Los Angeles politicians' plan to preserve affordable housing might just end developers' incentive to ever build more of the stuff in the city.
Last week, the Los Angeles City Council passed a resolution directing city agencies to explore options for freezing rents at privately owned buildings with expiring affordability covenants. These covenants require building owners to keep their rents at below-market rates for a specified period of time, typically 30 to 55 years, in exchange for various government subsidies—including tax credits, low-interest loans, and relief from zoning restrictions.
Covenants covering thousands of these units are set to expire within the next few years, allowing landlords to raise rents to market rate. Lower-income tenants benefiting from affordability restrictions could be faced with unaffordable rent increases.
A 2017 city report found that there were 11,771 affordable units in the city of Los Angeles at risk of being converted to market-rate rents by the end of 2021. A 2020 report from the California Housing Partnership found a smaller 11,241 rent-restricted units in the whole of Los Angeles County were at risk of expiring within the next ten years.
"Many covenants are now reaching an expiration date, which would effectively remove the affordability requirements, and allow an owner to raise rents," said Councilmember Gil Cedillo, who authored the motion, reports the Commercial Observer. "We can't let this happen, especially during the time of a health pandemic, because we can't create any opportunity for any resident to be unable to afford to stay in their own home."
His motion, citing the specter of 300 percent rent increases for some tenants, calls on the city attorney and the Los Angeles Housing and Community Investment Department (HCIDLA) to report on recommendations for implementing a rent freeze at units with expired or soon-to-expire affordability covenants.
A rent freeze would be a pretty radical move, particularly when compared to other policies people have floated to preserve affordability covenants. That California Housing Partnership report recommended more subsidies and tax credits to preserve affordable units.
HCIDLA has proposed forgiving building owners' debt they owe the city in exchange for extending affordability covenants, or, in the case of debt-free buildings, subsidizing owners for forgoing market-rate rents.
All those ideas involve compensating property owners for voluntarily keeping their rents low. Cedillo's proposal would require them to eat the entire cost of maintaining below-market-rate rents.
That would be a huge disincentive for anyone to ever participate in future affordable housing programs, says Dan Yukelson, executive director of the Apartment Association of Greater Los Angeles.
"We need affordable housing. We need to build more of it," Yukelson tells Reason. "This would just be a complete discouragement to develop more affordable housing if the city is literally at the end of these contracts pulling the rug out from under these people who agreed to take less rent for all these years."
This would be particularly true, says Yukelson, for any rent freeze enacted at the city level. Developers could easily forgo projects in Los Angeles proper and instead build in Santa Monica, Long Beach, or any other community in the L.A. metro area that isn't as dead set on forbidding the eventual conversion of units to market-rate rents.
Given that private, for-profit developers build the bulk of affordable housing in America—of the top 50 affordable housing developers identified by Affordable Housing Finance in 2019, 38 were for-profit entities—Los Angeles could well see almost all affordable housing development disappear.
In addition to the practical implications, there's also a question of whether Cedillo's proposed rent freeze would even be legal.
"On the face of it, it looks like this whole thing would be illegal. The city would unilaterally be changing some contracts they have in place," says Yukelson. "We'll see what the city attorney comes back with, but as a non-lawyer I am guessing they are going to find this very difficult to do."
California's rent control law, which limits rent increases to 5 percent plus inflation, doesn't apply to expiring affordable covenants.
Cedillo's motion directs HCIDLA and the city attorney to come up with recommendations for implementing a rent freeze based on "health and safety findings regarding undue tenant displacement during the COVID-19 pandemic."
It's possible that a public health justification could save a rent freeze from the legal challenges that such a policy might normally attract.
Eviction moratoriums—an extraordinary policy that also interferes with landlords' normal property rights—have been imposed by governments, and in some cases upheld by courts, on the grounds that they're needed to protect public health during the pandemic.
However, the pandemic doesn't give the city a carte blanche to do whatever it wants.
Cedillo's effort to fund the seizure of a 124-unit apartment building with an expired covenant using COVID-19 relief funds was shot down by city staff on the grounds that the councilmember's efforts to take over the building predated the pandemic. That was in spite of Cedillo arguing that the impact of the pandemic justified the use of relief funds.
Even if Los Angeles does manage to freeze rents of currently affordable units, it will be a temporary fix for a small number of the city's tenants. Market-rate rents these renters could be exposed to are so high because of how difficult the city makes building new units that would bring prices down.
Instead of trying to preserve the existing stock of publicly subsidized affordable housing, policy makers could repeal the reams of red tape that effectively prohibit private developers from building the affordable housing of tomorrow.