This is the second in a two-part series on rent stabilization in Los Angeles. You can find Part 1 here, or find a link at the bottom of this post.
In Part 1 of this two-part series on rent stabilization, I looked at some of the problems with rent stabilization/control, and why stability is not always synonymous with affordability—particularly in a constrained housing market like that of Los Angeles. The big three challenges, as I view it, are:
- Rent-stabilized units are free to reset to market rates when a tenant moves out. Rent control would solve this, but it would introduce even more unintended consequences than rent stabilization.
- Long-term tenants of rent-stabilized housing end up "stuck in place."
- Because rent-stabilization only applies to multifamily built before a specific point in time (October 1st, 1978), the stock of rent-stabilized housing is always decreasing—and adding to the supply of housing in LA very frequently means demolishing rent-stabilized housing. Disagreements between pro-housing and anti-displacement advocates can be blamed, in part, on this dynamic.
For this post, I want to explore an idea that might help resolve #3. If it were successful, this proposal would also stronger consensus about the need for more housing, which would stabilize rents and reduce the impacts of #1 and #2.
Rent Stabilization's Context in the Housing Market
Before introducing the "rolling" rent stabilization proposal, I need to set the scene a little bit.
The idea at the heart of this post is an expansion of rent stabilization to additional properties, but not an arbitrary expansion. It's not just, "let's expand it to all multifamily housing!" or "let's apply it to everything built before 2000!" Instead, it would grow the stock of rent-stabilized housing steadily and predictably, with minimal impacts on existing property owners and the developers of new housing.
One of the positive things about LA's existing rent stabilization ordinance is that it doesn't directly discourage new development. Since the law only applies to buildings constructed before 1979, new apartments are exempt. This means that a developer can count on charging market-rate rents for their new apartments, which gives them the predictability and confidence to take on the substantial risk of a new project.
To illustrate the importance of this aspect of the law, consider the following two scenarios:
In the fist scenario, imagine you're a developer considering a new project in downtown LA. You're worried about all the new housing coming onto the market, and whether you'll be able to get the rents you're anticipating when you finish the project. We're also due for an economic downturn sometime soon. One mitigating factor is that even if your project opens in the midst of a downturn, you can weather the storm and rent at depressed rates for a few years, taking a loss, and when the market recovers you can raise your rents and turn a profit in the end.
In the second scenario, imagine that you open your project in the midst of a downturn but, 2 years later, the city enacts a "universal" rent stabilization law that applies to every apartment in the city. You've got a bunch of residents paying rents that aren't sufficient to pay off your loans, and their rates are now locked in for as long as they want to stay. You lose your shirt, and your project is a failure. Instead of taking the risk of building in this type of regulatory environment, maybe you just decide to build in another city, or wait until the next development cycle. In the meantime, LA's housing shortage persists and rents continue to rise.
This comes down to predictability. Rent stabilization can work for property owners and developers—we're building new housing and there's plenty of market activity for older, rent-stabilized housing despite a rent stabilization ordinance currently in effect, after all—but everyone needs to know what to expect. If there's a risk of the rules changing mid-way through a development or acquisition, suddenly every project looks far less desirable. The Neighborhood Integrity Initiative is a great example of this: With the threat of a two-year retroactive moratorium on most LA housing development, permit applications for new projects have plunged over the past several months.
So how can we increase the supply of rent-stabilized housing without destroying the predictability that inherently risky development projects depend upon? A rolling rent stabilization law might be the best answer.
An Alternative, "Rolling" Rent Stabilization Law
So here's my proposal:
Instead of relying upon a rent stabilization law that applies only to housing built before a certain date, we should consider adopting a "rolling" rent stabilization rule that applies to all buildings beyond a certain age. Each year more buildings would "age into" the program, growing the overall stock of rent-stabilized housing.
This would fix some of the broken, perverse incentives of the existing law while avoiding many of the unintended consequences of a universal rent-stabilization expansion.
Rather than limiting our rent-stabilized housing stock to buildings built before 1979, we could expand it to every multifamily building at least 30 years of age, with new buildings added each year. Today that would mean everything built before 1986; on January 1st, 2017, it would include everything built before 1987. In 2030, every multifamily unit built before the year 2000 would be rent-stabilized.
The main benefit of this reform—aside from expanding the benefits of rent stability to more LA residents—would be to more clearly highlight the role of housing production in promoting affordability. Every new unit built today is a rent-stabilized unit for the future. While we might lose 10 rent-stabilized units today due to demolition and new construction, 100 more are on the way; for every unit demolished to make way for new construction, 10 or 20 more would be added to the supply when rent stabilization rolled over to the next year.
Restated, a rolling rent stabilization ordinance give us the choice between a system in which our rent-stabilized housing stock is doomed to permanent decline, or one in which the supply of rent-stabilized homes is always growing—with the added benefit of more housing at all income levels, lower market-rate rents, and greater investment in our communities' schools, streetscapes, parks, and other assets. It's an easy choice. Critically, growing the supply of rent-stabilized housing for the future becomes dependent on the construction of new housing today.
Making Sure It Works
Looking at this law from the developer perspective, there would still be plenty of incentive to build new housing since the law would only apply to buildings over 30 years old. Developers tend not to value revenues ~20 or more years into the future because their "present value" is essentially nil—it's too far away for them to really count it, so it doesn't factor into decisions about whether or not to proceed with a project. I chose 30 years somewhat arbitrarily, but it's enough to give developers several years to fully lease up their new buildings and get all the kinks of their new property worked out, then at least 25 years of unrestricted earnings. A different number might work better, but it would probably be in the ballpark of 20 to 35 years.
For the sake of easy accounting, I'd suggest that the rent-stabilized housing stock only be updated on January 1st of each year. That means that if a building was constructed on February 3rd, 2000, it wouldn't be rent-stabilized until the first day of 2031 (rather than February 3rd, 2030). From the city's perspective, tracking every unit that crossed the rent stabilization threshold every day would be a nightmare; limiting the turnover to one day each year would make the system much more manageable and comprehensible.
One of the unintended consequences of a rolling rent stabilization law would be the impact on property owners who had recently purchased a building built after October 1st, 1978.
Similar to how a developer makes decisions about whether to build based on anticipated future revenues, property owners purchase properties based on expectations about the future. One important consideration is whether or not their property will be subject to rent stabilization. Because post-1978 housing isn't affected by the city's rent stabilization ordinance, it sells for quite a bit more than rent-stabilized housing. If an investor purchased a 35-year-old property before rolling rent stabilization had been announced, and the rule went into effect shortly thereafter, their revenue potential might tank, and there's a good chance they'd lose money on their investment. They'd likely sue the city, arguing that it had engaged in an unconstitutional "taking" of their property rights, and they might just win.
To skirt that issue, the updated law should allow for a grace period based on when the property last changed hands. If it was bought 5 years ago, even if it was built in 1980, it wouldn't become rent-stabilized for 25 years. If it was bought 25 years ago, it would turn over in 5 years. This way, everyone gets their full 30 years of unrestricted rents. Aside from avoiding legal problems, this is also just the right thing to do.
Inevitably, everyone who owned a property more than a few years old, but built after 1978, would try to sell it (probably to themselves) before the law went into effect, ensuring that they'd receive the full 30-year grace period. This could be prevented setting a retroactive start date. For example, if the law was proposed in March and approved in June, the grace period might only apply to properties that were sold by the end of February.
By far the biggest hurdle to adopting a rolling rent stabilization law would be that, due to the Costa-Hawkins Act, it's... well... illegal.
Costa-Hawkins was passed in 1995 in response to excessively restrictive rent control (not rent stabilization) laws in places like Santa Monica and Berkeley. In addition to allowing landlords to reset rents to market-rate when a new tenant moves in—which is generally viewed as a good thing, since this allows the owner to invest in required major repairs and renovations—Costa-Hawkins also made it so that any housing not already subject to rent control or rent stabilization could not be added to the program. In effect, it froze LA's rent stabilization rules in time, forever preventing their expansion to any properties built after 1978.
I don't think reforming Costa-Hawkins would be easy, but if there's ever a time where the political support might be present, this could be it. When there seems to be real momentum behind significant changes to Proposition 13, long deemed "the third rail of California politics," revisions to Costa-Hawkins look relatively tame in comparison. If the revisions included protections like those discussed above, preventing the arbitrary, unpredictable application of rent stabilization laws, I could see a path forward. I'd also love to see a clause that only allowed changes to municipal rent stabilization laws in cities that revised their zoning to actually allow for robust housing production that would meet growth targets (or better yet, vacancy targets).
I'm curious to hear thoughts from others interested in housing policy and development. I've pitched this to a few developers thinking they would recoil at the idea, but actually found them to be pretty receptive—so long as such a law was applied fairly and predictably.
Do you see any unforeseen consequences of such a change (keeping in mind that we're dealing with a context in which rent stability is the law of the land and that's unlikely to change)? Any additional safeguards that should be included—sticks to discourage undesirable activities, or carrots to incentivize the good?
In my previous post I discussed some of the downsides to rent stabilization and rent control, especially in the context of LA. You can find it here: Rent Stability, Part 1: The Limits of Rent Stabilization in Los Angeles.