The $91 Million Fight to Reconsider Rent Control in California
(Bloomberg) -- California real estate developer Bob Champion did something last year that he says put other builders “in a tizzy”: He agreed to impose rent control on new apartments he’s planning in Hollywood.
The project calls for tearing down an existing apartment complex to make way for a new residential tower, hotel, shops and restaurants a block from the Capitol Records building. Tenants organized against it, so Champion made a bold gesture to win over opponents. In addition to putting the whole development under rent control, he agreed to help defray costs for displaced residents during construction and let them return to the new property at their previous rents. It was -- as one tenant told a real estate blog last November -- “frankly beyond our expectations.”
“I felt I needed to make a dramatic enough statement to get political support,” Champion said in a recent interview. He was also making a calculated decision about future regulation. Rent control -- long prohibited on newer buildings in California -- was likely to be allowed sooner rather than later, he said.
Next month, voters in the most populous U.S. state will consider a ballot measure that would usher in that change. Backers of Proposition 10 are seeking to give cities from Los Angeles to San Francisco new tools to address a widening housing crisis. The measure would eliminate a 1995 state law, the Costa-Hawkins Rental Housing Act, that has long crimped local officials’ ability to limit how much rents in newer buildings rise annually and whether they can be reset when a tenant vacates a unit. Big landlords including Essex Property Trust Inc. and Equity Residential have poured in money to defeat the effort.
No other state faces a housing shortage as deep and wide as California. Fees, regulations and delays have pushed building costs to among the highest in the nation, and the state adds far fewer new units than it needs each year to meet demand. As a result, median home prices have doubled in since 2011, to almost $600,000. Two in five households in the state are considered “cost-burdened,” paying more than 30 percent of their income on housing. Homelessness is surging.
The situation has prompted sharp debate over what to do and dovetailed with a renewed national conversation over how best to help renters at a time when housing costs have skyrocketed and wages remain stagnant. In addition to Prop 10, California voters will also get a chance to weigh in on whether to borrow more money to build affordable and supportive housing.
The rent-control measure, however, has proven to be especially contentious -- and a magnet for political donations from companies with a vested interest in keeping rent control limited. Publicly traded real estate investment trusts and other landlords have helped raise $65.7 million for groups that aim to defeat Prop 10. Companies affiliated with Blackstone Group LP have given more than $5 million to the effort.
“We agree steps should be taken to address housing affordability in California, but virtually all independent economists agree this measure exacerbates California’s existing shortage by discouraging new construction and reducing new investment in affordable housing,” said Matt Anderson, a Blackstone spokesman, adding that Blackstone’s portfolio companies have an obligation to protect shareholders.
“Yes, rents are expensive, but this is going to make matters worse,” said Steve Maviglio, a spokesman for the “no” campaign. Approving Prop 10 would stymie new building and be like “pouring gasoline on the fire that is the housing crisis.”
Proponents of the measure had raised $25.6 million. Almost all that came from the AIDS Healthcare Foundation, a nonprofit run by Michael Weinstein that bankrolled a previous, unsuccessful effort to curb development in Los Angeles. They argue that repealing Costa-Hawkins simply gives local governments more flexibility.
“We’re not suggesting that every single community needs to have a rent-control law on the books by Nov. 7, but that option should at least be available,” said Charly Norton, a spokeswoman for the Yes on 10 campaign. “What works in Modesto may not work in L.A.”
Besides, California apartment landlords have been able to enjoy decades of rent increases that have outstripped inflation, said Zev Yaroslavsky, director of the Los Angeles Initiative at the UCLA Luskin School of Public Affairs, who helped pass a rent-control ordinance when he was a city council member in the 1970s.
“Something has to be done” to address housing affordability in the state, he said. “This is a human crisis of unprecedented proportions.”
The measure has divided prominent Democrats in the state. Los Angeles Mayor Eric Garcetti supports it. But Lieutenant Governor Gavin Newsom, who’s leading the race to replace Governor Jerry Brown, has opposed it, saying he’d rather see reforms to Costa-Hawkins.
Economists have generally agreed that rent control is a disincentive to provide more affordable housing. Research from the 1970s onward shows that the policy “results in lost construction,” said Chris Mayer, a professor at Columbia University. “It results in a lack of investment for existing units because there’s not return on that. And it creates a world of haves and have-nots.”
But the extreme situation in California and elsewhere has prompted some academics to take another look at ways to keep low-income households from being priced out of their homes. Rent control is a “blunt tool” to keep people from being displaced, said Rebecca Diamond, an economist at Stanford University. A more effective approach would be providing neighborhood-based tax credits to help people insure against rising rents, she said.
Voters appear poised to keep Costa-Hawkins intact. Forty-eight percent of people likely to participate in the November election said they’d oppose the measure, compared with 36 percent who say they’d support it, according to a September poll conducted by the Public Policy Institute of California. However, a more general question about whether rent control by local governments was a “good thing” earned far more support.
Even Champion, the landlord who embraced rent control to get his project approved, is worried by Prop 10 and has personally given money to defeat it. He’s especially concerned about the potential for cities to curb how much landlords can raise prices when tenants vacate a unit. If the measure passes, he said he’d turn his Hollywood development -- which is supposed to break ground next year -- into condos, rather than rent-controlled rental units. He’d also table any future apartment developments in the state.
If Prop 10 fails, Weinstein from the AIDS Healthcare Foundation has vowed to put another measure on the ballot to repeal Costa-Hawkins, possibly in 2020. An approach that still allows landlords to boost rents when a tenant leaves a unit could also crop up in the legislature, Champion said.
“Developers wouldn’t be happy” if something like that passed, he added. “But they’d live with it.”
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