Regulating our way to prosperity?

Are the increasing restrictions placed on landlords too heavy, too light, or just right? Joseph Mailander and Peter Dreier debate whether City Hall gone too far or not far enough in reining in property rights. Yesterday Dreier and Mailander sketched out the contours of what they think this housing crisis is. Later this week, they’ll argue rent control, propose solutions, and clear up myths.

Developers cry wolf, politicians believe them
By Peter Dreier

The debate over housing policy—whether at the local, state, or federal level—is ultimately about the proper role of government in society. This involves various kinds of subsidies, tax breaks and other incentives (for developers, tenants, and homeowners) and regulations (over land use, building codes, and discrimination). What’s the proper balance between profits and the public interest?

The current debate in Los Angeles over inclusionary zoning, condo conversions, and tenants rights reflects these larger questions. Housing and community activists, union leaders, and some business entrepreneurs, and their allies in City Hall, want the city to strengthen city regulations on developers and landlords in order to create more affordable housing and protect the existing stock of affordable housing. Developers and landlords have their own friends in City Hall, and they’re resisting the regulations.

City Councilmember Bernard Parks, for example, opposes any restrictions on condo conversions. He thinks its sufficient for the city to require converters to give tenants moving expenses—even though the vacancy rate is invisible and there are few places for renters to move to. That’s like giving people food stamps when the grocery shelves are empty. In the L.A. Times yesterday, Parks argued that “the market’s natural ability to adjust itself to meet the needs of supply and demand cannot be overlooked. When the supply of condominiums or market-rate rentals rises, then the demand is satisfied, which results in lower prices.” There’s absolutely no evidence for this statement, and there’s absolutely no chance that L.A. can build its way out of its housing crisis, but Parks seems to believe it anyway.

I wonder if Parks, L.A.’s former police chief, would say that same thing about the “supply and demand” for guns. Does he think we should just let the market work? Forget about government’s role in protecting people?

Then there’s Ben Reznick, an attorney for Simms Commercial Development, which wants build a 438-unit luxury housing complex at Warner Center. According to the L.A. Times last week, Reznick says that the City Council’s requirement that the project include 25% below-market apartments is a financial burden on his client. (And, let’s be real, the rents for the so-called “affordable” units were $1,463 for a one-bedroom unit and $1,674 for a two-bedroom—more than most schoolteachers or cops could afford). Referring to Simms’ complaint, City Councilmember Dennis Zine, no radical, said: “We’ve got to maintain the livelihoods for working people so they don’t have to move to Lancaster and Palmdale and spend $2 to $3 a gallon on gas to drive the freeways every day,” he said. “It’s a quality-of-life issue. I want hard-working people to be able to afford a residence in Los Angeles.” (Zine is right, and hopefully he’ll be a “yes” vote when the Council considers an inclusionary zoning law).

Let’s not forget developer Geoff Palmer, who likes to give his luxury developments Italian names like Medici, the Orsini and the Piero. A few months ago, Times columnist Steve Lopez wrote a few pieces about Palmer, pointing out that last summer, he bought a $17-million beachfront house in Malibu, “with solid bronze doors, teak cabinets and his-and-hers bathrooms.” Apparently that’s his weekend retreat. His main residence is, according to Lopez, a “French Regency-style Beverly Hills estate he bought for $21 million in 2001. That property includes a 16,400-square-foot main house, plus two guest houses, each larger than 5,000 square feet.” Last December, the community group ACORN visited Palmer’s Beverly Hills house to protest his resistance to a city requirement that he set-aside 15% of the units in his proposed Lorenzo luxury project downtown for housing that regular people—nurses, teachers, firefighters—can afford. When Councilmember Ed Reyes, a real housing hero, tried to talk to Palmer about affordable housing, Palmer told him: “That’s not my problem. That’s your problem.”

Well, Mr. Palmer, it is your problem, and its your responsibility—although not yours alone.

To understand why Parks, Reznick, and Palmer are misguided, let’s put this debate over housing regulations in a broader, and historical, perspective.

More than a century ago, Americans forged a social contract with American business. It said, in essence, that business should be able to make a profit, but it must also be socially responsible. So, local, state and federal governments passed laws regulating their activities. In the early 1900s, state and then the feds adopted child labor laws to end the exploitation of children in factories. In 1938, Congress enacted a federal minimum wage to guarantee the workers had enough money to feed and clothe their families; 28 states have adopted their own minimum wage laws to account for higher living costs.

In the 1970s, Congress and states passed environmental laws— requiring factories and auto companies to limit pollution—so that we have clean drinking water and clean air, and to protect the public health. For the same reason, we require oil companies to remove lead from the gasoline we put in our cars and trucks. In 1970, Congress enacted the Occupational Safety and Health Act to require employers to meet basic workplace safety standards. To protect workers and consumers, we’ve outlawed companies from using certain toxic chemicals.

We inspect medicines, food and other consumer items to make sure that they are safe; since the 1970s, the federal government has required drug and food companies to show the ingredients on their labels. Counties and cities require restaurants to maintain clean kitchens and safe food, or risk losing their licenses to remain open. Federal laws outlaw banks from the practice of “redlining”—discriminating against minority borrowers if they can afford to repay the loans. States regulate private utility companies, setting their rates (prices) so that families and businesses can have electricity.

When these laws were first proposed, business and their industry lobbies protested. They argued that these laws violated their property rights, or that they would cost too much to implement and force entire industries to shut down.

Indeed, whenever public officials and community leaders proposed policies to make business act more responsibly, some business leaders reply in horror that it would destroy the incentive to invest and hurt the business climate. Let’s call this the “Chicken Little” syndrome or, to use another metaphor from children’s fables, crying “wolf.” Sound familiar?

But businesses learned to adapt to these requirements and make healthy profits. Most Americans think that these laws have made our country a better place to live and work.

Government investments in education, roads, transportation facilities, communication systems, and research and development, as well as our legal system of contracts, has allowed business to flourish. The quid-pro-quo— the social contract—is that businesses must behave responsibility; they owe something back to the broader community. Since Americans also don’t trust businesses to act responsibly on their own (i.e., voluntarily), they support laws that involve inspections, fines, and other penalties for violating the laws. What about housing?

By 1865, nearly five in seven city residents (not including Brooklyn) lived in sub-standard tenement housing. In 1867, New York state adopted The Tenement House Act, the nation’s first comprehensive law addressing health and safety issues in tenements. It mandated such things as fire escapes for non-fireproof buildings and at least one water closet for every twenty tenants. The law also forbade occupation of cellars.

In his 1890 book, How The Other Half Lives, Jacob Riis described the deplorable conditions in New York City’s slums:

The same conditions could be found in other cities around the country, including L.A. So, since the 1800’s, starting with municipal housing reform laws that required apartment builders to meet basic safety and health standards (i.e. fire safety, ventilation, plumbing), we’ve accepted the idea that the “free market” in housing must be balanced with regulations that protect the public.

We have zoning laws to make sure that developers don’t build huge factories in single-family neighborhoods. We have “fair housing” laws to make sure that realtors and landlords don’t discriminate against people based on race, age, or families with kids. We have “warranty of habitability” laws that require landlords to meet basic safety and health standards—such as keeping the heat on in winter, installing smoke detectors, and fixing exposed electrical fires.

Many cities around the country, including more than 100 in California alone, have adopted “inclusionary zoning” laws that require developers to include housing affordable to working families. Housing and labor groups in L.A. are now pushing L.A. to adopt such a requirement.

In the 1970s, a number of cities in New Jersey, Massachusetts, and California (including L.A.) adopted rent control laws to protect the supply of affordable housing, exempting new construction. In the mid-1990s, California’s real estate industry wielded its political influence to get the state legislature to pre-empt cities from adopting full rent control. As a result, cities can only enact “vacancy decontrol,” which allows landlords to raise rents whenever a tenant leaves—an obvious incentive for irresponsible landlords to evict tenants illegally.

Over the past few years, L.A.—where 60% of residents are renters—has experienced an epidemic of condo conversions and demolitions of apartment buildings. Community groups, unions, seniors groups, and tenant organizations have pushed city officials to limit demolitions and condo conversions in order to preserve the city’s already inadequate supply of rental housing.

Predictably, many developers don’t want inclusionary zoning laws. They say they can’t afford it, that “the numbers don’t work.”

Carol Schatz, president and chief executive of the Central City Assn., has been running around town warning that the sky will fall if the City Council adopts inclusionary zoning. Housing developers will no longer want to build homes in Los Angeles, she says. If they do, Schatz frets, they will raise the prices and rents of their expensive units to offset the losses from building units for schoolteachers, nurses, secretaries, factory workers, janitors and retail clerks.

That there is absolutely no evidence to support these dire predictions doesn’t muzzle Schatz and her business allies. More than 100 cities and counties in California—including San Diego, San Francisco, Pasadena, Sacramento and Santa Monica—have adopted inclusionary zoning, and houses are still being constructed in those cities. In those cities, housing developers initially grumbled about having to build more affordable units. They also warned that the requirement would undermine new housing starts. But developers soon learned to live with the new rules and have continued to build profitable residential projects.

Predictably, too, most landlords, developers, and speculators don’t want the city to regulate condo conversions or limit rent increases. They, too, are crying wolf.

In fact, socially responsible developers acknowledge that inclusionary zoning laws, rent regulations, and limits on condo conversions are a reasonable trade-off for their right to make a profit from owning a basic necessity—housing. But because groups like the CCA and the Apartment Owners Assn give big campaign contributions, some City Council members find it useful to believe them. So unions, tenant groups, and community organizations—who represent the concerns of a majority of working people in L.A.—need to mobilize to challenge the power of those businesses who refuse to live by the social contract.

Let’s learn from recent history. The Central City Assn. and the L.A. Area Chamber of Commerce have pushed the Chicken Little button before when opposing social legislation. In 1996, the Chamber released a report warning that the living-wage ordinance then under City Council review would cost taxpayers more than $130 million in tax increases and program cuts, force city contractors to downsize, eliminate about 3,000 low-skill jobs and cripple local job-creation programs.

The next year, the Council adopted an ordinance that required about a thousand firms with city contracts to pay workers at least $7.25 an hour, plus family health insurance and other benefits, or $8.50 an hour with no benefits. The City Council has since increased the wage and benefit levels.

A report published last year by two University of California economists showed that business leaders were crying wolf. The living wage law had none of the negative consequences that the CCA and the Chamber of Commerce warned about.

You don’t have to be a bleeding heart liberal to recognize that an adequate supply of housing is necessary for a healthy community. Its also necessary for a healthy business climate. Elise Buik, CEO of the United Way of Greater Los Angeles, says that she hears over and over from corporate CEOs and business leaders in LA that they are having increasing difficulties recruiting and maintaining staff because of the lack of affordable housing.

The great Supreme Court Justice Oliver Wendell Holmes Jr. once said: “Taxes are the price we pay for civilization.” Likewise, regulations requiring landlords and developers to act responsibly—to be part of the community—are a reasonable trade-off for the right to make profits from owning a basic necessity—housing.

Peter Dreier is E.P. Clapp Distinguished Professor of Politics and director of the Urban & Enviromental Policy program at Occidental College. He is coauthor of three books: Place Matters: Metropolitics for the 21st Century; The Next Los Angeles: The Struggle For A Livable City; and Regions That Work: How Cities and Suburbs Can Grow Together; and co-editor of Up Against the Sprawl.

Strollering toward million-dollar-only market
Joseph Mailander

Peter, my jaw just dropped when you compared supply and demand for housing to supply and demand for guns. It demonstrated how far the proponents of government as Nanny State are willing to distort their arguments!

In fact, Parks is right to describe our city’s housing problem as one of supply and demand. Condo conversion moratoria are the single most ruinous, dream-shattering housing idea the City has. They not only keep badly-needed median and below-median housing off of the market—precisely the kind of housing that is needed most in LA—but forfeit chances for contractors and builders (usually good, local ones) to do the kind of renovation work that politicians and economists otherwise find so stimulating to the local economy.

When tenants are kicked out of buildings, they indeed elicit a lot of sympathy (less so when we get to haggling over how high into five figures their relocation benefits should climb); but when they stay in units to the point of pushing the limits of a building owner’s private property rights, they also keep prospective first-time buyers out of homes.

I think some new code would indeed be welcome here, but it wouldn’t be in the form of moratoria. It would be in the form of incentivizing the conversion of condos to bring median and especially below-median homes onto the market. We don’t need to spend a billion dollars to create more affordable housing; we can get developers to do it for the city, free-of-charge to the taxpayer. Condo conversion: There’s your billion-dollar Affordable Housing Bond, minus the billion dollar bond.

What’s more, Carol Schatz does indeed run around town a lot screaming a lot of things about housing and inclusionary zoning (and by the way, I wish that academics would produce real papers on inclusionary zoning, rather than merely assuring us that it works without doing any due diligence). But let’s remember, one of the reasons Carol screams about things is that she’s already seen how things can work. She knows, for instance, that the conversion route works even when the conversion challenge is far more difficult.

The city, in fact, minimally incentivized adaptive-re-use (loft and live/work) housing development downtown in 1999, allowing developers to convert commercial buildings into residential ones. And what happened? A development boom ensued that has rocked downtown like a 8.0 earthquake and enabled downtown to lead the City in providing new units at far friendlier prices than thought possible. The incentives were so slight as to be almost meaningless to most ears—stuff like not calculating new mezzanines in floor area ratios—but the benefits to downtown were and remain enormous. We now similarly need not to block but to incentivize condo conversion on the West Side.

If you need to hang on to your beloved government regulation, here are some ideas. We have the best architects in the country right here in this county; we can put into place meaningful, codified Planning Department aesthetic involvement, to insure that the best and brightest are getting work. We can codify more incentives for developers to hire the great firms that are right here in Los Angeles County to do the magnificent conversions. We don’t need to keep young but declining buildings off of the housing market and in perpetual decline because their owners aren’t allowed to convert those buildings to condos.

Mommies on the west side tell me these days that when they go “strollering” in the afternoon, they’re now not able to push their buggies past anything under a million. How is a moratorium on condo conversion doing anything other than keeping badly-needed, less-spendy homes off the market? We all know how supply and demand works. Making conversion as inelastic as possible only crimps supply, and keeps all prices pointlessly high.

Which I suppose pleases everyone on the west side—everyone except the builders themselves, and even more, the hopeful but increasingly rare prospective first-time buyer, who must become our city’s and region’s primary focus, in order for the American Dream to stay alive in Los Angeles and the southland.

Joseph Mailander is a writer and lecturer on architecture and urbanism who often nags the city of Los Angeles about housing issues. He edits the blog MartiniRepublic.com, which features a special category on architecture and urbanist issues, martinirepublic.com/la+u.