Time for the narrow-casting of rent control benefits?

Rent Control Economics 101

It is not a surprise that the benefits and costs of rent control are hotly contested and debated in San Francisco. Most tenants, especially those who are long term residents, will espouse the benefits of rent control concluding with the very real and very personal benefit:  “I couldn’t live here without it.”

But when you ask a rental property owner, you hear a very different story.

More often than not, a property owner will have a rent control horror story which often ends with the owner selling the building in frustration, taking their housing units off the market in protest, or out of fear, the payment to of thousands of dollars to a hostile and unappreciative residential tenant, merely for them to vacate the unit.

Rent Control Benefits

Still, there is no doubt that rent control in San Francisco has legitimate benefits to identifiable San Francisco renters. No doubt some of these renters need financial assistance. No doubt, some actually deserve it.  No doubt there are societal benefits that stem from rent control that should not be dismissed or overlooked.

The question is not can we find some good in rent control; of course we can find some good. The question to be asked of all of our social safety-net systems spawned before the turn of this Century is: could there be another, better way to get to the same, or even a better result?  

Narrow Cast Rent Control Benefits

A look at the available evidence leads down a road which suggests the current rent control system is outdated, inefficient and overkill in the new economy we face in 2010.  Like so many of the programs of the past, rent control as a “public policy” is ready for a major overhaul and improvement.  It is time for rent control to become surgical and to narrow cast the benefits, rather than broadcast the benefits.

The San Francisco rent control public safety net, which is entirely privately funded, is too wide, too deep and too inefficient. Like so many of the entitlement programs of the 1970s, it mis-allocates and overspends limited resources.

The current rent control system transfers resources to the entire general populace of renters, when only a few are in need.  Instead of providing $50 of assistance to a single needy resident, the current system takes that $50 and distributes it among 10 residents, irrespective of need. The deserving few are forced to share assistance benefits with renters who can and should take care of themselves.  Imagine food stamps for everyone, just because a few people deservedly need them?  It makes no sense and we can’t afford it.

Marketplace distortions 

In addition to the public transfer of private resources for a public good, rent control distorts the behavior of the market place.

Go to any free market city, even a desirable one with a tight housing supply like San Francisco, and you will find rent specials and promotions, as building owners attempt to entice customers into moving to their complex or building. 

Missing concessions

Now look at San Francisco. No promotions. No market incentives.  No negotiations.  No DEALS. The dynamic market is dead.  Why?   Because concessions- inducements- incentives- and negotiations can be and have been used against property owners to reduce the base rent of tenants. The result?

New San Francisco residents receive none of the typical market concessions we see in dynamic free markets. Concession dollars are reallocated in budgets by San Francisco owners to allow longer periods of vacancy.  Money that could be in the pockets of residents, remains locked inside the building.

Price reductions slow to occur

A related distortion is that rental rates are not lowered as quickly as they are in other cities. Go anywhere else and you will see a market that reacts in real time.  Rents are reduced –and discounted and adjusted sometimes daily and even hourly.  These market adjustments happen quickly, in prompt response to a changing market.  As a market slows, rental rates go down.  It if slows further, the rates go down further.  You will not find these consumer benefits in San Francisco.

In San Francisco you can see pricing stagnate week after week as owners refuse to drop pricing because it is permanently lost.  In todays environment of annual increases that are typically only $1 per thousand in rent, a $50 per month price decrease equates to a lifetime of rental increases. 

Do price controls work? The anecdotal evidence is lush with stories of inequities and problems. The academic literature indicates “no”.  A Goggle search comes up with paper after paper and research article warning of unintended consequences and market distortions resulting from price controls.  Economic models teach us price controls provide a short term solution at a significant long term cost. 

But for a real answer look at the San Francisco rental market. At times of increasing vacancy the San Francesco rental housing market does not react as a typical healthy free market.   But it could; it should; and it can.

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Do you have an opinion about San Francisco rent control?  How would you improve the system?  Share you ideas through Comments.  

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San Francisco Board of Supervisors attacks Rent Ordinance and property owners

Newest assault on San Francisco property owners comes from the Board of Supervisors

Seven members of the SF Board of Supervisors have put forth a sweeping proposal, in the form of a Charter Amendment, to fundamentally change the way the San Francisco Rent Control Ordinance is implemented and monitored.  The measure should appear on the November 2010 ballot where San Francisco voters can approve or reject it.  Perhaps not surprisingly in a city like San Francisco, the proposal is unabashedly and mathematically pro-tenant. 

Current Rent Board Commission structure

Currently the Rent Board Commission is appointed by the Mayor and is made up of 10 members, 5 of whom vote and 5 of whom are alternates and vote when a voting member is absent.  Each body of 5 is made up of 2 tenant commissioners, 2 landlord commissioners and 1 neutral.  The qualifications are simple.  To be a tenant commissioner you must be a SF tenant and not own property.  To be a landlord commissioner you must own SF residential rental property.  To be a neutral you must not be a tenant or a landlord.  Generally this has meant the neutral is a homeowner. 

The Commission structure has changed only once since the inception of the Ordinance in 1979.    Previously, Commissioners had designated alternates; if both a voting commissioner and their specified alternate were absent, there was no vote for that seat.  Now if that occurs and the other alternate is in attendance, the secondary alternate can vote instead.  

The Commission is important because it holds two critical functions.  First, the Commission makes the rules which implement the Rent Ordinance.  Over the years, it is rule changes that have provided some of the most important shifts in the implementation of the Ordinance.  Second, the Commission is responsible for the hearing of cases that are appealed from the administrative hearing decisions of the Administrative Law Judges, as a result of cases filed with the Rent Board by both landlords and tenants.  This appellate judiciary function is critical to the fair implementation of the Ordinance. 

The Charter Amendment proposal

The new proposal changes every aspect of the Commission structure formula.  First, the Commissioners would no longer be appointed exclusively by the Mayor, but appointments would be shared with the Board of Supervisors, furthering weakening the position of the Mayor in San Francisco. 

Second, the Commission would mathematically favor tenants, who would own the largest number of voting representatives with three, landlords with two and neutrals with two, for a total of seven voting members.  With this guaranteed built-in majority, the tenant community would effectively and easily block any future landlord sponsored legislation or changes.  Any successful landlord vote would always require both neutral votes.  The other unlikely scenario is that one tenant commissioner would have to break ranks with the other tenant commissioners along with a single neutral vote and vote with the landlord group. 

In comparison, the tenant community four votes would need only a single neutral vote to move forward with any change.  And with four tenant votes, a missing neutral would always result in either a tie vote or a tenant win.  The built-in imbalance would always favor the tenant community. 

Finally, since over the years the tenant community has lost some of their favorite commissioners to home ownership, the requirement that tenant commissioners own no property is removed from the tenant qualification standards.

Perhaps the most alarming part of this modification stems from the Rent Board Commission’s function as an appellate adjudicatory body.  Any quasi-adjudicatory body should be balanced and fair.  A built-in numerical advantage is neither balanced nor fair. This new structure would undermine any remaining public confidence in a Rent Board where fair results are possible. 

The last time a proposal was put forth to change the structure of the Rent Board was in 2003, when Supervisor Daly attempted to have the Rent Board elected. 

The current seven sponsoring supervisors are Campos, Alvalos, Daly, Mar, Maxwell, Mirkarimi, and Chiu.  It takes only six supervisors to place a measure on the ballet. 

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What do you think of this proposed change?  Please respond in Comments, or share you point of view privately at Examiner@LightnerGroup.com

 First published on Examiner.com. 

Mid-year recap of rental residential real estate legislation in SF

SF Legislative Recap for Residential Rental Real Estate mid-year 2010

With just a month to go until the official mid-year point of the year, the San Francisco Board of Supervisors has been busy passing legislation.  Despite the economic crisis, the budget deficit, the health care crisis and a host of other pressing issues facing our city, state and country, our dedicated Board has found time to shift their attention to the business of rental housing long enough to make changes to the Rent Ordinance as well as other laws impacting rental housing. 

In case you have been busy working, here’s the short list of changes coming from the San Francisco Board of Supervisors and a link to the legislative language:

Amendment to Just Cause Eviction limiting evictions during the school year (0060-10)

A resident now has a defense during the school year, to an eviction if they have a custodial relationship with a school age child.  The interesting part of this modification is that the legislation is crafted as a defense to an eviction, rather than an eviction prohibition. 

Amendment to Just Cause Eviction extending protections to buildings previously not covered (0030-10)

Buildings built after 1979, the residents of which had not been protected under the Just Cause Eviction protections, will now, after a foreclosure, have Just Cause protections during their lease term.  In addition, after a foreclosure certain notices must be provided to the tenants.  Failure to provide the notices creates a defense to an eviction.

No Smoking in public areas (0058-10)

The no smoking ban has been extended to residential multi-family housing and encompasses common areas, building entrances and sidewalks.

Soft-story building earthquake improvement fee waivers (0054-10)

As an economic inducement for building owners to spend tens, if not hundreds of thousands of dollars, the City will waive a few hundred or a few thousands in buildings fees, if you voluntarily make structural improvements to your soft-story building.

Fee Increase for Recordation (0070-10)

If you record a real estate instrument, you will now pay $3 per page rather than $2.

 Link:  2010 Passed San Francisco Ordinances  

First posted on www.Examiner.com