Economics

Regulation: Rending Rent Control

An earthquake shakes the practice to its foundations.

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Carl Lambert got off relatively easy. In the wake of the massive 6.6 earthquake, only one of his 12 apartment buildings was condemned. The quake rocked the 15-unit complex clean off its foundation, buckling the exterior walls like so much Sheetrock. "I don't know if I'll rebuild," says Lambert, a Santa Monica real-estate broker and past president of ACTION, a property-owners' rights group. "I do know that I won't be able to get loans if I can't show that I'll be able to pay them back."

In human terms, the January 17 earthquake–the most destructive in over 20 years–staggered Southern California: over 60 people dead, thousands more injured, 20,000 displaced. The physical wreckage was similarly the stuff of nightmares: collapsed freeways, gas-line eruptions, toppled buildings. Estimated costs of the quake range from $10 billion to $30 billion. In Santa Monica alone, over 250 buildings, including two major hospitals, were severely damaged. Eventually, city inspectors "red-tagged"–evacuated and sealed off–more than 100 buildings.

The extensive property damage in Santa Monica illustrates one of the underlying problems of heavily rent-controlled housing markets: Why should landlords bother to repair or rebuild properties rented out at below-market levels? After building inspectors condemned an estimated 3,100 of the city's 28,000 rental units as uninhabitable, it became clear landlords could not afford to fix their buildings if they could not recoup repair costs through higher rents. Otherwise, they wouldn't be able to secure loans from FEMA, the Small Business Administration, or private sources.

The squeeze isn't just on landlords seeking reimbursement and displaced tenants seeking shelter, however. Rent-control advocates, who dominate the city's Rent Board and traditionally hold a slim advantage in local elections, realized that, perhaps even more than the landlords, they needed to back measures that would expedite repairs. After all, if the 3,100 apartments–housing 4,000 to 5,000 voters–remained uninhabitable or were ultimately destroyed, their electoral plurality would disappear along with the units. To maintain the housing stock would necessitate their enacting the thing they most vehemently oppose: rent hikes.

"The earthquake has been a nightmare for tenants and landlords both," says Lambert, who has tried to put displaced tenants into vacancies in his other buildings. By underscoring the anti-market economics of rent control and its inability to maintain or increase housing stock, the current crisis may prove to be a wake-up call for a city that is jokingly referred to (by supporters and detractors alike) as the "People's Republic of Santa Monica."

"There will be rent increases," Santa Monica Rent Board member Lisa Monk Borrino told the Los Angeles Times a few days after the quake. "It's naive to think there won't be."

Santa Monica implemented rent control in 1979, after Campaign for Economic Democracy, a group led by Tom Hayden and partly financed by Jane Fonda, won control of city hall and created a governing body responsible for setting maximum annual rent increases. Newly constructed apartment buildings are exempt from controls. But rents in residential buildings built before the law are based on what was charged in April 1978, plus annual adjustments characterized by urban designer and critic Sam Hall Kaplan as "miserly" (in recent years, they have averaged between 3 percent and 4 percent). Rents in Santa Monica are estimated to be 30 percent to 50 percent below market value.

The rent controls are complemented by zoning policies that also undermine market forces. The town's comprehensive land-use ordinances operate on a principle of continuous "down-zoning," meaning that demolished structures typically can be replaced only by much smaller ones. If a 50-unit complex is destroyed, for example, the owner may only be allowed to rebuild 10 units. Furthermore, due to "Proposition R," 25 percent of all newly constructed housing–rental or otherwise–must be made available to low-income residents at below-market rates. That subsidy typically shows up as higher prices for other units, which in turn discourages building in the first place.

Although Santa Monica's rent-control and zoning policies were passed in the name of preserving economic and social diversity, they have, in fact, produced the opposite result. According to a study by economist Michael St. John, head of a Berkeley-based consulting firm, from 1980 to 1990 Santa Monica lost 2,443 rental units and saw a 10-percent decrease in the number of renters. At the same time, the percentage of low-income households dropped 3 percent, despite a 5-percent increase in Southern California. When contrasted with similarly sized cities and surrounding Los Angeles County, Santa Monica experienced disproportional decreases in precisely the populations targeted for "protection" by rent control–the elderly, the handicapped, single-parent households, the less educated, the working poor. St. John concludes that, at best, rent control has failed to maintain or increase diversity in Santa Monica. At worst, it has been a primary cause of the city's growing affluence and increased exclusivity.

St. John's conclusions are echoed by City Council Member Asha Greenberg. "People talk about the need for `affordable housing' in Santa Monica," she says. "We've got plenty of affordable housing. We also tend to be more single, white, and affluent than the surrounding communities. It's time to rethink rent control."

Ten days after the quake, the Rent Board met and decided, if not to rethink rent control, at least to temporarily reinvent it. The board OK'd a "pass-through" plan that would allow landlords to raise rents to cover repair costs on a dollar-for-dollar basis, amortizing the increases over a number of years.

Many of the damaged buildings will need to be virtually gutted and rebuilt. In one potentially repairable property managed by Lambert, for instance, the interior walls crumble to the touch, doors no longer fit their jambs, and floors dip and sag under the slightest weight. Sunlight streams in from cracked outside walls, and windows are boarded to prevent glass from falling to the street.

The Rent Board's plan allows different schedules for different repairs. Minor work, such as painting and carpeting replacement, might be amortized over five years, while some bigger-ticket projects, such as repiping and fire-sprinkler repair, could be spread over up to 20 years. While the amortization schedule builds on one already on the books, the plan claims to loosen up the repair approval process.

In other words, the plan resembles something missing in Santa Monica for the past 15 years: a market in which landlords can recoup repair costs by adjusting rents. While it remains to be seen exactly how the plan will be administered, its basic idea received high marks from Charles Isham, executive vice president of the Apartment Association of Greater Los Angeles, a group representing 1,500 landlords in Santa Monica. "If you have a mortgage to pay, you want to keep it going," says Isham. "This will help."

What to do with the more than 100 apartment buildings damaged beyond repair is a thornier issue. Santa Monica's byzantine zoning ordinances don't allow much room for improvisation.

Because most rental complexes are on down-zoned lots, they cannot simply be rebuilt as they were. Santa Monica Mayor Judy Abdo, who sees rent control as "the most effective way of maintaining affordable housing" and wants to save as many rental units as possible, says the earthquake will lead to some zoning changes. But it is unlikely the revisions will include letting owners rebuild what was standing before the quake. So there will likely be fewer rental units available when all the building is completed. And any new units will not be subject to rent control.

There's a good chance that some lots will remain vacant. If Lambert's 15-unit complex is torn down, he says, the current down-zoning for his lot allows him to build six condominiums on the property. Because Propositon R has a "rounding-up" mechanism, that means that two of them would be slated for low-income residents. Covering the costs on the two units, however, would price the other units out of the market. Given his options, it might be easier to leave the property fallow.

Will the earthquake's political aftershocks undermine Santa Monica's rent-control policies in the long run? Council Member Greenberg is optimistic, but she isn't placing any bets. "Although the quake at first brought everyone together, it has also unleashed hostility and anger and resentment all around," she says.

Whatever happens will depend in large part on how the Rent Board navigates between the need to compensate landlords and the desire to minimize rent increases. Those are hazardous waters at best.

"The rent-controllers usually win elections by 3,000 to 4,000 votes," says AAGLA's Isham, "so they're really in trouble." Isham figures that 500 to 1,000 apartments will go unrepaired, a loss that significantly eats into rent-control advocates' slim margin of victory. Rich Seeley, a columnist for The Outlook, a Santa Monica newspaper, predicts the reverberations will continue at least through next fall's elections. In a February 1 column, he writes, "How eager will landlords be to help [Santa Monicans for Renters Rights] ensure that tenants get to stay in the city?…How far can SMRR go to make nice with landlords before it starts alienating renters?"

If the recent upheaval showcases the inability of rent control to respond to market forces and its effects on the replacement of housing stock, then something positive may be pulled from the rubble of the January 17 earthquake. No one predicts Santa Monica will abolish its draconian rent-control and land-use ordinances any time soon. But the quake has, however fleetingly, forced a city known for denying market forces into acknowledging their existence.

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