DATE: December 19, 2017 TO: FROM: SUBJECT: Ron Davis, City Manager Patrick Prescott, Community Development Director By: Simone McFarland, Assistant Community Development Director and Fred Ramirez, Assistant Community Development Director-Planning RENT CONTROL RECOMMENDATION Receive and file the Rent Control Report. BACKGROUND Recently there was a request by the City Council to evaluate the pros and cons of establishing rent control or a similar rent stabilization program as an option to regulating housing affordability for rental properties in the City of Burbank. Various communities throughout the State have used rent control by establishing caps on the amount that rents can be increased for a select number of rental dwelling units in the community. Unfortunately, this approach does not address the larger systemic problems that impact our community; lack of affordability and supply of housing. Burbank s problems have occurred due to a small amount of new housing units being built while jobs have increased significantly, creating a housing to jobs imbalance. In the last 5 years, Burbank has only provided approximately one new housing unit for every 57 new jobs created within the City. During this time period, the City Council was not prone to approve new projects and risk-adverse developers are not willing to gamble spending upfront money when there is not a high-possibility of entitlement approval. An additional result is rental prices have also increased during this time period by about 20% so that the average rental price in Burbank for all rental units is now a little more than $1,700. Within the Burbank Affordable Housing Analysis and Strategy presented to Council on July 11, 2017, it lists Burbank s average rent as approximately $3.21 per square foot with smaller units charging higher amounts and larger units costing a little less per square foot. Currently, approximately 59 percent of Burbank s residents are renters. 1 P a g e
The following sections: Discuss conditions affecting existing and prospective renters access to housing in Burbank; Summarize state laws governing rent control and rent stabilization programs; Outline general components that can be included in a rent control ordinance and stabilization program; Identify some of the pros and cons associated with rent control. Additionally, attached is a memo requested by the City Council addressing resources and assistance for renters. Overviews of legal limits applicable to rent control programs California has no statewide law controlling rents or rent increases. Each municipality is free to decide whether, and within certain limits, how to regulate residential rents. State law; however, imposes limits on the type of rent controls that a city may enact. When any ordinance is adopted, the City should have a legitimate interest to regulate rents. In the case of rent control ordinances, cities with rent control/rent stabilization programs have made factual findings reasonably related to addressing excessive rents, identifying a shortage of decent and safe housing, right to non-discrimination of tenants, and maintaining the availability of existing housing that is resulting in tenant displacement while at the same time providing landlords with just and reasonable return on their properties. Rent control ordinances are subject to compliance with the provisions of the Costa Hawkins Rental Housing Act of 1995 and the Ellis Act of 1986. Costa Hawkins Rental Housing Act. The Costa-Hawkins (California Civil Code Section 1954.50-1954.535) (AB1164, Chapter 331, Statutes of 1995) Rental Housing Act ( Costa-Hawkins ) was passed by the State Legislature in 1995. Costa-Hawkins includes the following provisions: Housing with a Certificate of Occupancy after February 1, 1995 must be exempt from local rent controls (Civil Code 1954.52(a)(1). New housing that was already exempt from a local rent control law in place before February 1, 1995, must remain exempt (Civil Code 1954.52(a)(2)) (The City does not have any units that fall under this exemption). Single family homes and other units like condominiums that are separate from the title to any other dwelling units must be exempt from local rent controls (Civil Code Section 1954.52(a)(3)(a)). Rental property owners must have the ability to establish their own rental rates when dwelling units change lawful occupancy (Civil Code Sections 1954.53 (d)(2) and (d)(3), et seq.). 2 P a g e
Ellis Act. The Ellis Act ( Ellis Act ) (California Government Code 7060-7060.7) (SB 505 Chapter, Chapter 1509, Statutes of 1986) was passed by the State Legislature in 1986. The Ellis Act gives landlords the right to withdraw their property from the rental market by repurposing their property for some other use (e.g. condos, hotels, dirt lots, etc.) or for demolition, (Government Code Section 7060 et. seq.).the Ellis Act was enacted to overrule a California Supreme Court case upholding a Santa Monica ordinance that required a removal permit before a landlord could evict tenants, and in order to obtain that permit, the landlord was required to show it no longer could earn a reasonable rate of return on the investment. Under the Ellis Act, if a City has rent control, then the City may adopt an ordinance that limits a landlord's right to remove a rent control unit from the market and then re-enter the rental market within 5 years. There are also other procedural safeguards that a City with rent control may adopt to further protect rent control units. At the same time, the Ellis Act allows local government to mitigate any adverse impact on persons displaced by reason of the withdrawal of a unit from the market. Any such mitigations measure; however, are subject to preemption challenge. For example, the courts have upheld reasonable relocation payments but have found that forcing a landlord to pay the delta of the increase in rental rates for a period of time violates the Act. Furthermore, the Ellis Act does not effect a city's land use powers. Aggregate Effects of the Costa-Hawkins and the Ellis Act. Taken as a whole, the Costa Hawkins and the Ellis Act severely limit the scope and efficacy of a local rent control ordinance. The former, known to some as the Anti-Rent Control Act, drastically reduces the number of units subject to local rent control and allows landlords to reset rents to a more lucrative market rate upon a vacancy (i.e. vacancy decontrol ), preempting local rent restrictions. The latter essentially has incentivized landlords to take thousands of rent-controlled units off the market in favor of converting to non-rentrestricted uses. Cities clearly have the legal power to adopt rent controls for housing issued at certificate of Occupancy (CofO) before February 1, 1995; however, this area remains active with litigation. AB1505. On September 29, 2017, the California Governor signed an extensive housing reform bill package that included 15 housing bills. One of these, AB1505, allows the return of inclusionary housing, overturning a prior 2009 appellate court ruling in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles. This new bill authorizes (but does not mandate) local governments to require, as a condition of residential, rental home development that new rental housing projects include a specified percentage of affordable units for moderate, low, very-low and extremely-low income households. To achieve this Burbank would need to provide for alternate means of compliance, including in-lieu fees, land dedication, offsite construction, and/or acquisition and rehabilitation of existing housing units. 3 P a g e
The bill also gives the State Housing and Community Development Department the authority to review inclusionary ordinances approved after September 15, 2017, that require more than 15% moderate, low, very-low and extremely low income housing in localities that have met less than three-fourths of their regional, fair share of housing, and to require an economic feasibility study to support that their ordinance, If the ordinance is found to unduly inhibit development, the State can mandate a reduction to below 15% of required inclusionary housing. Burbank s Inclusionary Unit Requirement, (code section 10-1-646), states that At least 15 percent of all newly constructed dwelling units in Residential Developments shall be developed, offered to and sold or rented to Very Low, Low and Moderate Income Households. For rental projects, a minimum of five percent of units in the total Residential Development shall be Very Low Income; the remaining ten percent of the units shall be Low Income. Additionally, it allows inclusionary credits thereby, affording a reduction in the number of units if the developer builds additional units at a lower income level. Recently, the City has negotiated affordable housing requirements through the Developer Agreement (DA) process. This has been the preferred choice for both the City and the developer as it allows for the City to negotiate additional amenities such as open spaces, tree-lined streets, sound walls and inclusionary housing requirements. It is suggested that based on the implementation of AB1505 and the fact that Burbank has not met our 75% of our Regional Housing Needs Allocation (RHNA) numbers, Council revisit this ordinance during a future City Council meeting, considering the requirement percentages along with allowing moderate housing requirements to be included and possibly offering the additional option of negotiating units through the DA process. DISCUSSION Arguments in Favor of Rent Control Rent control or rent stabilization programs regulate the amount of rent a landlord can charge their tenants during specified period of time (typically per calendar year) with defined limits on future rent increases. Ordinances vary widely. Many local ordinances tie the amount of future monthly payment increases to a base rent amount at which the rental unit was first rented; future rent increases are typically a maximum allowable percentage increase per year above the base rent initially and then a similar prescribed percentage increase for every year thereafter. See Exhibit A. Year Monthly Rent 1 $1,000 2 $1,030 3 $1,061 4 $1,093 Exhibit A 5 $1,126 If the tenant moves out, the unit s rent is then reset by the landlord to a new base rent that can be any amount including current market rate rent; and the regulated rent increases begin again. See Exhibit B below. Cities with rent control or rent stabilization programs have specific regulatory provisions requiring reporting by landlords of base rents and then proposed rent increases 4 P a g e
thereafter. The number of units that fall within the rent control/rent stabilization program will determine the amount of city personnel and cost to administer and enforce the program. Exhibit B Year Monthly Rent Notes 1 $1,000 Beginning market rate 2 $1,030 3 $1,061 4 $1,093 Renter moves out 1 $1,500 New market rate; resets to year 1 2 $1,545 3 $1,591 Some of the positive effects of rent control is that it initially caps the rental prices and allows for small increases of rent annually that are intended to reduce the impact to renters who may have otherwise seen large increases solely at the discretion of the landlord. These benefits are specific to the units that fall under the adopted rent control provisions, subject to the previously noted state regulations. Typically rent control also provides specific provisions dealing with illegal (unjust) evictions that safeguard renters who are paying their rent on time and abiding by the terms of their lease. Additionally, some regulations adopted by other municipalities have included relocation assistance for renters that are displaced when units are being rehabilitated, removed from the renter rolls and/or converted into condominium units. Many rent control or rent stabilization ordinances include a rent control committee or similar oversight body. They sets the regulated annual rent increases and review tenant complaints. Most ordinances provide landlords with rights to increase rents to varying degrees when the number of tenants increase or improvements to the units are needed to address life, safety and/or housing quality standards. These requests for rent increases are normally reviewed by the rent Positive Aspects of Rent Control control committee. Additionally, rent control ordinances or rent stabilization programs may include provisions that guide the process to when dwellings change from rental units to ownership units, and what happens when rent control of those units is discontinued. These regulations can include things such as requirements outlining what is a justified eviction, what is an unjustified eviction, and what, if any, moving/relocation costs the owner would be responsible for in the eviction of an existing tenant. In Burbank, there are approximately 22,647 multi-family units and 12,231 of these were built after 1995 leaving 10,416 units that could potentially be subject to rent control. Caps rents Controls increases Reinforces financial remedies for illegal evictions Can require relocation assistance 5 P a g e
Concerns Regarding Rent Control When compounded with the lack of affordable rental housing supply, the limited rent increases allowed under rent control or rent stabilization programs can have the effect of causing people to stay in their units regardless of changes in their family makeup and can sometimes lead to units becoming overcrowded. Consequently, overcrowded units lead to additional use and wear and tear, which in turn can lead to deteriorated rental housing stock. Additionally, illegal subleasing of units may occur as primary leaseholders move and find another person to sublease in an effort to maintain the rent controlled price. Rent control doesn t always help the person(s) it is intended to assist. Someone who can today afford to pay $1,700 a month may be able to afford twice that in 10 years but may choose to stay in a rent controlled apartment; thereby, not opening up the opportunity for a new person to benefit from the rent control program. Lastly, landlords are not encouraged to make improvements to their buildings while they are receiving lower rents that do not offset improvements costs and still require that they obtain approval of a committee or board. Concerns Regarding Rent Control After implementation, the City would then have to enforce the restrictions by expanding staffing for both enforcement and administration, which result in the need to hire additional staff. This can be very costly. Currently, the City s Section 8 Housing team consists of six (6) full-time employees to monitor and enforce regulations for 961 vouchers. Using this number as a guide, in Burbank, to monitor 10,416 potential rent-control units could require a very large staff. When staff compared rent control administration as the per unit cost for the cities of Santa Monica ($182 per unit), West Hollywood ($214 per unit), and Beverly Hills ($214 per unit), the result was an average cost per unit of $203 to administer the programs. Applying this average cost per unit to the 10,416 potentially eligible rent control units in the City of Burbank would result in an annual operating budget of approximately $2.1 million to administer a similar rent control program. Additionally, the table below shows Northern California cities who have enacted rent control and just-cause eviction programs and their associated fees and budgets for enforcement. Applies to apartments with two or more units Does not include units built after 1995 Incentivizes people to say in apartments longer May increase overcrowding Encourages Illegal subleasing Can cause deteriorating housing stock Limits availability of rent controlled housing for new tenants Does not encourage structural improvements by landlords. Requires additional enforcement and administration 6 P a g e
Source: City of Fremont Rent Control and Just-Cause Eviction: Review of Programs Report: June 2017; Annual budget documents, city websites and program reports. 1 The City of Alameda information represents an estimated amount as the program has just recently been approved; however, the fee has not yet been adopted. 2 The City of East Palo Alto budget includes $206,000 City overhead charges. 3 The City of Hayward includes various conditions that allow rent increases greater than 5%, including rent carry overs. Cost is based on 80% program recovery. A total of 20% is funded by the General Fund and 3,000 units are subject to the rent control portion of the program. 4 The City of Santa Rosa program fee was adopted on August 30, 2016 based on program cost and fee estimates. The Santa Rosa and Alameda programs were selected in part because they have just recently been adopted and include one time costs anticipated in program start up. The Santa Rosa program no longer exists because it was rejected by voters in a special election on June 6, 2017. Revenue from annual registration and/or inspection fees for units that fall within the oversight of a rent control/rent stabilization program could help to offset a portion of staff s time to administer and oversee program compliance pursuant to the rent control regulations; however, the implementation of a registration fee and charges for inspections are unlikely to cover all the expenses and regulatory oversight needed to enforce rent control. Additionally, a possible dispute fee for those filing for unjust eviction review would need to be set low enough to not discourage renters from filing potential disputes. Relocation costs. As part of rent control (or perhaps in conjunction with a just cause eviction ordinance), City ordinances may include relocation assistance related to evictions; although, these may also be enacted without mandating rent control. Specific findings must still justify the proposed regulation. The City of Pasadena has enacted Tenant Protection (Exhibit B) that includes a relocation allowance for households that are at or below 140% of the median income for Los Angeles County or if the owner is converting rental units into condominiums - if the tenant is required to leave due to demolition, government order to vacate or permanent removal of a unit from the rental market. The relocation allowance is equal to two (2) months fair market rent as established by the U.S. Department of Housing and Urban Development (HUD). In addition to the relocation allowance, a landlord must also pay the tenant a moving expense allowance in the amount of $1,120 for adult households or $3,364 for households with dependents, disabled or senior members. Exceptions apply and modifications were made to the Ordinance earlier this year to update tenant 7 P a g e
protections, and clarify other provisions. These stand-alone ordinances pose challenges that adequate study and careful drafting might overcome. More recently, there has been a movement to require relocation fees when landlords increase rents more than a specified amount in one year. In Portland, the city mandated in February 2017 a relocation fee be paid to renters who moved out due to a rent increase of more than 10% per year that ranges between $2,900 to $4,500 depending upon the number of bedrooms. This ordinance is currently being challenged in court. The City of San Leandro has also enacted a similar ordinance in October 2017 that requires relocation fees of up to $7,000 if rents are increased more than 12% in one year. Note: the City has a relocation law that applies whenever someone converts apartments into condominiums. The landlord is required to apply for an Administrative Use Permit along with paying a relocation amount of $2,500 for each unit. (http://www.codepublishing.com/ca/burbank/mobile/?pg=burbank10/burbank100106.html#10-1-661) Alternative Approach (Affordability Covenants) Other options to traditional rent control exists. The Burbank City Council has sought to increase the number and range of housing units available to Burbank residents and City workforce through the negotiation process. In the case of the First Street Village Mixed-Use Project, the Council negotiated and the developer agreed to provide a community benefit to obtain development concessions, and included 14 deed-restricted micro units that were affordable to qualifying moderate-income households. These negotiated units (provided by the developer as part of development concessions for the project) not only facilitated a mixed-use project, but they had the effect of still limiting the rental prices and potential increases for the term of the Affordability Covenants affordability covenant. These deed-restricted micro units are to remain affordable to qualifying moderate-income households for a term of 30 years. An added benefit is that the covenant continues with the unit for the 30-year term and does not change as the tenants move in and out. The covenants for First Street Village require the starting rent to be at $3/square foot, and limit increases to two percent per year for a term of 30 years. The approach of working with prospective developers through development agreements to provide community benefits, which may include amongst other things developer contribution of deed restricted affordable units, as part of the proposed project, is one way that the City can increase the number of new affordable housing units in the community. Alternatively, the development agreement can also provide an opportunity for developers to propose off-site deed restricted affordable units (affordable to low and moderate income households) for a term equal to or greater than required under the First Street Deed restricted Limits rental prices Can contain income-level qualifications Sets beginning rental prices Allows controlled rental increases Sets time periods for enforcement 8 P a g e
Village Project example. This approach has the potential to keep qualifying low- and/or moderate-income households in older deed restricted units. In the short term, additional analysis is needed to determine the appropriate in-lieu ratio that should be applied when a developer proposes to provide off-site units versus new on-site units (e.g., developer to provide two (2) deed restricted off-site units in existing housing, versus one (1) new onsite deed restricted affordable unit). In the long term, City staff will be evaluating zoning regulations applicable to new housing projects to ensure ongoing compliance with General Plan policies seeking to facilitate new housing units at all income levels, as well as opportunities to facilitate density bonus through infill development projects that are in compliance with local and state density bonus regulations. CONCLUSION It must be stressed that many experts agree that rent control regulations have no impact on increasing the amount of affordable housing (and clearly some economists feel that it hurts affordable renters by driving up the price of housing due to a decreased supply). In a 1992 poll of the American Economic Association, 93% of its members agreed that a ceiling on rents reduces the quality and quantity of housing (Paul Krugman, NYT article, June 7, 2000). Some renters within Burbank s eligible 10,416 units that could fall under a rent control program may get some temporary relief, but the majority of the people seeking access to affordable units will find it difficult to find one, especially when there is no incentive for existing renters to move out of a rent-controlled unit even when they can afford higher rents. Rent control limits the incentive for housing mobility. In other words, there is a builtin incentive to stay in a rent-controlled unit even if a person needs additional space because the increase in rent might be substantial for a larger, new non-rent controlled unit. Under this scenario, you can have families that are looking for a place to live and cannot find adequate-sized and affordable housing. Under rent control, developers have less incentive to build new housing or enter the market to renovate existing housing if the potential to recoup their investment is capped under rent control. The risk is still great while the reward is limited. The result is that rent control can drive up the price of most rents by restricting the supply of new units being built and therefore, spur greater competition for the remaining units. Implementation of a rent control ordinance or rent stabilization program will create the need to expand the bureaucracy needed to administer and enforce the program resulting in greater costs for the City. Fees may not be enough to recover the total administrative and enforcement costs for program implementation. At a time when budgetary constraints have the potential to affect service delivery to residents, the City Council would need to consider the tradeoffs between operation and maintenance of a rent control or rent stabilization program and other unfunded community services or infrastructure needs. It is staff s assessment that a solution to increasing the affordability of housing is to increase the supply of housing and not focusing on rent control. 9 P a g e
Instead, the City s focus could be on building more housing and adding supply to lower demand and rent prices, along with creating incentives through the entitlement process for developers to build more housing in the appropriate places within the city while still protecting existing neighborhoods. The previously noted First Street Village Mixed-Use Project is a good example. In this project, the city negotiated new deed-restricted housing units as community benefits in exchange for a planned development. The planned development allowed for reduced development standards than would otherwise apply under the prior zoning regulations, which resulted in reduced setbacks and parking standards while still producing a well-designed and aesthetically pleasing project. The negotiated concessions allowed the project not only pencil out but also create an opportunity to turn a profit. In combination with this approach, the City should consider ways of expediting and streamlining its housing construction processes. This can be accomplished by establishing a set of uniform regulations (i.e., mixed-use development standards) that facilitate by-right development projects (that meet City standards), and create financial incentives for new projects that include affordable housing units whether through a density bonus and/or approval of a planned development with consideration of a negotiated development agreement. Furthermore, the City should lobby the State to provide more funding for affordable housing that goes beyond just extremely low and low-income households. The State could facilitate moderate-income, mixed income projects as well as workforce housing to address the housing to job imbalance that affects Burbank and other communities throughout the State. FISCAL IMPACT No Impact RECOMMENDATION Receive and file the Rent Control report. EXHIBITS Exhibit A: Resources and Assistance for Renters memo dated 10/17/17 Exhibit B: City of Pasadena Tenant Protection Fact Sheet 7/01/10 10 P a g e