjustmentsfor profis as well as operuing costs. A new board majority respondedby passingrent increasesaveraging 33 percentin January1992. Theseincreases were challengedin court but upheld as within the discretionarypowers of the electedRent Board- In comparisonwith market rentsthe averagediscount provided by rent coriEolhas decreased from 35 ro 40 percent below market in 1990 to 10 to 20 percent below market in 1993, with a substantial minoriry of legal rent ceilings now abovemarket rent levels. I Affordability Surveydata f¡om 1988 show that tenantsin rent controlledunits included30 percentvery low-income non-students,16 percentlow-income non-srudents,22prcent student households, virnrally all of whom arecurrently very low-income,and 32 percentnon-student households with incomesthat were moderate and above.Two-thirds of the Befteley tenantswho benefit from rent cont¡ol are low-income and nearly half are low-incomeand not students.Despiæ paying below-market rent-controlled rents, most very low- incometenants still paid over 30 percentof their incomesfor rent and utilitids and nearly two-fifttrs of them paid more than half of their income for rent evenduring the period of strong rent conFol. As a result of the recentrent increases,however, the situationof poor terumtshas deteriorated. For example,by 1993 there were less than 500 units with legal rent ceilings under 5300, half the income of an elderly or disabledperson receiving SSI, comparedwith 4,5m in 1990. Profitability Landlords profit from rental housing to the extent that rents and expendituresprovide cash flow, tax deductions,equity appreciation,and mortgage loan principal repayment,which alsoincreases equity. Much of their profit is rcalized orùy when they sell or refinancethe building. Using Rent Board cost studiesto do an intemal rate of retum analysison an "average"rental property, we find that under t}:re1979 to 1991 systemit was possibleto obtain a nearly 9 percentpre-tax annualrate of retum on invesunent,compared to the 5.5 percent averagerate of inflation, but th¿t this rate of retum dependedon building salesprices that were becoming difficult to sustain.The Boa¡d increasedrents to provide an inflation adjusunentfor the Net Operating Income (NOI) as well as increasesto cover increasedoperating expenses.After the retroactive rent increasein November1991, the averageannual rate of retum for the sameperiod jurnped to 12 percentfor the 1980to 1Ð1 period.Had this inflation adjusunentbeen in placeduring the entire 1980 to 1991 time period, the owner would have had a retum of 15 percentannually due to receiving higher rents as well as a higher salesprice. Without rent controls the sameowner could have eameda spectacular 19 percent annual retum. An altemative inflation adjustnent was proposedby the City, providing an inflation increasefor the part of NOI that provided cash flow profit to the landlord but not for the part usedfor debt sewice on mortgages,whose interest rates had declinedsubstantiatly since 1979. The rate of retum on this alæmative would have been a reasonable10 percent and would have been sustainableindeñnitelv. Conversion of Rental Units About 3,500units that wererented in 1980were not rentedin 1990.This lossof rentalunits hasbeen due almost entirely to two factors; first, loss of residential hotel rooms, none of which resulted fiom rent contlìols,and second,conversion of rental units for use by owner-occupants.Conversions included 1,200 single-family houses converted to owner-occupancy,750 units in multi-family properry converted to owner-occupancy,500 more vacant units, mostly in smaller properties that have owner-occupancy potential, absorptionof about 650 rentals into enlargedsingle-family housesand loss of 400 residential hotel rooms. Rent control encouragesaltemative use of rental spaceby reducing the oppornrnity cost of conversion,but conversioncan best be restained by creationof new condominiumsto meet the demand for ownershipof apartrrentsand by regulæoryrestrictions on conversionin existing rental propertieswith multiple units. It is not practical to restrict conversionof single-farnily houses,and since most of their owners are not real estateprofessionals they are easily discouragedfrom renting by fear of bureaucratic entangements.There is no evidencethæ rent control has any effect on constructionof new housing. II Building Condition It is likely ttrat rent controls reduceexpenditure on cosmeticmaintenance, since new tenanß can be aüracted by the below-ma¡ket rents rather than the appearanceof the building. Building permit data provide an indicatorof expendituresfor repairsand improvements.The numberand valueof permitsin propertieswith ñve units or more remainedconstant before and during the strong rent control period of 1979to 1991,while permitsincreased in Albany anddecreased in North Oaklandduring the sametime period. Thus thereis no evidencethat rent conftols reducedexpenditures on repairsbelow pre-rentcontrol levels. Building