McNellis: Rent Control Behind the Curtains

McNellis Partners, Palo Alto, Silicon Valley

McNellis Partners, Palo Alto, Silicon Valley

By John McNellis

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[dropcap]R[/dropcap]ent control measures are sweeping the San Francisco Bay Area. For good reason. To pay no more than 25 percent of your pretax income—the yardstick for apartment affordability—you must earn $170,000 a year for an average two bedroom apartment in Mountain View. With even the techies doubling up, bunk bed sales are trending.

Unlike other ballot measures, rent control has appeal. Your heart goes out to those broken by annual double-digit rent increases, those forced to move hours away from their jobs to find housing. The most striking indictment of the Bay Area’s housing crisis is that the busiest hour on the Bay Bridge is now from 5 to 6 in the morning. To beat the traffic, some employees are arriving two hours early and napping in their cars until their shifts start. If you fail to understand rent control’s allure to those who work for a living, your empathy quotient might be a half-quart low.

If, however, you fail to understand the concept’s flaws, you likely haven’t studied the issue. Other than their individual needs for publicity, big-time economists agree on nothing. Yet over 90 percent are in accord that rent control is bad for both the quality and quantity of housing. You can find the big picture detailed anywhere on the net—how rent control blights properties and neighborhoods, decreases housing stock, unfairly singles out landlords, creates a windfall for well-off renters because it is not tied to their incomes, etc. The only counter to the dismal science is the small picture—the suffering caused by rampaging rents.

[contextly_sidebar id=”hEZ3H3ArzjifaPeKhiJh8kGvCEgBHuLB”]The irony may be that, at this very moment, just when it appears that the Bay Area’s housing affordability crisis is exploding, the market—the law of supply and demand—is stepping in. An owner of thousands of Silicon Valley apartments told me a week ago that in the last twelve months, his apartment rents have declined up to twenty percent. Twenty percent. And in the next twelve months, many thousands of new apartments will be completed in Silicon Valley. Yes, new jobs are being created at a still faster pace, but not at salaries that can garage-sale bunk beds. The rent peak may have been crested.

Supply and demand is the only real solution to the housing crisis. If you make zoning a regional rather than local decision, establish residential densities appropriate to a near-urban setting, prevent municipalities from blocking new housing and ban project-killing CEQA lawsuits, you have gone a long way toward addressing the issue.

But rather than debate economic theory or demand—for the moment at least—politically impossible solutions, I will simply recount my personal experience with rent control. My wife and her brother inherited an old five-unit apartment building in San Francisco. A couple of the building’s apartments turned over after they took ownership. Because of the way San Francisco’s rent control ordinance works, this meant we could actually choose our new tenants and raise the rent to a market rate. Two of the other units, however, had been occupied by nice guys for twenty years. The final apartment was occupied by “jail house lawyers”—insolent tenants we had never met or approved, but had made the mistake of accepting a rent check from one (an unknown subtenant at the time), who then sublet to untold others. They refused to speak with us in person, insisting that all communication be in writing. They wanted to be ready to take us up on charges to the Rent Board at the drop of a garbage can.

Finally, we gave up. We decided to sell the building, tired of tenants who all but claimed outright ownership of the building. At the time of sale, we knew the three units were paying about 1/3rd of market rent. What we didn’t know until we inspected these units was this: One long-term tenant who was paying us $1,400 a month for a three-bedroom unit had in turn subleased two of its bedrooms (without notifying us) for more than his total rent and had thus been living in our building rent-free for years. Salting this particular wound, we discovered he had taken the previous year off to travel in Europe, while his subtenants forwarded his rent checks. The other nice guy, a successful businessman, had an unreported roommate as well—he, too, was paying us almost nothing from his own pocket. Our apartments were thus rented at market rent, just not by us.

During our time as amateur apartment owners, we learned that San Francisco’s rent control ordinance has more unintended consequences than a hot air balloon ride with an arsonist. It allows tenants to become a building’s subrosa landlords and steal rent from its rightful owners. It permits a revolving door of co-tenants to occupy your apartment forever—you lease to four new co-tenants, one moves out a year later and someone you haven’t met takes her place (at the old rent) and then the next original tenant departs, someone takes her place and so on until you have an apartment full of unapproved tenants paying out-of-date rent. The ordinance discourages landlords from doing anything beyond critical repairs—your tenants demand services and improvements, while telling you how deep to shove your rent request. And, finally, perhaps worst, because of the many abuses it engenders, the ordinance drives well-intentioned amateurs out of the business, leaving the city’s housing stock in the hands of case-hardened professionals, landlords who will bring a handgun to a knife fight and who are grimly prepared to go mano-a-mano with tenant lawyers, real and otherwise.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.

mcnellis-book-coverTo read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.

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