Rent control: seldom what it seems
Why does rent control exist? Because politics trumps policy. But even the most abject voter pandering must have a cover story.
As Buttercup sang:
Things are seldom what they seem
Skim milk masquerades as cream
From a public-policy perspective, there are so many things wrong with rent control (which I call ‘heroin for neighborhoods’) that it will take many posts to cover them all. Let’s just take one, a tale that comes from the Washington Post with headline horrific — “D. C. Tenants Fight to Own; Closing Loophole in Building Sales Law Considered” — and lead frightening:
You’re in trouble when this is the photo the Post runs …
“It’s just devastating to me to think about,” said Ardis Clark, 80, a retired dental assistant who has made the building at 4840 MacArthur Blvd. NW her home for 31 years.
The tenants learned that their apartment building had been sold and that their rights to buy their units had vanished. Their landlord had crafted the sale to avoid triggering a District [of Columbia] rent-control law that gives tenants the right to purchase their buildings.
Now they have united to regain what they lost and to avoid an uncertain future.
Exactly what have the tenants ‘lost’?
They occupy the same apartments, at precisely the same rent, as they had before. Indeed, that rent is a considerable bargain:
The city’s booming real estate market is creating opportunities for thousands, but many longtime renters say they are being battered by market forces, landlords and their attorneys and city regulators. At risk are their longtime apartments …
At risk of what? They cannot be evicted:
Tenants in the
Nor can the new owner jack the rents:
The Rental Housing Act of 1985 covers more than 60 percent of all rental housing in the District. According to this law, there are several ways a landlord can raise an apartment’s “rent ceiling” — the legal limit that can be charged for that unit. Often there is a yearly automatic rental increase based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Thus DC rent-controlled rents will rise not with demand, but with the earning power of what we will presume is a lower-income group — and, if I am reading the DC law correctly (link in PDF) not even DC workers, national averages. In short, this is a prescription for rents to lag inflation — as, obviously, they have done here — and lag them worse in a strong market (such as DC).
Rent control statutes thus give a slow windfall to residents lucky enough to be tenants in rent-controlled apartments — many of whom are in fact not low-income at all. Meanwhile, the same slow windfall creates a widening gap between rent-controlled rents and market rents, and usually pushes up market rents because it shrinks supply.
The residents of
John Hoskinson, one of the new owners, whose management company also took over maintenance of the building, said he asked the city for permission to do emergency repairs. The cost of the work would be passed on to the tenants, potentially increasing some rents by $370 a month, according to tenants.
So what exactly is ‘at risk’? Back to the Post:
The transaction means the loss of possible homeownership, a goal that is increasingly out of reach for many working-class and middle-class District residents.
‘Possible homeownership’? But this is rental housing. Ah, but the Washington DC rent control statute, like so many of them, has expanded its mandate, so that not only is there control over rents, but also it seeks to cripple the owner’s ability to sell the property, via:
A law that gives tenants the right of first refusal when their buildings are for sale.
So the buyer arranged to buy not the building but its ownership, and in stages:
In the sale of
Throw a boulder in a stream and the stream changes course to flow around it….
Landlords have sold hundreds of buildings using a so-called 95-5 transaction, which allows them to sell 95 percent of a building with the understanding that the other 5 percent will be transferred later. Such sales do not trigger the tenant-purchase option, city regulators say.
Even a brief examination of the District of Columbia Tenant Opportunity to Purchase Act (TOPA) reveals plenty of reason to avoid it if one can. Under TOPA, residents have a lengthy right to try to buy their apartments:
1. Owner sends an “offer of sale” that includes “the selling price and the material terms of the sale as well as specific representations, including representations that certain information will be provided to the tenant.”
2. The tenant has 30 days to provide a “written statement of interest.” Interest. Not commitment. Not offer. Not earnest money. Not demonstration of seriousness.
3. The tenant then has a minimum of 60 days to negotiate a contract. “The negotiation period is extended by one day for every day the owner delays in furnishing the tenant with the information the owner represented would be provided in the offer of sale.”
4. Then the resident has an additional 60 days to secure financing.
5. With another 30 days beyond that if the proposed lender says ‘it might take 90 days.’
Add it up: a minimum of 180 days (plus any delays, especially in responding to information-to-be-provided fishing expeditions) before the tenant has to do more than write a letter or take a meeting. Meanwhile:
If an owner contracts to sell the accommodation to a third party for a price that is more than 10% less than the price offered to the tenant or for other terms which would constitute bargaining without good faith, the owner shall issue a new offer of sale …
And the process starts all over again.
Pity the real third-party buyer, who knows it faces a minimum of 180 days to wait while the owner engages with the residents. A minimum of 180 days to hold financing together, to maintain investor interest, to worry about due diligence or physical condition. Obviously TOPA, if mandatory for all sales, would have an enormous chilling effect on normal real estate transactions.
Finally, if the tenant has declined or exhausted the “offer of sale” route and the owner later secures any purchase offer, then:
In addition to the rights outlined above, the tenant also has the right of first refusal to match any third party contract accepted for the sale of the accommodation. The Act requires that the owner provide the tenant with a copy of the third party contract. Upon receipt of a copy of the third party contract, the tenant has 15 days to match the third party contract.
All this is self-evidently — and, I would submit, by political design! — a recipe for protracted delays and “gotcha, you didn’t send me such-and-such” obstructive tactics. But we know tenants would never use those …
The new owners of 4840 MacArthur were unwilling to trigger the first-refusal right:
John Hoskinson, one of the new owners, said the deal was structured “to avoid having the property tied up for a long time” by first offering it to the tenants.
The sales arrangement outraged the tenants, and they filed a lawsuit against Hoskinson and the other partners in the deal, saying they should have had the first opportunity to purchase the building.
Marianne Hawk, a resident for more than 20 years, and other tenants have contributed $5,000 to a legal fund
What would it have taken to buy the building?
to win back their building
Whose building? Has it been lost?
or force a settlement with Hoskinson.
Force a settlement? A settlement of what?
“What we’re trying to do is correct an abuse of tenants’ rights, not just a legal technicality,” Graham said. “In effect, these landlords have repealed the tenants’ opportunity-to-purchase law.”
By now it’s clear that this case has nothing to do with apartments at risk — it’s a power play. At issue is, who owns the building’s economics?
Vincent Policy [What a great name! — Ed.], a lawyer with Greenstein DeLorme & Luchs, a firm that is involved in many of the 95-5 deals, said the procedure is legal and is used to speed up transactions and avoid small groups of tenants who use the law “to extort money [from owners] without any intent to buy the building.”
Rent control slowly distorts markets into unrecognizability. Indeed, the longer rent control lasts, the greater the resulting distortions, the more wealth is seepily transferred from owners to residents. This leads to a dysfunctional cycle of de-investment, and when the distortions become enormous, they drive the whole story, to the point where it is no longer about housing, but about how much the owner will pay the residents to leave:
“Our rights are being ignored,” said Giron, a bartender with three children, who said he wants the chance to either buy his apartment [NB this quote is from an entirely different building — Ed.] or receive a buyout.
Or receive a buyout.
