ANALYSIS: THE BATTLE TO SAVE RENT CONTROL : Landlords See New Plan’s Half a Loaf as a Mere Crumb
The Santa Monica Rent Control Board continues to promote its inclusionary housing program as a way to stop landlords from evicting tenants and going out of business, but many landlords say the program provides too little and comes too late.
Although the program was hailed at its unveiling in June as a way to give landlords a better financial return while ensuring an adequate supply of affordable housing, a growing number of landlords say they would rather quit the business altogether.
Notices Filed
At latest count, the owners of 113 buildings with nearly 600 units had filed notices of intent to evict their tenants and shut down their buildings.
Landlords say the inclusionary housing program doesn’t give them enough incentive to participate. Meanwhile, tenant groups, the dominant political force in a city where 80% of the residents are renters, say the concessions to landlords are too generous. Despite the program’s hostile reception, the Santa Monica Rent Control Board is expected to give it final approval later this month and put it into effect in October.
The voluntary program would allow landlords to raise the rent substantially--as much as $900 in some cases--on apartments when they are vacated. In return, they would be required to set aside an equal number of apartments for low-income renters at rates as low as $266 a month. The amount of rent the landlord forgoes by renting to the low-income tenant would be more than offset by the increase on the “incentive” apartment.
But many landlords argue that the program will not work because vacancies occur so infrequently. A recent telephone survey of tenants by the rent board found that 62% have been in their apartments five years or longer.
“The mom-and-pops don’t get vacancies,” said landlord Wesley T. Walker, owner of a six-unit complex, noting that two of his five tenants have been in their apartments for 25 years. “I’ll probably go before they do.”
The poor financial returns particularly worry elderly landlords who counted on rental income or land appreciation to augment Social Security benefits and pensions.
Small Increases
“I bought this place in 1963 with the idea of having a little something to supplement my income after I retired,” said Walker. “Now I’m 80 and . . . I can’t even afford to paint this place.”
Since rent control was instituted in 1979, the rent board has generally limited the allowable annual increase to about two-thirds of the increase of the Consumer Price Index. The result has been rent increases of about 3%.
For an apartment renting at $220 a month in 1978, for example, that has meant an average increase in the monthly rent of about $7--and a monthly rent in 1989 that is still below $300. The average rent for regulated apartments in Santa Monica is less than $500 a month, and is about half the prevailing rate for apartments in neighboring areas of Los Angeles.
Though the decision to go out of business may be primarily one of dollars and cents for landlords, supporters of rent control say the landlords’ financial needs are more than outweighed by the need for affordable housing.
“That’s the underpinning of rent control,” said Susan Packer Davis, chairwoman of the rent board. “You are dealing not with a stock commodity that you buy and sell, but with people’s housing. That’s why we have to protect it. Just because you are not making enough money is not reason enough to evict people out of affordable housing.”
For landlords, the toughest provision of Santa Monica’s rent law--and what sets it apart from rent control laws in most other cities--is that the controls remain in place when a unit is voluntarily vacated. Davis and other city officials say that vacancy decontrol would mean the eventual loss of all affordable housing.
Program Lauded
“Rent control is not designed just to protect existing tenants, but to preserve the stock of affordable housing,” she said. “I see the inclusionary housing program as a compromise that allows landlords to raise rents on some units while still preserving our stock of affordable housing.”
Some landlords say they would like to get out of the rental business immediately, but that is costly too. Under city law, they would have to pay relocation costs of up to $4,000 per unit.
Luisa Kot, 71, and her husband Paul, 69, for example, have owned a five-unit apartment complex in the 2900 block of Broadway in Santa Monica since 1971. They live in one of the units and were renting the other four.
In 1978, the year before rent control was implemented in Santa Monica, the Kots collected $699 for the four units. After 10 years of rent control, the maximum they can collect is $993.
But the Kots do not take in that much. When tenants voluntarily move, Luisa Kot said, “It’s cheaper for us to leave them empty.” At present they rent out just one apartment, a two-bedroom unit, for $296.64 a month.
‘We Just Wait’
“We can’t afford to fix up the apartments to rent them out,” she said. “We’re just waiting for the remaining tenants to move out so that we can get out of business and sell the building. We would like to get out now, but we can’t afford the relocation costs to evict the tenants. So we just wait.”
The Kots collect $3,560 a year as rent for the one apartment. They said their annual fixed expenses (water, taxes, insurance and mortgage) are $6,775. They get modest tax benefits in the form of depreciation and interest deductions, but not enough to turn the loss into a profit or pay for maintenance.
If they were to rent out the three other units they could collect $11,927.40 a year, a pretax profit of about $5,000, excluding maintenance.
That isn’t enough, the Kots say, to justify the trouble of maintaining rental property. Besides, they said, they would have to spend at least $25,000 to bring the other three units up to city standards to rent them out, money they don’t have.
The Kots hope that an empty building will bring a better selling price.
Real estate agents say the Kots are probably right. Although the maximum allowable rents per unit remain, when property changes hands, an empty building provides more options for a new owner. First, because the new landlord will be paying a larger mortgage, the buyer can petition the rent board for an increase in rents. The rent board often approves rent increases in such cases, though rarely enough to fully cover the new landlord’s increased expenses.
2nd Advantage
Second, if the new landlord participates in the inclusionary housing program, half the units could be rented at close to market rates if the other half were rented to qualified low-income tenants.
Third, if the owner chooses to demolish the empty building, he can do so without having to pay tenant relocation costs.
Finally, for owners willing to be patient, a rental property left vacant for five years becomes free of rent control. An owner can then charge whatever rent he chooses, or convert the property to another use, including condominiums.
A decade of rent control has not only pinched landlords who remain in business, it has depressed the resale price of Santa Monica apartment buildings, making it harder for those wishing to quit. Real estate agents note that in some cases, an empty lot may be worth far more than a similar lot in the same neighborhood with an apartment building on it.
For example, an empty 50-by-150-foot lot north of Wilshire Boulevard zoned for multifamily residential use would be worth about $800,000, according to agents. If the lot contained a seven-unit apartment complex with monthly rents of about $350 each, the property would be worth less than $500,000.
Meanwhile, Westside housing costs and property values have soared in the last 10 years, creating tremendous economic pressures and disparities that test the ability of city officials to keep the rent control program working.
Condominiums no larger than some $400-a-month apartments sell for $400,000 or more. In theory, this means that huge profits can be made by developers who tear down rental properties and replace them with condominiums.
The city attempts to discourage this with a system of fees charged to property owners who remove rental housing from the market. The fees run several thousand dollars per unit, and the city is contemplating a new plan, known as Program 10, that calls for fees of $27,000 to $63,000 per unit, depending on the size of the apartment. The fees provide replacement housing for low-income residents.
Landlord and attorney Carl J. Lambert, who heads Action, the city’s largest landlord organization, questions whether the proposed Program 10 fees are constitutional. But even if they are, he said, a condominium construction boom may be in the offing in Santa Monica.
$500,000 Building
Citing a seven-unit apartment building on the market for about $500,000, Lambert said it could be torn down, city fees paid and five condominiums built, and still generate a profit of $800,000 for a developer.
Fueling prospects for a boom, Lambert believes, are recent court decisions that clarified some key rights and obligations of landlords and tenants in eviction cases and limited landlords’ liabilities.
“The economics say that we have to shift to a higher and better use of the land,” he said. “That means condos or raw land.
“If landlords could charge market rates they would stay in business,” he said. “Is it logical to stay in business for an annual gross of $15,000?” Without vacancy decontrol, he predicted, landlords are going to continue to evict tenants and go out of business.
“The rent board is continuing to battle landlords, but they are losing the war,” Lambert said. “You just can’t stop the market. Tenants had better wake up, because their building could be next.”
