Cornell Journal of Law and Public Policy Volume 17 Article 1 Issue 1 Fall 2007 Absentee Landlords, Rent Control and Healthy Gentrification: A Policy Proposal to Deconcentrate the Poor in Urban America Jorge O. Elorza Follow this and additional works at: http://scholarship.law.cornell.edu/cjlpp Part of the Law Commons Recommended Citation Elorza, Jorge O. (2007) "Absentee Landlords, Rent Control and Healthy Gentrification: A Policy Proposal to Deconcentrate the Poor in Urban America," Cornell Journal of Law and Public Policy: Vol. 17: Iss. 1, Article 1. Available at: http://scholarship.law.cornell.edu/cjlpp/vol17/iss1/1 This Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell Journal of Law and Public Policy by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact [email protected]. ABSENTEE LANDLORDS, RENT CONTROL AND HEALTHY GENTRIFICATION: A POLICY PROPOSAL TO DECONCENTRATE THE POOR IN URBAN AMERICA Jorge 0. Elorza* ABSTRACT Empirical data overwhelmingly suggests that the presence of mid- dle- and working-class homeowners is beneficial for inner-city communi- ties. Yet, absentee landlords have a systematic financial advantage over resident landlords when it comes to purchasinghomes in blighted neigh- borhoods. This advantage has disastrous effects for inner cities, as the communities with the greatest need for the stabilizing presence of mid- dle- and working-class homeowners are the ones least likely to attract them. The lack of in-moving homeowners and the resulting increase in poverty cause declining neighborhoods to fall deeper into downward spirals. In this Article, I propose a rent control plan designed to attract middle- and working- class homeowners to blighted neighborhoods, and I argue that many positive outcomes will result. By designing this plan, I hope to challenge the conventional wisdom that rent control has only one legitimate purpose, reducing tenants' rents, and call attention to the ex- ternalitiescaused by the absentee landlord industry. Second, I provide a legal and economic model for inner cities to deconcentrate poverty and to better integrate the poor into mainstream society. Third, I develop a model for healthy gentrification whereby vicious cycles of poverty are transformed into virtuous cycles of stability. A B STR A C T .................................................. 1 INTRODUCTION ............................................. 3 I. UNDERSTANDING URBAN INSTABILITY ........... 5 * Assistant Professor of Law, Roger Williams University School of Law. B.S., Univer- sity of Rhode Island; J.D., Harvard Law School. I would like to express my deep gratitude to Duncan Kennedy and Colleen Murphy for their helpful comments. I also benefited from the comments of Emilie Benoit, Jeffrey Dana, Jared Goldstein, Andrew Horwitz, James Huguley, Bruce Kogan, Timothy Kuhner, George Nnona, Nicolas Retsinas, Leticia Tejada, and David Zlotnick. I would also like to thank my able and diligent research assistants Timothy Cavazza, Katherine Johnston, Michael McMillen, and Rikin Mehta. This research was generously sup- ported by a RWU SoL Summer Research Grant. 2 CORNELL JOURNAL OF LAW AND PUBLIC POLICY [Vol. 17:1 A. CONCENTRATED POVERTY AND THE ABSENCE OF THE MIDDLE CLASS ........................................ 7 1. The American Ideal & Exclusionary Zoning ..... 7 2. Federal Housing Policy & Racial Discrimination .. 9 B. BENEFITS OF THE PROPOSED RENT CONTROL PLAN... 12 1. Middle- and Working-Class Presence ........... 12 2. Higher Rate of Homeownership ................. 17 C. ABSENTEE LANDLORDS AND THE SELF-PERPETUATING CYCLE OF BLIGHT .................................... 19 II. A PROPOSED RENT CONTROL PLAN TO ENCOURAGE AN INFLUX OF RESIDENT LAN DLORDS ......................................... 26 A. THE BASICS OF THE PROPOSED RENT CONTROL PLAN. 26 1. Setting the Rent Ceiling ........................ 28 a) Minimum Departure from Fair Market V alue ..................................... 29 b) Maximum Departure from Fair Market V alue ..................................... 29 2. Targeted to Blighted Neighborhoods ............ 33 3. Targeted to Neighborhoods with a High Rate of 2- to 4-Unit Homes ............................ 34 B. GENTRIFICATION AND DISPLACEMENT ................ 36 1. Traditional Process of Gentrification ............ 37 2. Likely Class Composition of Rent-Controlled Home Purchasers ............................... 38 3. Displacement of Homeowners by Higher-Income Hom ebuyers ................................... 39 4. Displacement of Low-Income Tenants by In- Moving Resident Landlords ..................... 40 5. Displacement of Low-Income Tenants by Higher- Income Tenants ................................ 43 6. Healthy Gentrification.......................... 44 C. OTHER PROVISIONS ................................... 48 III. POTENTIAL BARRIERS AND ADVERSE CONSEQUENCES ..................................... 51 A. ECONOMIC CRITIQUES AND BARRIERS ................ 51 1. Deterred New Construction and Decreased Supply of Rental Housing ....................... 51 2. Inefficiencies Caused By Over- and Under- Consumption of Housing ....................... 53 3. Under-Maintenance of Rental Units ............. 55 B. POLITICAL CRITIQUES AND BARRIERS ................ 57 1. More Effective Alternatives ..................... 57 2007] LANDLORDS, RENT CONTROL AND HEALTHY GENTRIFICATION 3 2. Government Bureaucracy and Corruption ....... 58 3. Government's Woeful Track Record ............. 59 4. Political Feasibility ............................ 60 C. LEGAL BARRIERS ................................... 61 1. Substantive Due Process-Takings Clause ....... 61 CONCLU SION ................................................ 66 A PPEN D IX ................................................... 69 1. Additional Tenant Protections................... 69 2. Risk of UnderestimatingHigh Tenancy Turnover ...................................... 72 INTRODUCTION Until recently, rent control has been almost unanimously con- demned by economists. While rent control has been effective as a short- term tool for reducing tenants' housing costs, its long-term, adverse con- sequences have been commonly believed to outweigh its benefits.' 2 While I agree with these assessments of traditional rent control schemes, I challenge the conventional wisdom to the extent that it assumes rent control can have only one legitimate purpose-the reduction of tenant's housing costs. In this Article, I hope to provide a new perspective by developing a rent control plan with an entirely different goal: deconcen- trating poverty by encouraging an influx of middle- and working-class 3 homeowners into blighted neighborhoods. 1 See Edward H. Rabin, The Revolution in Residential Landlord-Tenant Law: Causes and Consequences, 69 CORNELL L. REV. 517, 555 (1984) ("The popularity of rent control is puzzling in view of the virtual unanimity among professional economists that rent control is, in the long run, bad for all concerned-tenants as well as landlords."); ANTHONY DOWNS, A REEVALUATION OF RESIDENTIAL RENT CONTROLS 45-74 (1996) (arguing that rent control de- ters new rental construction, encourages under-maintenance, reduces tenant mobility, and pro- duces many inefficiencies); Richard Amott, Rent Control: The International Experience, reprinted in PERSPECTIVES ON PROPERTY LAW 415 (2002) (arguing that rent control reduces maintenance of the rental units, incites gentrification and abandonment by landlords, and ulti- mately does not make the units more affordable due to key money issues and black market transactions); Richard A. Epstein, Rent Control and the Theory of Efficient Regulation, 54 BROOK. L. REV. 741, 767 (1988) (arguing that rent control deters new construction not only by making the rental housing market less profitable in rent-controlled zones but also by sending a chilling message that non-rent-controlled zones may soon become regulated); Robert C. El- lickson, Rent Control: A Comment on Olsen, 67 Cm.-KENT L. REV. 947, 948 (1991) (stating that rent control forces landlords and tenants into uncooperative relationships). 2 I define traditional rent control schemes as any whose primary purpose is the reduc- tion of tenants' housing costs. 3 With a long and unified opposition to rent control, it is only recently that economists and legal scholars have begun, on a limited basis, to challenge the conventional wisdom. Commentators have examined whether a fine-tuned rent control ordinance, often referred to as "second-generation" rent control, can partly accomplish the goal of reducing rents without producing the harmful results of "first-generation" rent control. Often times, this analysis is not motivated by a normative claim such as "second-generation" rent control is desirable but rather that "second-generation" laws are not as bad as "first generation" laws. See Arnott, 4 CORNELL JOURNAL OF LAW AND PUBLIC POLICY [Vol. 17:1 The rent control scheme I propose has been entirely overlooked by legal and economic scholars. Depending on the needs of the local com- munity, rent control may be designed to address an array of different goals, and each scheme will have different legal, economic, and political consequences. Much of the literature has missed these points and has declared broad pronouncements of the desirability of rent control without 4 considering its infinite permutations. This rent control plan is intended to