HomeMy WebLinkAbout1979-07-03; City Council; 5908; General Plan Policies/Condominiums.CITY OF CARLSBAD
• ' Initial
AGENDA BILL NO: <$ / O f? ' Dept. Hd.
DATE: July 3, 1979 •
Cty. Mgr.
DEPARTMENT: City Manager
SUBJECT:
GENERAL PLAN POLICIES/CONDOMINIUMS
Statement of the Matter
Councilman Skotnicki has requested that the City Council consider adopting
policies in the General Plan relative to the conversion of condominiums. '-
Present law allows the establishment of condominium development standards
or conversion standards, as we have done in our Zoning Ordinance. . If how-
ever, the City wishes to control the number of condominium conversions, it
will be necessary to adopt specific policies in the General Plan.
These changes can be accommodated in the current Housing Element review.
The scope of work of the contract with our Housing Element consultant,
Peggy Goldstein, is sufficiently broad to include this matter. In fact
Ms. Goldstein is the principal author of the CPO report and therefore is
familiar with the issues.
Exhibit • .
CPO Study . '
Recommendation ••'•••
If the Council wishes to consider General Plan policies for controlling
the number of condo conversions, they may wish to refer the. matter to the
City's General Plan Housing Element Consultant for consideration as part
of the General Plan Housing Element revision.
Council Action
7-3-79: A motion was made to direct staff to follow th.e recommendation
outlined above.
THE MOTION FAILED FOR LACK OF MAJORITY
COMPREHENSIVE
PLANNING ORGANIZATION June 7, 1979
Suite 524, Security Pacific Plaza
1200 Third Avenue
San Diego, California 92101
(714)236-5300
TO: Board of Directors and Alternates
FROM: Executive Director
SUBJECT: Rent Control-Condominium Conversion Study-
Preliminary Draft
Enclosed with this memorandum is a copy of the Preliminary Draft
of the Rent Control-Condominium Conversion Study prepared by the
staff with the assistance of a consultant, Ms. Peggy Goldstein.
This report will be the subject of Item R-93 on the Board of
Directors agenda for June 18, 1979. It is being mailed to you
in advance of the regular agenda mailing because some Board
members have requested a copy as soon as it became available.
It is also being mailed to the Advisory Committee appointed by
the Board to review this report (the Committee includes a repre-
sentative of every local planning department).
RICHARD j. HUF,
Executive Director
RJH/SS/sc
Enclosure
SAN DIEGO REGION'S COUNCIL OF GOVERNMENTS
Member Agencies: Cities of Carlsbad, Chula Vista, Coronado, Del Mar, El Cajon, Imperial Beach, La Mesa, Lemon Grove, National City, Oceanside,
San Diego, San Marcos, Vista, and County of San Diego/Ex-of ficio Member: California Department of Transportation/Honorary Member: Tijuana, B. CFA.
RENT CONTROL AND
CONDOMINIUM
CONVERSION STUDY
DRAFT
May 22, 1979
Comprehensive Planning Organization of the San Diego Region
Suite 524 Security Pacific Plaza
1200 Third Avenue
San Diego, California 92101
(714) 233-5211
This report was financed with Federal Funds from
the U.S. Department of Housing and Urban Development
and Local Funds from CPO Member Jurisdictions.
EMBER AGENCIES: Cities of Carlsbad, Chula Vista, Coronado, Del Mar, El Cajon, Escondido, Imperial Beach, La Mesa, National City, Oceanside, San Diego,
in Marcos, Vista, and Courty of San Diego / EX-OFFICIO MEMBER: California Department of Transportation / HONORARY MEMBER: Tijuana, B. CFA.
BOARD OF DIRECTORS
COMPREHENSIVE PLANNING ORGANIZATION
OF THE SAN DIEGO REGION
The Comprehensive Planning Organization (CPO) is a voluntary association of local governments formed to
assure overall areawide planning for the San Diego region. Voting members include the County of
San Diego and the Incorporated Cities of Carlsbad, Chula Vista, Coronado, Del Mar, El Cajon
Imperial Beach, La Mesa, Lemon Grove, National City, Oceanside, San Diego, San Marcos, and
Vista. Advisory members include the State of California, through a memorandum of understanding with
the California Department of Transportation.
The City of Tijuana, Baja California, Mexico, is an honorary member of CPO.
CHAIRMAN: Paul Graham
VICE CHAIRMAN: George Bailey
SECRETARY-EXECUTIVE DIRECTOR: Richard J. Huff
CITY OF CARLSBAD
Hon. Anthony Skotnicki, Vice Mayor
(A) Honorable Dr. Ronald Packard, Mayor
CITY OF CHULA VISTA
Honorable Will Hyde, Mayor
(A) Honorable Lauren I. Egdahl, Councilman
CITY OF CORONADO
Honorable Lewis Hardy, Councilman
(A) Honorable C. Patrick Callahan, Mayor
CITY OF DEL MAR
Honorable Hervey L. Sweetwood, Councilman
(A) Honorable Al Tarkington, Mayor
CITY OF EL CAJON
Hon. Merrill Groat, Councilman
(A) Honorable John Reber, Mayor
CITY OF IMPERIAL BEACH
Honorable Hazel Bailey, Councilwoman
(A) Honorable Jackie Palmer, Vice Mayor
CITY OF LA MESA
Honorable George Bailey, Vice Mayor
(A) Hon. Richard Augustine, Councilman
CITY OF LEMON GROVE
Honorable W. Dale Bailey, Councilman
(A) Honorable James V. Dorman, Mayor
CITY OF NATIONAL CITY
Honorable Jess E. Van Deventer, Councilman
(A) Honorable J. Louis Camacho, Councilman
CITY OF OCEANSIDE
Honorable Paul Graham, Mayor
(A) Honorable Wm. D. Bell, Mayor Pro Tern
CITY OF SAN DIEGO
Honorable Larry Stirling, Councilman
(A) Honorable Tom Gade, Deputy Mayor
CITY OF SAN MARCOS
Honorable Robert Harman, Councilman
(A) Honorable Richard R. Danover, Councilman
CITY OF VISTA
Honorable Bernard Rappaport, Mayor
(A) Honorable Dan Carr, Councilman
COUNTY OF SAN DIEGO
Hon. Roger Hedgecock, Board of Supervisors
(A1) Paul Eckert, Board of Supervisors
(A2) Hon. Tom Hamilton, Chairman
STATE DEPT. OF TRANSPORTATION
(Ex Officio Member)
Adriana Gianturco, Director
(A) J. Dekema, District Director
TIJUANA, B. CFA (Honorary Member)
Lie Xicotencatl Leyva Mortera, Mayor
As of May 22, 1979
11
ABSTRACT
TITLE: Rent Control and Condominium Conversion
Study
AUTHOR: Comprehensive Planning Organization
Peggy Goldstein, Consultant
SUBJECT: Rent Control and Condominium Conversions
DATE: May 1979i '
LOCAL PLANNING AGENCY: Comprehensive Planning Organization
of the San Diego Region
SOURCE OF COPIES: Comprehensive Planning Organization
1200 Third Avenue, Suite 524
San Diego, California 92101
NUMBER OF PAGES: 59
ABSTRACT: This study identifies the rental market
conditions in the San Diego region,
summarizes the advantages and dis-
i advantages of rent control, and
discusses various rent control systems
that exist throughout the United
States and California. A summary
of condominium conversion activities
ia the San Diego region is also given.
Recommendations for public and
private actions that address rental
supply shortages are made.
111
ACKNOWLEDGMENTS
The Comprehensive Planning Organization wishes to acknowledge the assistance
of the Advisory Committee in the preparation of this report.
Building Contractors Association Allan Jaffe
Housing Coalition of Greater Mel Shapiro
San Diego
Apartment Association of San Diego Steve Drogin
Real Estate Board of San Diego Bud Porter
Area Agency on Aging Janice Crooks
Legal Aid Society of San Diego Gregory Veach
League of Women Vbters of San Diego Bea Byrnes
Carlsbad Bud Plender
Chula Vista James Peterson
Steve Griffin
Coronado Tony Pena
Del Mar Katherine Jesch
El Cajon Jack Henson
Roy Meenes
Imperial Beach Bob Vasquez
Lemon Grove James Butler
La Mesa Michael Huse
National City Malcolm Gerschler
Oceanside Michael Blessing
Jim Ondler
San Diego Charles Cardillo
San Diego County Kenneth Baumgartner
San Marcos Jeff Okun
Vista William Gutgesell
Michael Coleman
The Rent Control and Condominium Conversion Study was prepared with the
assistance of Peggy Goldstein, Housing Consultant. Most data were supplied
by the Comprehensive Planning Organization. The CPO staff assisting in
the preparation of the report include:
Kenneth E. Sulzer, Deputy Executive Director
Stuart R. Shaffer, Director of Land Use and Public Facilities
Michael T. McLaughlin, Senior Regional Planner and Project Manager
IV
TABLE OF CONTENTS
CHAPTER 1 FINDINGS OF THE STUDY , , 3
Introduction 3
Conclusions > 3
Recommendations 4
Summary of Chapters 5
CHAPTER 2 RENTAL MARKET 11
Overview .11
Profile of Renter Demand 11
Profile of Renter Supply 13
CHAPTER 3 RENT CONTROL SYSTEMS 17
Tenant-Landlord Mediation 17
Voluntary Rent Boards 20
Compulsory Arbitration 21
Rent Control Systems Tied to Cost of Living 25
Rent Control Systems Tied to Fair Net Operating.. 29
Income
Maximum Base Rent 32
Evaluation of Rent Control 34
CHAPTER 4 THE CALIFORNIA EXPERIENCE , . - . . 39
Overview ,.,,,, ,,,,,.,,,,,,,... 39
Local Responses , - , .. . 'II
Pending Legislation. .,,,,, 43
CHAPTER 5 CONDOMINIUM CONVERSIONS 49
Background 49
Maintaining Development Standards 50
Social and Economic Concerns 50
Role of the State Department of 51
Real Estate
APPENDIX: BACKGROUND ON RENTAL STATISTICS 55
CHAPTER 1
FINDINGS OF THE STUDY
Findings of the Study
Introduction
In 1978 the Board of Directors of the Comprehensive Planning Organization
authorized a study of rent control and condominium conversion issues within
the San Diego area. The study was conducted by staff and a consultant,
Ms. Peggy Goldstein, and financed with local funds and federal funds from
the U. S. Department of Housing and Urban Development (HUD).
The purposes of this study were to:
1. Analyze the local rental situation (its problems and trends) and
the economic profile of the renter population;
2. Discuss the above as related to local rental supply and demand;
3. Review the issues, problems, and impacts of major rent control systems
in the United States;
4. Discuss the local rental situation within the context of California
tenant-landlord law and developments in the California legislature;
5. Summarize existing ordinances, local pressures, and state action in-
volving condominium conversions; and
6. Present findings and conclusions to local elected officials Toe iiiwi.c
use in evaluating local rental issues.
The study is being presented to the Board for its acceptance for distribution.
The study is also being reviewed by the Rent Control Advisory Committee.
The findings of this Committee and any comments resulting from staff, local
agency, and public review will be brought back to the Board for further
consideration.
Conclusions
The major conclusions reached, as a result of the Rent Control and Condominium
Study, tie the issue of rent control directly to the shortage of rental
units in the San Diego region. In short, more rental housing is needed.
1. While the demand for rental housing has been increasing, the supply
has been decreasing. The lag in the production of rental units is the
biggest problem in the San Diego area housing market.
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2. Rent control has been used as a short term solution across the country
to control the rate of increase in rent raises; however, rent control
does not stimulate the production of additional rental stock.
3. Condominium conversions have contributed to the decreasing rental sup-
ply. While the study shows a large number of: condominiums still being
rented, a substantial portion of these units supply higher income housing
needs and further aggravate the shortage of low and moderate income
rental housing.
Recommendations
As a result of the study, several actions are recommended to increase the
supply of rental housing in the San Diego area.
1. Higher Density Zoning.
While substantial justification may exist for the lack of higher density
zoning, all communities should be required to stipulate a portion of their
area for higher density residential use (12 to 20 units per acre). Steps
should be taken to expedite the development process in established com-
munities and to increase the supply of higher density development in
the newer communities where lower densities prevail.
2. Land Inventory and Leasing of Public Lands.
The draft of tlie CPO Areawide Housing Opportunity Plan proposes to
stimulate an analysis of local publicly owned property by each juris-
diction. The purpose of the local analysis would be to identify the
properties in each city and the County that are suitable for housing
development and to coranit at least some of these properties for housing
construction. The local effort must include the identification of
. developers willing and able to build housing on selected sites.
3. Providing Public Housing.
The revised State housing guidelines mandate that each city and county
housing element contain provisions that adequately address the community's
need to provide low income housing. Local government must indicate
sites where lower income rental development may take place and the
procedures and regulations necessary to develop the sites. In order
to comply with these requirements, local governments would have to
remove the barriers to such housing and formulate a program which iden-
tifies specific local actions. No apparent substitute exists for direct
public assistance for the development of housing for lower income groups.
Conventional public housing has the advantage of using federal subsidies
to actually build units while other types of programs provide direct
assistance to the renter. All these programs need to be used to
significantly increase the supply of units available for rent.
4. Streamlining Permit Approval and EIR Procedures.
Time lag and the complexity of regulations and procedures are serious
obstacles to producing moderate cost housing. Each community should
review its requirements and procedures for residential development and
take every £X>ssible step to reduce duplication and delay. One possible
improve nen t would ix- to institute the processes which catalogue land
according to use/ especially residential, and provide all required
approvals/permits on such parcels prior to development — "one-stop"
development processing.
5. Exclusionary Zoning.
Zoning out higher densities/ apartments, mobile homes, etc., is clearly
exclusionary. "Exclusionary" ordinances have been successfully chal-
lenged in many parts of the country and resulted in legal requirements
that cities provide more opportunities for moderate income housing.
Local land use regulations should be analyzed to ensure that they remove
the barriers to low and moderate income housing and promote opportunities
for such housing wherever possible.
Summary of Chapters
The following are sui -ovaries of the chapters in the report.
Rental Market (Chapter 2).
o Renters comprise nearly half of all {leaseholds (49%) in the San Diego
area. In 1975 the median income of homeowners was more than twice
that of renters, $15,600 vs. $7,700. While 16% of all owner households
had incomes less than $10,000, 64% of renter households were below this.
o Rental rates in the last year have increased about 9 percent, about the
same as most items in the Consumer Price Index. The increases in costs
of homeownership are more than double this rate. This is a major
reason why, in 1978, the San Diego region had the highest cost of living
increase of any area in the continental United States.
o There is increasing difficulty in developing multifamily rental housing.
Less than 10,000 units were built in 1978 as compared with more than
13/000 in 1970.
o There is an increasing rate of condominium conversions. Almost 3,500
rental units were converted to condominiums In
o The costs of housing are rapidly increasing. According to the Federal
Home Loan Bank, the average price of a newly built single family house
in San Diego was $97,600 in March, 1979. Although such a statistic repre-
sents a short term, small sample, housing costs in the San Diego region
continue to be among the most costly in the United States.
Rent Control Systems (Chapter 3).
o Hotlines and complaint systems attest b> i:he f-tei: I-.'M'- MIM/ t»>>ole are
unhappy with rental increases, particularly since the passage of Prop-
osition 13 in June 1978. Such hotlines and complaint mechanisms also
indicate that other problems such as evictions, deposits and repairs,
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and the general issue of "tenant rights" are apparently as important
as rental increases as a source of complaints.
Current systems of hotlines and complaint mechanisms, however, have
only minimal value because of their low level of visibility, lack of
legal or political role, and the limitations of current tenant-landlord
laws.
Tenant-landlord problems are aggravated by the shortage of low income
housing.
A dearth of information on the rights and obligations of both tenants
and landlords causes further problems. Part of this could be remedied
by the updating and wide publication of the Tenant-Landord Handbook
originally developed by the Human Relations Commission.
The major problem for tenants is the lack of "just cause" eviction and the
issue of retaliatory eviction usually related to tenant organization or
rental complaints. AB 33 now under consideration by the State Legislature
offers seme protection against retaliatory eviction and AB 751 currently
specifies reasons for "just cause" eviction.
Voluntary mediation boards like the ones now in operation in El Monte
and San Bernardino are valuable because the mediation board has high
visibility, an "above reproach" reputation, and the support of the
local governing body, this is true particularly in El Monte. Such
boards are often successful by sheer persuasion. They can increase
knowledge on both sides, often resolve disputes by providing correct
information, perform fact finding, and provide a forum to discuss
rental problems. Political support and visibility are crucial to the
credibility of such boards.
Rent control systems related to consumer price indexes (CPI), or across
the board increases, are operating in Maryland, Washington, D.C., and
New Jersey. New Jersey has the largest and the best known system. The
primary conclusion to be drawn from New Jersey, where CPI plus rather
generous passthroughs of owner expenses originally existed, is that
such systems tend to become more restrictive over time. This is because
the less restrictive systems tend to see regular rent increases. Those
wishing to cut the increases eventually opt for more restrictive measures,
such as lowering the loaximum allowance below CPI or restricting or elim-
inating passthroughs. It is this latter restriction of the system, not
the system itself, that causes more of the negative results such as
lender conservatism, increases in alternate types of construction, and
lowering of tax assessments and housing quality.
Systems based on "Fair Net Operating income" (FNOI), suchas that in
Massachusetts, are extremely complex, require large amounts of admin-
istrative time and money, and are open to the continuing discussion
of what constitutes "fair net operating income". application of
FNOI requires case by case review, which makes it cumbersome and time
consuming. As a result, the systems do work more efficiently and have
more support in smaller cities in a metropolitan area, such as Brookline
in the Boston area.
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o The New York system is especially complex because they are really two
different systems — one on older buildings and another on newer. As
older units become vacant, they are phased into the new system until
ultimately there will be only one system. Criticisms of the system
abound and in 1977 an Interim Report to the Mayor by the Temporary
Commission on City Finances recommended the phasing out of both systems.
o The San Diego Fair Rent Ordinance (now being circulated in the City of
San Diego) is much like the program implemented by the Connecticut Fair
Rent Commissions. However, broader powers are ascribed to the boards
proposed for San Diego. These include the authority to make decisions
on the disposition of rental housing. Also, the election of board
members politicizes the issue and the positions on evictions may be pre-
empted by state tenant-landlord law. These latter features are legally
and practically questionable.
o Systems of compulsory arbitration like the Connecticut System (Stamford)
establish fair practices and make sure that no single rent will be too
high for its class. Stamford is an appropriate model for preventing
many serious abuses in times of acute rental shortages. The cost ($35,000
per year), political visibility, and community support indicate that
it would probably work well in cities with populations up to 250,000.
Its operation in larger cities is questionable because of the possible
volume of complaints. It is possible, however, that in a large city
more than one commission could be appointed.
California Experience (Chapter 4).
o In California, the ability of local government to control rents is
beyond question, particularly after the Berkenfeld Decision of 1976.
This decision, while invalidating a Berkeley rent control initiative
over the due process issue, found nothing in California constitutional law
which would prevent a California municipality from enacting rent control
either ly ordinance or initiative. In addition, a legislative atteipt
to reserve the Tie Id to the state was defeated in 1976.
o Currently, Berkeley and Davis, have initiative-enacted legislation
which provides renter property tax relief based on Proposition 13
savings. San Francisco, Beverly Hills, Vacaville, Santa Monica, El Monte,
and Los Angeles have passed rent control measures.
o On May 1, 1979, a seven-month rent moratorium expired in Los Angeles.
It v/as replaced by a system allowing a 7 percent increase for all units;
an additional 6 percent increase will be allowed for each year previous
to 1978-79 in which rents have not been raised — back to two years.
Thus, if a rental unit has not had an increase since May 1976, a possible
19 percent incrvvi>;. • oi-xild be levi^l.
The issue is being discussed locally as well. San Marcos has a tenant-
initiated complaint system applying to mobile home parks. Vista has
appointed an eloven-member committee to deal with the issue. El Cajon
has discussed a report to the Council on rent increases in that city.
La Mesa has discussed the issue at its Council and groups continue to
work to qualify the "Fair Rent Initiative" for the ballot in the City
of San Diego.
o Oonmittees of both the Assembly and Senate continue to hear testimony
on "renter rebate" bills. Currently, a $37 renter rebate is being
proposed. All the bills under discussion raise this amount to varying
levels ranging from $137 to $300. It is still too early to tell which
bill will emerge from committee with consensus, but some form of renter
rebate is likely to be supported.
Condominium Conversions (Chapter 5)
o Condominiums are an increasing part of the region's housing supply.
In 1970, less than one percent of the area's housing units were condo-
miniums. Today, the figure is 8.5 percent. Of the almost 48,000
condominiums in the region today, about 10 percent (4,800) are estimated
to be conversions. Many of these conversions took place during con-
struction and so renter displacement was not involved.
o The consensus among most jurisdictions in the region is that condo-
minium development or conversion, because of its potential for home
ownership, should meet standards appreciably higher than multifamily
residential development. Most condominium conversion ordinances reflect
this belief.
o Disclosure, consumer protection, notice, and information on conversions
are generally controlled by the State Department of Real Estate.
o The main issue surrounding conversions seems to be loss of units from
the moderate income stock. Nearly half of all condominiums are
rented and so are an important part of the rental stock. However,
both costs of home ownership or re-rentals after conversion are increased
by as much as 35% over original rental.
o Experience of major developers in converting units is that about half
of the tenants will opt to buy the unit after conversion.
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CHAPTER 2
RENTAL MARKET
Rental Market
Overview
Rent control is frequently the res.ni. . >F -«i inadequate supply of rental
housing. Tight rental markets usually lead to higher rents which in turn
lead to public demands for regulation. Rent control is usually perceived
as a short term action by those? who adopt it. Indeed, in most rent control
statutes, cities must indicate not only the "emergency" oc "crisis"
situation which compels controls but also the long-term plans being im-
olanented to meet the crisis. Critics and proponents of rent control agree
that no system of regulation (no matter how fair, effective, or necessary)
will produce housing. While housing is being produced, the difficulty is
that less and less multifamily rental housing is being produce! in the
San Diego region, and no rental housing with rents below $300 per month
Is !»ing built. Income figures indicate that about half the rental housing
would have to carry rents less than $160 to meet low-income needs. The
situation is similar in the rest of California and the nation.
Since 1970 the number of units built each year for rent has actually been
decreasing. Increasing numbers of multifamily housing units are accounted
for by condominiums. Since 1970 about 40 percent oC the multifamily con-
struction has been for condominiums. The result is that even with an incro.iso
of nearly 400,000 people since 1970 and an increasing percentage of households
renting, fewer multifamily reniial units were produced in the region in 1073
than in 1970. Rental units such as single family houses and condominiums carry
higher o-Mtvs t"1 r.v>.si: maw rental <•:•• »vs!:ruction carries minimum rents of $300 for
the smallest: units (one-bedroom). Ii 1975, just four years ago, median rent
in San Diego was $178 or about 30 percent of median renter income. In
1970 median rent was $127 or about 25 percent of median renter income.
PROFILE OF RENTER DEMAND
Ownership _Related__t.q _Incgme
The median income of renter households in the San Diego region is less than
half the median income of homeowner families. This income discrepancy
increased in the period 1970 to 1975. Census figures available for both
years indicate that median income for ownership households in 1970 was
$11,100 compared with $6,200 for renter households. In 1975 median income
of ownership households had increased to $15,600 compared with a median
income of only $7,700 for renters. Ownership rates increased steadily as
income rises. (See Table 1, Percent Owner and Renter by Income, in Appen-
dix.)
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Household Composition and Age Related to Tenure
Renter occupancy is extremely high anong one-person households, particularly
younger ones. A third of the households had incomes less than $5,000 in
1975. About half of elderly (over 65) one-person households are renters.
Table 2 in the Appendix summarizes owner/renter percents by household
composition, age, and income. The following conclusions are possible from
an analysis of this table. The prime "need" renter groups are:
o the one person household whether male or female: the young, single
person, student or worker;
o the elderly single person, retired;
o the family with husband, wife, and children with very young head of
household, i.e., under 25 years of age, probably military, student,
part-time employed, or first job; and
o the female-headed household, young or middle-aged, with children.
While other types of households are often low income, the above four target
groups are disproportionately renter and low income households.
Overpaying Related to Tenure
Another characteristic which seems to present a clear contrast between
owner and renter in the San Diego region is what is termed "overpaying" for
housing. No precise definition of what constitutes overpaying exists.
While paying more than 25 percent, or 35 percent, for housing may be over-
paying at low or moderate income levels, this principle is inappropriate when
applied to higher incomes with more discretionary spending powers.
Despite the lack of a precise definition of overpaying, Table 3 of the
Appendix shows the percentage distribution of housing expenses as a portion
of income to be higher for renters than for owners. More than 36 percent
of all renters spent more than a third of their income for housing compared
to 12.5 percent of the owners spending a similar portion of housing. The
table also shows that both owner and renter households with incomes under
$10,000 spent a greater portion of their incomes on housing. It should be
noted that the number of renter households in this income category out-
numbers owners by more than 5 to 1.
Ownership vs. Renter Ratios - Recent Shifts
For many years the ratio of owner to renter households in the San Diego
region has been fairly constant, with a slight percentage edge to ownership.
In 1970, approximately 56.5 percent of all households were owner occupied.
By 1975 that figure was only slightly lower (55.3 percent) for the region.
However, with the recent availability of new data on ownership from the County
Assessor's Office, there is strong indication that the traditional mix favor-
ing a majority home ownership rate is changing. Table 4 in the Appendix
demonstrates that in most cases ownership rates are slipping and renter
households are moving into the majority. The unincorporated area is the
12
exception to this rule. Declining ownership rates are entirely reasonable
as a result of escalating housing prices, high interest rates, higher
capital requirements, and other effects of inflation.
PROFILE OP RENTAL SUPPLY
Construction Trends 1970 to Present
During the last decade the San Diego area has consistently been among the
top five metropolitan areas in the nation in the production of housing
units. The record building year in 1977 demonstrates the formidable
construction capacity of the local building industry. Table A summarizes
overall construction rates for the region since 1970, divided into single
family and multi-family units.
TABLE A
RESIDENTIAL CONSTRUCTION
SAN DIEGO REGION 1970-1978
Single Family Units Multi-family Units
1970
1971
1972
1973
1974
1975
1976
1977
1978
Total
10,337
13,124
13,968
11,742
10,743
8,283
15,157
18,163
12,677
114,194 (48.5%)
13,335
15,585
16,074
13,730
10,201
5,471
13,151
18,895
14,916
121,358 (51.5%)
Total Units
23,672
28,709
30,042
25,472
20,944
13,754
28,308
37,058
27,593
235,552
The table illustrates that the early seventies was an era of very strong multi-
family construction. Of course, the condominium construction trend had
begun; there were only about 2,000 condominiums in the region by 1970.
While year by year totals are not available, assessor's data permit the
following compilation. Of the approximately 87,500 multi-family units
constructed between 1970 and the end of 1976, 32,400 (or about 37 percent)
were condominiums. Estimating condominium percentages in 1977 and 1978
multi-family construction is more difficult because the title company data
include all condominiums, i.e., conversions as well as new construction.
Information on conversions indicates that most major conversions took place in
1978. The following tables summarizes current condominium statistics in the
region.
Condominiums, as of assessor's data, March, 1977
Condominiums, either converted or constructed in 1977
Condominiums, either converted or constructed in 1978
Total
34,699
4,753
8,389
47,841
About 20 percent of the 1977 figure estimated to have been conversions and
about one-third of the 1978 figure were conversions. Therefore, in 1977
about 3,800 out of 18,900 (20 percent) were condominiums. Figures for
1978 (even discounting one-third conversions) indicate a far higher percentage.
In 1978 out of approximately 14,900 multi-family units constructed, about
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5,600 (38 percent) were condominiums, about the percentage indicated
between 1970 and 1978.
Another change in the composition of the housing stock since 1970 is the
size of units, i.e., the number of units in developments. Unfortunately,
the size breakdowns available from the Assessor's office and the figures
used in 1970 are not directly comparable. However, some compilations are
possible which permit comparison.
1970 Percent of Total 1977 Percent of Total
Duplexes 22,027 17.9 42,359 1577
Tri-Quadplexes 20,430 16.6 50,717 23.4
Smaller Complexes 68,315 55.5 88,226 40.7
Larger Complexes 12,420 10.0 35,178 16.2
Total 123,192 100.0 216,480 100.0
Housing Costs, Rents and Relationship to Consumer Price Index
For the year 1978 the Consumer Price Index for the San Diego area rose 12.4
percent. This was the highest overall increase in the nation. (Portland,
Oregon, had the same rate of increase.) The following illustrates the com-
parison with other areas:
Percent Increase in Cost of Living, All Items - 1978
United States Average 9.0
Los Angeles - Long Beach - Anaheim 8.3
San Diego, California 12.4
Dept. of Labor, Bureau of Labor Statistics
The following summary shows the difference between the San Diego area and
the national average and the closest metropolitan area for seven items.
Percent Increase - 1978
U. S. Average L.A.-Long Beach r_ San Diego
Food and Beverages 11.1 11.6 10.3
Housing 10.0 8.8 15.5
Transportation 7.1 7.8 7.8
Medical Care 9.1 10.0 9.3
The most striking difference is, of course, in housing expenses. This has
several individual components, compared as follows:
U.S. Average L.A.-Long Beach San Diego
Rent 7.3 9.1 9.4
Home Ownership 12.9 9.9 19.3
Gas & Electricity 7.0 6.2 8.1
Again the most striking figure is the rise of home ownership costs in San
Diego as compared with the other areas. Although other costs are also high,
rental increases in San Diego in 1978 were only somewhat above the U. S. and
the Los Angeles area averages, and three percentage points below the overall
increase. In 1978 rents apparently rose about the same rate as most items.
The cost of home ownership, however, pushed the total percentage increase upfurther.
14
CHAPTER 3
RENT CONTROL SYSTEMS
Rent Control Systems
TENANT-LANDLORD MEDIATION
Introduction
Various systems have been used in the past to monitor, respond bo, and evaluate
tenant complaints of various kinds. These systems usually deal with the whole
area of tenant-landlord relationships, with rent increase complaints as a
part of a general framework. These programs provide an additional source
of data on rental problems.
Tenant-Landlord Clearinghouse Project — San Diego County Human Relations
Commission
From mid-1977 to mid-1978 the Human Relations Commission in cooperation
with the Regional Employment and Training Consortium conducted a landlord-
tenant clearinghouse. The purpose of the project was to inform tenants and
landlords of existing housing legislation and to attempt to resolve tenant-
landlord misunderstandings through mediation. Offices were on Fifth Avenue
in San Diego, and complaints were received by phone and in person. Three
housing counselors received calls five days a week and three evenings. In
the eleven months duration of the project, 9,000 calls were received, or
approximately 750 calls per month.
The following conclusions are possible following the completion of this
project:
o The shortage of low income housing in San Diego transcends and ex-
acerbates tenant-landlord conflicts.
o Increased community information on tenant-landlord issues is necessary
for housing consumers and housing agencies with counseling services.
o More and better tenant organization is needed if legal rights of
tenants are to be maintained.
o Serious problems require more than phone information or community
service. Direct mediation must be used. The effectiveness of such
voluntary mediation is directly proportional to the legal position
of the opposing sides. Lack of effective eviction legislation limits
mediation on this issue.
o An important part of the project has been the updating of the Tenant-
Landlord Handbook. Unfortunately, this updated version was never
17
published and valuable information is unavailable to both tenants and
landlords.
o Remedies available to tenants, such as Municipal Court or Legal Aid for
very low income tenants, are difficult and cumbersome to use.
o More and better lease arrangements might provide better protection
for tenants.
o Complaints over evictions, deposits, and repairs were more prevalent
than rental increase complaints.
Neighborhood House Association — Tenant-Landlord Counseling
In 1978 San Diego County, through the Community Action Partnership, awarded
a $50,000 contract to Neighborhood House Association to conduct tenant-
landlord counseling through June 30, 1979. The program was actually approved
and operational on December 13, 1978 and will conclude June 30 with option
for continuing for another six months. Hie goal of the project is to
"create better understanding and harmonious relationships between landlords
and tenants." The object of the project is to obtain a satisfactory client
case resolution for 70 percent of clients as measured by client statements.
Additional Hotlines
San Diego Apartment Association. From July 26, to August 29, 1978 the
San Diego Apartment and Rental Owners Association, Inc., conducted a
hotline service in San Diego. Approximately 1,000 phone calls were received.
As a result the Association contacted nearly 500 owners of whom 137 agreed
to freeze rent or give rebates. Of a total of approximately 4,000 members
of the Association, 850 (21 percent) agreed to either a six-month rent
freeze or a rebate following passage of Proposition 13. While the members
represent about 60,000-70,000 units, the 850 members voluntarily agreeing
to freezes or rebates represented more than 36,000 units, or more than half
the units represented in the Association. Owners of larger numbers of
units were apparently more cooperative than owners of smaller developments.
Governor's Hotline on Rents. The Governor's Hotline, which operated in
July and August of 1978, received about 16,600 calls from throughout the
state, most related to rent questions. The Governor's task force attempted
to contact over 8,000 landlords. About 3,000 contacts were successfully
made and data were analyzed. The following questions and answers were
tabulated.
1. Willingness to roll back rents to May 31, 1978 level:
Yes - 12%
No - 81%
Undecided - 7%
2. Willingness to freeze rents at current level (i.e., August 1978):
Yes - 57%
NO - 36%
Undecided - 7%
18
The most camvon reason given for reluctance to freeze rents was "es-
calating costs".
3. Willingness to pass on Proposition 13 savings:
Yes - 31%
No - 35%
Undecided - 35%
Of those responding negatively, 42 percent gave as their reason that they
had not yet received any Proposition 13 savings themselves.
Additional information:
Average rent increase - $34.00
Average percent increase - 17%
Area codes 714 and 213 had 53 percent of all calls made.
California Public Interest Research Group. In January and February,
1979, the California Public Interest Research Group (CALPIRG) kept a tally
of calls received related to rents. Normally, CALPIRG receives generalized
consumer complaints. Of approximately 30 calls relating to rent increases,
most were for increases in excess of $50 per month.
Conclusions
The mechanisms for hearing, screening, evaluating, and reporting tenant-
landlord complaints of all kinds have generally been sporadic, disorganized,
and ineffective. Evidence from recent surveys of HRC, SDAA, Governor's
Hotline and NHA indicate that in a metropolitan area the size of San Diego
about 1,000 complaints a month will be received if even a rudimentary
system and minimal publicity are provided. The "hotline" approach of
simply calling in complaints serves only to document the number and type of
complaints. In the absence of any follow up or recommendations for future
action, such systems have little value. Systems such as HRC and NHA have
some value if trained housing counselors are responding. In this case, at
least those questions which can be solved by correct information or a
correct referral will be successfully handled. If voluntary mediation is
to take place under this system, trained and knowledgeable counselors are
necessary as well as in-person meetings, fact finding, and follow up. If a
voluntary mediation board is to be appointed, it should have broad repre-
sentation, an "above reproach" reputation, and probably be appointed by the
political body of the jurisdiction as are other such boards. Complaint
mechanisms or systems must be prepared to deal with tenant-landlord prob-
lems in general because experience has shown that rent increases rank only
fourth after such areas of concern as evictions, deposits, and repairs. In
addition, housing counselors indicate that even when rent increases are the
first complaint, they are usually related to other problems.
All of the above mechanisms are limited by appropriate state law in tenant-
landlord relationships. Their main value is one of dispensing correct
information and having some degree of persuasive power which is directly
proportional to the importance and publicity given them by local govern-
ment.
The end of the Human Relations Commission Project meant that much of the
groundwork on forms, referrals, accounting, and counselor training accomplished
19
during the Tenant-Landlord Clearinghouse Project was lost. The new project
now administered by Neighborhood House must use a great deal of its lead
time to train counselors and establish procedures for the project.
VOLUNTARY RENT BOARDS
Introduction
Voluntary mediation systems designed to bring opposing tenant-landlord
interests together have been fairly common as part of broader housing
policies. The efforts of HRC and Neighborhood House locally are along the
lines of such voluntary systems. However, one important difference is that
actual voluntary mediation systems are represented by Voluntary Mediation
Boards usually appointed by the governing body of the jurisdiction. Such
boards are designed to be impartial, represent landlord and tenant interests,
and have public "citizen" representation. Two cities in California using
such a system are El Monte and San Bernardino.
El Monte, California
El Monte is a city of 68,000 residents in east Los Angeles County. More
than half the households are renters. As an emergency ordinance, the City
passed a moratorium prohibiting rental increases on residential units from
July 29, 1978 through December 31, 1978. The moratorium included all
rental units, rental services, and deposits. Exclusions were hotels,
motels, public housing, and units built after the effective date of the
ordinance. Rentals occurring after July 29 were also not to be raised
during the moratorium period.
Units re-rented because of voluntary vacancy could be increased upon re-
rental. For units involuntarily vacated (i.e., eviction) the re-rental rate
was not to exceed the rent in effect immediately prior to such involuntary
vacation. This is the prime protection in the ordinance against retaliatory or
unjust eviction. Violation of the ordinance was considered a misdemeanor,
punishable by fine and imprisonment. Later provisions were added to cover
negative cash flow and capital improvements. Increases were allowed in both
cases under special conditions. To implement the ordinance the City Council
appointed a nine-member board chaired by one councilman and with four tenant
representatives and four landlord representatives. The four tenants were
selected by landlord groups and the four landlords by tenant groups. The
title of the group is the El Monte Community Residential Unit Owners/Tenant
Conciliation Board and it has remained in effect subsequent to the end of the
moratorium and now has voluntary status backing of the City Council.
Evaluation. The City of El Monte decided to continue the board as a forum
between owners and tenants. It did a commendable job during the moratorium
and, most important, has high credibility and political visibility. The
Board has continued to mediate complaints, do fact finding, make referrals
for problems, and send its recommendations to both tenants and landlords.
Cases are heard every other week with both parties in attendance.
After their legal powers were removed with the end of the moratorium and
no subsequent action by the City Council, the Board continued to mediate
20
disputes. At the end of the moratorium widespread large rent raises were
not evident. Board members gave credit to previous Council action that had
indicated "gouging" would not be tolerated, as well as the continued
presence of the Board and landlord restraint. At the first meeting follow-
ing the moratorium (January 8, 1979), the Board heard about a dozen com-
plaints, with several being confined to two different complexes. Only
about four of the twelve complaints involved large increases or gross
disrepair of units and in several cases the Board took action to utilize
City Building Inspectors.
In January, the City distributed a Tenant-Owners Information packet, which
describes current rights of both tenants and landlords under California
law, with additional specific information relevant to the City of El Monte.
A review of voluntary systems indicates that:
o systems are sometimes effective by sheer persuasion;
o political support and visibility are crucial in establishing credibility
for such a system;
o they increase knowledge on both sides;
o they offer correct information in the resolution of disputes;
o they perform fact finding and this is often valuable in
settling disputes; and
o they provide an avenue for discussion of tenant-landlord problems.
A similar voluntary mediation board appointed by the City Council is operating
in the City of San Bernardino. Santa Monica recently enacted a similar
system.
COMPULSORY ARBITRATION (BASED ON TENANT COMPLAINT)
The Fair Rent Commission System of Stamford, Connecticut
The Fair Rent Commission System currently used in Stamford and six other
Connecticut communities was established by state enabling legislation
enacted in 1969. No emergency situation was declared or presumed. The
purpose was to "control and eliminate excessive rental charges." The Fair
Rent Commission legislation covers all housing accommodations except
seasonal units rented less than 120 days per year. Provisions of the Act
require that tenant initiated complaints of excessive rental charges are
submitted to Commission. The Commission is empowered to order a rent
reduction and may suspend rent payment if housing is in violation of code
statutes until conditions are corrected. As a regulatory mechanism on
rent, the Connecticut system is considered quite mild.
Seven communities in Connecticut have adopted the Fair Rent Commission
approach subsequent to state action in 1969. Stamford is the best known
of these. Stamford is a town of about 110,000 with half of its housing
stock in rentals. As a "bedroom community" for New York City, Stamford has
had a high rate of growth in the past ten years. While overall housing
development increases, a net loss of rental units is occurring because
of low construction, demolitions, and conversion to condominiums. These
factors have made it increasingly difficult to maintain a moderate rental
housing stock. Vacancy rates are zero.
21
The Stamford Fair Rent Commission was established by enactment by the Board
of Representatives (Council) on October 6, 1969, for the purpose of controlling
and eliminating excessive rental charges on residential property within the
city. The Conmission is composed of five members and three alternates.
Members are appointed to voluntarily serve a term of five years by the
Mayor subject to approval by the Board of Representatives. The cost of the
system is $35,000 per year.
The Fair Rent Commission acknowledges its dilemma as "to permit landlords
to receive reasonable return on their investment in order to avoid further
loss of rental units and at the same time try to keep rents at reasonable
levels which tenants of moderate incomes can afford." The Commission uses
two full-time and one half-time persons to investigate complaints and
prepare cases.
The following services were provided:
o Receipt of complaints of rental charges or decrease in services,
o Determination of fair rent for units at request of landlord,
o Receipt of "retaliatory eviction" complaints,
o Investigation of every complaint received,
o Mediation and conciliation of disputes,
o Survey of rental housing throughout the city,
o Presentation of hearings and establishment of fair rents for apartments for
which complaints have been filed,
o Provision of counseling to tenants and landlords,
o Provision of information on pertinent legislation, take legislative
positions, and work with other housing agencies, and
o Provision of statistics on rental housing and fair market
rents.
Caseload. From approximately 10,000 rental units in 1977-78, 185 (less
than 2 percent) formal complaints were filed with the Commission. Only
72 of the complaints were heard by the Commission at formal hearings. The
other 113 cases were settled by mediation prior to a Commission hearing.
Of the 72 complaints heard by the Commission, decisions were rendered in 41
cases: full rental increase was granted to the landlord in 18 cases; partial
increases were granted in 18 cases; the Commission denied an increase in only
one case; the Commission actually reduced the rent because of deteriorated
conditions in four cases; and decisions were not rendered because repairs were
being completed or because tenants vacated the apartments before the cases were
heard in 31 cases. While repairs are being completed, the Commission holds
rental payments in an escrow account.
Rental Surveys. The city's rental surveys provide important information
on rents which is used for comparison when complaints are received. The
Commission staff maintains Apartment Record Books with information on
buildings with six units or more. These rental ranges and averages are
used to guide the Commission.
Retaliatory Eviction. Although the Commission is able to slow down, it
cannot totally stop retaliatory evictions. The Commission is working with
the state legislature to obtain several amendments which would strengthen
the tenant position on retaliatory evictions.
22
"Code of Fairness". The Commission has adopted a "Code of Fairness" which
is believed to limit the severity of problems arising between landlords and
tenants. The Code of Fairness includes a model rental agreement, rules on
notices of increases, etc.
Evaluation. Systems operating in Stamford and other Connecticut towns
as a result of the state legislation are unusual because the Commission
has no rent setting, no maximums, no minimums, and no reviews of owner or
property finances. The system is activated only upon tenant complaint, and
this can and does happen in all income ranges. After the complaint the
Commission is empowered to determine comparable rents by fact finding and
in addition, this constituted less than 2 percent of the total number of
rental units in the city. This relatively low volume combined with many
actions by the Commission indicates that complaints were not made capriciously.
The following is a quote from a letter by the director of the Commission:
"We do not have rent control and we believe the fair rent commission system
is far superior. There has been no decline in property values in Stamford.
On the contrary, property values are constantly increasing at a tremendous
rate. With a small supply of housing and a large demand, as well as high
property costs, rents are high and are constantly increasing. Therefore,
the need for the services of the Fair Rent Commission is very great."
The Commission seems specifically directed toward investigation of gouging
and unfair rental practices of all kinds, since most reasonable increases
were approved. In addition, the Commission takes a strong stand on main-
tenance and repair and holds up both rent and/or increases based upon
repair as evaluated by the city. The Commission is also actively involved
in the eviction issue, but as in California, Connecticult state laws
governing eviction do not give the basis for action other than slowing down
evictions. The type of legislative change urged by the Commission is
similar to various suggestions in California, i.e., extending the period in
which an eviction can be considered retaliatory and seeking "just cause"
evictions statutes. The "Code of Fairness" authored by the Commission is
not significant for California since 6 of the 7 provisions in the Code are
adequately covered in California law (although enforcement could be a
problem). One significant provision is the recommendation that rents not
be raised more than once a year. This relates closely to the issue of
leases as protective and stabilizing documents for both tenants and land-
lords.
Stamford seems to be a workable model for preventing serious abuses in
times of housing shortages. Its low cost, political visibility, and
community support indicate that it would probably work well in cities with
populations up to 25,000. Its operation in large cities is questionable
due to the possible volume of complaints. However, in the larger cities
more than one Commission could be appointed.
Alaska adopted state legislation similar to the Connecticut model in 1974.
Fairbanks and Valdez subsequently adopted tenant initiated complaint
systems with local rent review boards.
23
The San Diego Fair Rent Initiative
Background. The San Diego Fair Rent Initiative currently being circulated
for signature is very similar to the Stamford system because it is based
on tenant initiated complaint and provides for compulsory arbitration. For
the past year San Diego-based tenants groups have attempted to place the
San Diego Fair Rent Initiative on the ballot. These groups failed to
obtain enough signatures to qualify the initiative for the November, 1978,
ballot. However, signatures are being gathered to qualify the initiative
for the June or September, 1979, ballot. The current initiative being
circulated applies to the City of San Diego.
Purpose. The stated purpose of the San Diego initiative is "to prevent
abusive rent increases". It would apply to all rental units except govern-
ment-owned, managed, or subsidized housing, motels, hotels, transient
boarding houses, units in hospitals, monasteries, convents, or rest homes;
units constructed after the effect date of the initiative; and rental units
which have been vacant for six consecutive months and rehabilitated by
improvements amounting to at least one-third of appraised value are also
exempted.
Provisions. The major provisions of the Fair Rent Initiative address the
composition and election of Fair Rent Boards. Eight such boards would
correspond to the City's eight Council districts; voters would elect two
representatives from a landlord slate and two from a tenant slate; a fifth
member would be a homeowner in the district, would be selected by the other
four members, would be neither a landlord or tenant, and would serve as
chairperson. Elections would be held at the Municipal Primary Elections.
A central board of seventeen members would be selected from among the local
boards: eight tenants, eight landlords, and one neutral.
The main duty of the local board would be to hear tenant initiated com-
plaints of rent increases filed in writing with the local board. The local
board would schedule a hearing for the complaint. A hearing officer would
present findings in the case. The landlord would be notified of these
findings and given two weeks to prepare an answer. A hearing would be
called at the convenience of all parties. Upon a review of all findings,
the board would make its decision and inform all parties of findings of
fact and law and right of judicial review.
An additional power of the local boards would be to issue permits for the
removal of any rental units from the housing market either by demolition,
conversion, or other means. These permits would only be issued if findings
were made that such removal would not adversely affect the supply of rental
housing and the level of affordable housing. Such a removal would be
approved, however, if the unit(s) is uninhabitable or incapable of being
made habitable in an economically feasible manner.
The Central Board would have power to hire and compensate necessary staff
(including hearing officers), to conduct hearings, to issue orders, rules/
and regulations, and to charge fees. The Central Board would conduct
studies, prepare landlord-tenant information, report to the San Diego City
24
Council on the rental housing market, and conduct registration of all
rental units.
The factors that local boards would take into consideration when making
determinations on rent increases would be: property taxes; operating and
maintenance expenses; capital improvements and replacements; change in
amenities, space, facilities, services, etc.; deterioration; code com-
pliance; and rate of return on investment. Negative cash flow would not be
adequate reason for rent raise if it could be reasonably foreseen at time
of purchase.
The initiative contains a just cause eviction statute enumerating nine
legal reasons for eviction and expressly forbidding retaliatory evictions.
The Central Board would be empowered to suspend operations of the hearing
provisions in any category of housing when the vacancy rates goes above 5
percent. Appropriate civil and criminal penalties as well as civil relief
in court are also described in the initiative.
Funding. Landlords would pay an annual fee of $2.00 per unit and tenants
$1.00 per filing. Federal funding from various programs could also be
available through the City of San Diego.
Evaluation. The San Diego Fair Rent Ordinance is very much like the
Stamford (Connecticut) system of Fair Rent Commissions. However, broader
powers are ascribed to the San Diego Board by its ability to present
findings and make decisions on the disposition of existing rental housing.
This latter provision would give the Board powers not residing in any other
City Commissions or offices or even the Council. As such the legal validity
of this provision is questionable. In addition the election of board
members makes the rent boards more unwieldy than the Stamford Fair Rent
Commission. It also strongly politicizes the tenant-landlord confrontation.
Lastly, the positions of the initiative on eviction would be contested as
unconstitutional because of state legislation which preempts the area of
tenant-landlord relations.
RENT CONTROL SYSTEMS TIED TO COST OF LIVING
Introduction
The best known systems of this kind are operative in Maryland, New Jersey,
and Washington, D. C. Each system is distinct and within each system there
are wide variations and interpretations. In addition, all of these systems
have different types of exemptions, allowances, and passthroughs.
Maryland
The Maryland system which was developed in 1973, is operative in seven
counties and the City of Baltimore. The statewide statute expired in 1975
and these counties and Baltimore have their own ordinances. The system was
adopted following the expiration of federal wage and price controls. Base
rent is dated from January 11, 1973. An annual 5 percent increase in base
rent is permitted plus proportionate passthroughs and increases of real
estate taxes, water and sewer charges, utility rates, heating fuel charges,
and capital improvements incurred from January 11, 1973.
25
Washington, D. C,
The Washington, D. C. system was also adopted following the expiration of
federal wage and price controls which is based on rent effective February 1,
1973. In 1973 the allowable increase was 4 percent; in 1974, 8 percent;
and in 1975, 4 percent if two utilities are provided, 8 percent if all
utilities are provided. Other allowable increases are based on a hardship
provision related to fair return and to increases for capital improvements.
New Jersey
Background. The most famous "second generation" rent control systems are
those in various towns in New Jersey. About 100 municipalities in New
Jersey have rent control legislation and the Port Lee Ordinance adopted in
1972 has been the model for most of these. The New Jersey ordinances
include most rentals except single family units, transient units, and
publicly owned units. Initial rental for newly constructed units is
exempted but the units are subsequently controlled. Base rents are those
rents in effect preceding enactment of the ordinance. Rent increases may
not be greater than the percentage difference between the Consumer Price
Index prior to the expiration of the lease and the CPI at the date on which
the lease was entered. Some communities have, however, amended their ord-
inances specifying a maximum percent increase. Provisions are generally
included for passthroughs for increase due to real estate tax and capital
improvements.
Fort Lee, New Jersey. Fort Lee is an affluent suburb of New York City in
Bergen County, New Jersey. In the 60's and 70's it experienced rapid
population growth and luxury apartment building. In 1972 Fort Lee adopted
the ordinance which limited rent increases to Consumer Price Index (CPI).
That ordinance was upheld by the State Supreme Court in 1973. In May,
1974, the Council replaced the fluctuating scale of CPI with a flat 2%
percent rate increase allowable during one calendar year. In November 1974
a third ordinance prohibited increases greater than 2\ percent but allowed
additional compensation to landlords for rising real estate taxes and
capital improvements. The validity of that ordinance was sustained by the
Court in 1975. In 1976 the tax surcharge aspects of the ordinance was
repealed which made the ordinance even more restrictive. When municipal
rent control systems were upheld by the New Jersey Supreme Court, the
concept of "a just and reasonable" return for the landlord was also upheld.
Various cases have been entered to determine if Fort Lee, as it operates,
has denied this minimum return to the landlord. The 2s percent rule was
contested in Helmsley vs. Fort Lee. The tax repealer passthrough was
challenged in New Jersey Realty vs. Fort Lee and Americana Associates vs.
Fort Lee.
In October, 1978, the New Jersey Supreme "Court finally decided the issues
surrounding the Fort Lee ordinances. The 2.5 percent allowable increase
was found to be confiscatory and property tax passthroughs were not allowed.
As a result an alternate system of computing automatic rent increases based
upon weighted percentage increases of certain components of the CPI and
additional taxes actually paid to the Borough was developed. It provides
26
automatic increases of 5 percent for buildings in which tenants pay utilities
and 6.5 percent for single-metered buildings. Vacancy decontrol (units
voluntarily vacated are not controlled by rent freeze) is also included.
Evaluation. The impact of the New Jersey system is difficult to assess.
The main provisions of the system have been in litigation during much of
its existence. The ordinances initially adopted by most of these cities
permitted rental increases that fully passed on cost increases and took
into account the changing value of the dollars, but later many of these
ordinances became more restrictive. Several generalizations can be made on
the New Jersey system.
Rent control is centered primarily in seven of the 21 New Jersey counties.
Six of these are suburbs of New York City, and one, a suburb of Phila-
delphia. Apartment construction was very heavy in these counties in the
1960*s as New York City workers began to leave the city and live in surround-
ing areas. Most of the rent regulation systems evolved in the 70's have
been based on the CPI principle with passthroughs for taxes and capital
improvements. As they have evolved, however, many of the systems have
tended to become more restrictive, i.e., the CPI allowance has gradually
been reduced to half of CPI or a flat 5 percent or, as in the case of Port
Lee, to a flat 2.5 percent.
Another general conclusion on the flat allowance systan is that the market
value of rental property decreases with a corresponding decrease in assess-
ments and taxes paid. This trend takes a very long time to exhibit itself
and the assessment appeals on rental property have substantially increased
in New Jersey. With reduced assessments, taxes must be shifted to other
types of development.
Rent regulation in the various New Jersey communities has definitely slowed
the rate of rental increases in rent controlled communities in spite of
rapid increases in utility and construction costs.
Several building trends have been evidenced in the seven counties with many
rent controlled communities:
o Condominium construction has increased faster than the statewide
averages.
o Pour of the seven counties evidenced a shift of apartment construction
away from rent controlled communities to non-controlled communities.
o A sizeable portion of the apartment permits filed in rent controlled
communities were those with liberal ordinances. In a survey conducted
of major New Jersey lenders, the issue of the passthroughs was critical,
i.e., lenders look most critically at the allowances for passthroughs of
operating and maintenance costs.
Most of the New Jersey ordinances exempt small units, such as 1 and 2 unit
structures. While initial rental on new construction is exempt, new
construction is quickly factored in either upon vacancy or after expiration
of the first lease (usually one year).
27
A report by Gruen, Gruen, and Associates states: "This tendency for rent
control legislation to become more restrictive over time stems from the
structure of the ordinances themselves. The original purpose was to stop
rapid rent increases. The ordinances started out with investment neutral
laws which allowed moderate increases. When generous systems are in effect
and annual increases plus passthroughs are allowed, rents continue to rise.
In some cases they may rise as quickly in controlled as in uncontrolled
areas. In any case because increases continue under liberal ordinances,
the allowable increases and/or passthroughs are cut in order to slow the
rise of rents once again."
Effects of Rent Controls on New Construction. Long-term housing construc-
tion rates are so interwoven with general economic policies and trends that
it is very difficult to isolate the effect of any one factor such as rent
control on overall rates. In addition, in a state like New Jersey com-
parisons between rent controlled and non-rent controlled counties should be
carefully drawn. Those counties which have rent control normally are in
the direct path of urban pressures, particularly in New Jersey where rent
control counties are suburbs of New York City and Philadelphia. Non-rent
controlled counties are generally those outside the direct path of urban-
ization with fewer pressures for development.
Condominium Development and Rent Control. The assertion is often made that
rent control shifts builders and lenders out of apartment development to
condominiums. The evidence in New Jersey is mixed. While the New Jersey
rent control counties account for about 50 percent of the condominium
construction and 90 percent of the conversions in New Jersey, rent controls
may not be the cause since these counties also represent the top demand
sectors of the state for housing of all kinds. In addition, the leading
county in the state in condominium construction and conversions was
Atlantic, a non-rent controlled county that has experienced tremendous
pressures since gambling legalization in 1975.
Rent Control and Apartment Construction. The Gruen and Gruen Report states
"the construction data suggest (1972-76) that rent control did not shift
apartment construction from counties with many rent controlled municipalities
to counties with few such municipalities. While total construction dropped
significantly in these counties, as it did elsewhere, they maintained their
percentages of statewide construction. The units continued to be built in
the general areas where they were demanded. The data on the shift of
construction within the seven counties is also not decisive. In the
1972-76 period four of the rent controlled counties saw a shift of con-
struction from rent controlled municipalities while three of the counties
saw a continued increase in construction in its rent controlled municipalities.
In all the counties, however, there was some shift away from construction
in the more restrictive municipalities to those with more liberal ordinances."
Effect of_ Rent Control on Rental Construction in General. New Jersey, as
the rest of the nation, experienced a decline in rental construction in the
70's. This trend was evident in rent controlled and non-rent controlled
areas. Many complex factors are responsible, including cost of apartment
development, the scarcity of properly zoned land; the popularity of ownership
whether single family or condominium multifamily; and the increased avail-
ability of mortgage money to make ownership available to more households.
28
Rent Control and Availability of Financing in New Jersey. A survey of
short-and long-term effects of rent control on mortgage financing in New
Jersey presented several interesting findings. The New Jersey mortgage
market is one of the country's strongest and has remained so despite rent
control and many other developments. The continuation and increase in
mortgage debt for multifamily structures (5+) was explained by the great
pressures to get investment out of local communities. However, New Jersey
mortgage sources state that local regulations of all kinds (including rent
control) are changing the character of apartment construction, i.e., from
smaller or medium sized to very large; from municipalities to outlying
areas where political pressures are less. Lastly, the most significant
finding of a survey of New Jersey lenders was that the long run effect of
rent control would depend upon the rate and magnitude of passthrough
provisions. If the passthroughs are generous and perceived to be stable,
the lenders will have confidence in the ability to obtain adequate return.
"They may not be willing to lend as high a proportion of the total cost as
they would absent rent control, but they will nevertheless make loans.
When passthroughs are eliminated, the lenders willingness to make loans
will also disappear."
Rent Control and Tax Assessments. It is difficult to evaluate the effects
of rent control on changes in assessments because tax assessments are
usually far behind economic trends. This has certainly been the case in
New Jersey despite the appeals of landlords that their property is over-
assessed considering the restrictions facing them in raising income (rents).
Again the tax assessments of rental properties under rent control can be
judged much the same way as availability of mortgage money to rental
housing. Serious change in assessments and their dislocations of the tax
burdens to other groups (i.e., homeowners) would only take place under very
restrictive types of rent control.
Rent Control and Housing Quality. Rent control has often been blamed for
causing various types of deterioration and lowering of housing quality.
One of the general conclusions of studies looking at housing quality in New
Jersey is that in the absence of other factors causing deterioration (i.e.,
neighborhood change; crime; lack of code enforcement low socio-economic
status) rent control alone will not cause deterioration. However, when
present with some of all the above conditions, it will speed deterioration.
Again, the same generalization on housing quality as on mortgage funding
and taxes can be made in New Jersey—when the rent programs are liberal,
allow passthroughs, and particularly make exceptions for rehabilitation, rent
control will be a neutral factor in maintenance of quality.
RENT CONTROL SYSTEMS TIED TO FAIR NET OPERATING INCOME
Massachusetts
Background. The very complex rent regulation systens operative in Massa-
chusetts are based on principles known as Fair Net Operating Income
(FNOI). They are more complicated than complaint systems or than systems
based on agreed upon percentage increases, whether CPI or some arbitrary
figure. Systems such as FNOI require a much larger administrative frame-
work to operate because of the very specific knowledge necessary for each
29
building and investment. Many observers of rent regulation systems believe,
however, that such system, even though complicated and difficult to
administer, are fundamentally more fair since each situation is judged on
its individual merits.
State Enabling, The Massachusetts system was made possible by State
enabling legislation in 1969. It is considered quite stringent and local
ordinances are currently in effect in Boston, Brookline, and Cambridge (the
latter two are in the Boston area). The General Laws of Massachusetts read
as follows: "The board or the administration shall make such individual or
general adjustments either upward or downward of the maximum rent established
by Section 7 for controlled rental units or any class of ontrolled rental
units are established at levels which yield to landlords a fair net
arating income." The definition of fair net operating income is left to
municipality. As a result a wide variation exists. The formula and
methods of determining it have been different for the various municipalities.
Boston
Background. Boston began its own Rent Review Board by Mayoral proclamation
in 1968 and has had a succession of ordinances since then. By 1977 Boston
had a system controlling 74,000 units which was overseen by a paid five-member
Board appointed by the Mayor and administered by an Executive Director.
The ordinance included registration of units, adjustments of rent, eviction
control, and vacancy decontrol. In 1977 the Rent Board granted a general
rent adjustment of 11 percent with a 50 percent exemption for the elderly.
In September, 1977, a Mayor's Committee recommended that all rent controls
be lifted except for the elderly and that those renting to the elderly be
provided with relief through the tax abatement process. The conclusions of
this report were not totally accepted. At the present time the City is
operating under its own ordinance adopted effective January 1976 which
provides for vacancy decontrol. The Board estimates that about 30,000
units have been decontrolled as a result of the vacancy decontrol pro-
vision. The current law is due to expire in December, 1979, and there is
no way of telling if it will be continued.
One of the major factors in the Committee's recommendation was "lessening
of the emergency housing situation in Boston as evidenced by rising vacancy
rates." A long term change in Boston's multifamily construction trends
in the past decade has been the shift from conventional multifamily develop-
ment to subsidized multifamily development. Conventional mortgages dropped
from 68 percent to 28 percent between 1970 and 1977. This has many
causes, including the desire of the City to increase its supply of low and
moderate cost housing.
Another reason for the Committee's recommendations was thatythe Boston
system of case by case review is inefficient and difficult to administer.
The report concludes that the difficulty in obtaining increases causes few
applications. The process is complex (especially the ENOI Formula), time
consuming, and requires excessive paper work.
The best conclusions of the study are that the City of Boston maintain
rent and evictions controls for those people 62 years or older who have
30
fixed incomes and now live in rent controlled units. Further recommen-
dations for streamlining the administration of the process were also made.
The Rent Control Board would still hold hearings on increases, reductions,
and evictions.
FNOI in Boston. Boston still operates under FNOI. The formula used fixes
a structure's dollar Net Operating Income as of the end of December, 1971.
The method assumes that the rents charged as of this date yielded the
landlord a fair net operating income. In theory to retain the same NOI in
dollars subsequent to December 1971, landlords simply must be given rent
increases commensurate with increases in operating costs. Simple passthroughs
are not permitted and complicated formulas are used. NOI is computed
differently for separate classes of buildings. For example, for buildings
with more than six units, the NOI equals 25 to 40 percent of Gross Operating
Income (GOI). In buildings with six or fewer, the NOI equals 20 to 35
percent of GOI. In addition, Boston analyzes accumulated return on equity
to determine if the landlord is getting a fair return on equity. The
formula is Net Operating Income divided by accumulated equity which gives
the percent return on equity. If return on equity is less than 6 percent,
accumulated equity is simply multiplied by .06 to arrive at a net income
needed to provide a 6 percent return.
Cambridge, Brookline, and Somerville all have had systems' established by state
legislation and conforming to local standards. Brookline1s system is
particularly well known. It allows a return of 6-11 percent on market
value. Market value may be determined in any one of the following manners:
o Current purchase price,
o Estimate of certified appraiser,
o Landlord testimony,
o 5.5 gross income multiplier, or
o 1.45 x assessed value.
An additional factor is that the rate of return is contingent upon the
condition of the property:
o 6-7 percent return on poor properties,
o 8-9 percent reuturn on fair properties, or
o 10-11 percent return on good or excellent properties.
Brookline and Cambridge are similar to Boston in that FNOI is based on
a previous year before rent regulation. Somerville (also in the Boston
area) aldermen voted in December, 1978, to end rent control.
Evaluation. A major problem with the FNOI method (as reported in the
Report of the Mayor's Committee on Rent Control, September, 1977) is that
it requires case by case evaluation, and a huge administrative structure.
In addition, because of date of purchase and type of financing, identical
buildings and units might carry quite different allowable rents. Lastly,
the discussion of what constitute Fair Net Operating Income has never been
adequately determined and has been litigated in several instances. The
first FNOI approach was incorporated into federal rent control in 1949 and
based on a percentage of Gross Net Operating Income. Smaller units were
31
allowed to yield up to 30 percent and larger ones up to 25 percent. From
this point FNOI was incorporated into many statutes but formulas based on
percentage of value (variously determined) tended to prevail. While the
courts have upheld the legality of FNOI, little guidance on what constitutes
FNOI has been provided. Definitions and formulas have been left to local
municipalities with resulting wide variations.
The degree of variation occurring under the FNOI system is evident in the
following four types of formulas used to define fair net operating income:
1. Value Formula—FNOI is equivalent to some percentage of the value
of the property; value can be defined by a number of approaches.
2. Gross Rent Formula—FNOI is equal to some percentage of the total
rents charged in the building.
3. Equity Formula—FNOI allows the owner a percentage rate of return on
the actual cash investment in the property.
4. Dollar Net Operating Income Formula—FNOI uses no rate of return and
no base but provides the owner the same net operating income earned
in an earlier "base year" or that amount increased by some percentage,
i.e., the general rate of inflation reflected in the Consumer Price
Index.
Option 1 presents all of the difficulties of how value is determined; options
2 and 4 bring up the whole issue of current vs. previous base year costs
and Option 3 usually results in a wide variations of allowable rents for
similar buildings because of the variability of financing tools, equity
arrangements, and depreciation.
FNOI is generally held to be constitutional. However, specifics in the
application of the formula have often been invalidated.
MAXIMUM BASE RENT
New York
Background. In New York City about 1.4 million units are subject to either
rent control or rent stabilization. When federal rent controls lapsed in 1950, t±
State of New York passed its own rent control program covering New York City
and about 120 other cities and villages. During the years 1950-1961, a
state-run rent control system was in effect. In 1953 a 15 percent across
the board increase was given. In addition, inflation was not severe, rehab-
ilitated buildings could escape, and new residential construction after
1947 was exempt.
In 1962 administration of the system was transferred to the City. Controls
became more restrictive with only two allowances available—a 15 percent
rent increase upon vacancy and allowances for replacements of equipment.
Between 1962 and 1969 the shortage of units and pressure on the newer stock
(post-1947) prompted the City to impose new controls on post 1947 housing.
Ihe Rent Stabilization Law of 1969 created an industry-policed system
32
termed rent stabilization. A nine-member Rent Guidelines Board establishes
guidelines for annual increases and renewal of leases.
In 1970 the first major reform of the original rent control system took
place with the establishment of Maximum Base Rent (MBR). The MBR represents
an approximation of the rent required to operate controlled buildings under
an economic rent. The MBR is established for all units biennially.
Rents are permitted to rise by 1\ percent annually until the MBR is reached.
Upon vacancy the unit was allowed to rise the full MBR. Administration of
the MBR program has been very complex. The data are too complex for most
owners to complete, computerization of the system has failed, and rent
increases are denied to those owners not certifying that building is code
violation free. An estimated 30 percent of the pre-1974 controlled inventory
have never obtained MBR.
In 1971 the State superseded the City with the Vacancy Decontrol Law which
permitted all apartments whether controlled or stabilized that were volun-
tarily vacated to be rented at free market rent. In 1974 the New York
State Emergency Tenant Protection Act of 1974 (ETPA) eliminated vacancy
decontrol; placed units built between 1969 and December 31, 1973 under
stabilization; and placed vacancy decontrolled units vacated after May 1,
1974 under stabilization. Since 1974 rents have generally been allowed to
go up about 5 percent per year for stabilized units and ~l\ percent for
controlled units (these latter are starting from a lower base). Units
vacated under the old control program automatically became part of the
stabilization system. Currently in New York City, about 500,000 units are
subject to rent control and about 800,000 to rent stabilization (1969).
The original control system is considered highly restrictive while the
stabilization system is considered less restrictive.
Evaluation. New York's various systems exhibit not only the disagreement
over types and severities of systems, but a conflict between state and
local government and city versus industry administration. From 1943-1962
the system was run by the state and had only one major increase with other
allowable expenses having to be proved. In 1962 the system was transferred
to the City. In 1969 the City issued an additional law which, in effect,
put all other units in the City under rent stabilization administered by
the industry. Failure to register for this system, however, means auto-
matic imposition of the rent control system. After a three-year period of
attempting to decontrol (1971-1974), the Emergency Tenant Protection Act of
1974 effectively put every unit in the City constructed before December 31,
1973, under one system or the other. As units under control are vacated,
they go under stabilization. Annual increases are established by the Rent
Guidelines Board.
In June, 1977, an Interim Report to the Mayor by the Temporary Commission
on City Finances reccranended phasing out of both systems and gradual
vacancy decontrol. The report recommends that ETPA be repealed and the
state revoke local administration and conduct the phase out itself. All
controlled and stabilized housing would be placed under administration of
the State Rent Stabilization Board which would administer: annual in-
creases with an added 1.5 percent to reestablish equity return over time,
automatic decontrol upon vacation or legal eviction, and establishment of a
33
needs criterion for families in controlled units with incomes over $20,000.
A final recommendation is to actually facilitate conversion to condominiums
and cooperatives by various changes in state and local laws.
EVALUATION OF RENT CONTROL
Advantages of Rent Control
Emergency Situation. The utility of rent control as a tool of government
policy is most readily seen in wartime emergency situations. As invoked
in World Wars I and II, the purpose of controls was to stabilize rents
during indefinite emergencies, when no other solutions were available. For
example, the alternate solution of "additional building" was not a wartime
possibility because resources had to be used elsewhere.
The Nature of the Housing Market. In the classically competitive market,
rising demand should generate increased production until supply meets
demand. Proponents of rent control argue, however, that the housing market
does not meet the classic competition standard — that supply is dependent
upon financing, costs, governmental regulation (such as growth curbs), and
availability of public facilities. They claim that since the market can
only correct itself after long delays, rent controls are a necessary public
policy at least during periods of adjustment.
Housing as a Consumer Commodity. The unique characteristics of housing
consumption are cited as another reason for special protection for the
housing consumer. Other costs are considered more elastic or flexible:
buying fewer clothes, consuming less energy, etc. However, rent increases,
especially in time of low vacancy rates, are considered inflexible.
Rent Control As a Social Function for Lower Income Households. Rent
control is often viewed by housing advocates as a strategy for providing
housing protection for the poor and especially the elderly on fixed incomes.
Indeed, the principles of rent control are written into every type of
housing subsidy program, i.e., rents are set at what a tenant can afford
and even market rents are set by an evaluation of costs and the local
market. In the absence of any other measures, some forms of rent control
may be the only method available to protect low income tenants. Lastly,
even some critics of general rent control have recommended its use for the
elderly on fixed incomes with consequent remuneration in the form of tax
abatement to landlords.
Disadvantages of Rent Control
Discourages Housing Production. The most serious criticism of rent control
svstems is that they discourage housing production and more production is
specifically needed to moderate rents. Although new construction is almost
always exempt from controls, the housing industry is wary of the possible
extension of controls. Indeed, under most systems (such as New Jersey),
new construction is factored into the program at the end of the first lease
or first year. Although initial rents are set by local market conditions,
even new construction is soon under regulation. Both theoretical and
empirical studies indicate that rent control probably has no effect on the
34
volume of housing constructed, but a serious effect on the mix of housing,
i.e., rent control seems to facilitate the shift to owner occupied and
luxury units and more recently to the condominium market.
Lowers Housing Quality. Critics of rent control argue that since many
costs of housing are fixed, landlords have most control over maintenance
and this is the first item to suffer with restricted income. Certainly
under very restrictive forms of rent control, particularly that in New York
City in the fifties and sixties, several empirical studies show high
correlation between rent control and deterioration.
Of course, other complex social and economic factors were also contributors
to deterioration. Most lenders seem to relate maintenance of quality to
the restrictiveness of the rent regulation program and to the passthrough
issue (where certain costs are permitted to be "passed through" as an
increase in rent). Where passthroughs are generous, housing quality can be
maintained. The quality question is also linked to the powers and attitudes
of the regulatory body. The city of Brookline, Massachusetts, for example,
places such a premium on housing quality that the percentage return each
year is determined by the quality of the property.
Causes Inequities in the Housing Market. Another serious criticism of
retn control systems is that subsidies are dispensed without regard to
income or needs of tenants. The exemptions under most rent control programs
are not related to income except that in some systems luxury units may be
exempted. Rent control also tends to limit mobility and use housing in-
efficiently because people are encouraged to remain in rent controlled units.
Rent control applied to all rental housing or at least multifamily rentals
would certainly provide benefits for some high as well as low income
people. This has particularly been the case in the eastern cities where
until recently many high income people have tended to rent. In California,
and the San Diego area particularly, any rent regulation measures, while
benefitting some higher income households, would mainly benefit low and
moderate income households. (See Chapter 2, Profile of Renter demand.)
Long-Term Market Dislocations of Rent Control. A substantial part of the
wealth and viability of a community lies in its housing stock. The local
tax base is determined, in part, by that housing stock. Severe limitations
on the income of property cause tax appeals, abatements, and eventual
lowered assessments. Again, the issue here is not whether severe restrictions
will cause lowered values and a loss of an iitportant part of the tax base—
they will.
35
CHAPTER 4
THE CALIFORNIA
EXPERIENCE
The California Experience
OVERVIEW
Background
Housing market pressures, combined with the passage of Proposition 13 in
mid-1978, have increased discussion of rent control, rent stabilization,
and renter rebates in California. Rent raises which occurred after passage
of Proposition 13 were particularly ill-received and were the single biggest
impetus to organized activity by tenant groups. Since June 1978 several
events around California have brought the rent control issue to the public
arena:
o In November, 1978, two cities, Davis and Berkeley, passed initiatives
to mandate rebates based on Proposition 13 savings.
o In summer and fall of 1978, El Monte and Los Angeles passed rent
moratoriums. El Monte's expired December 31, 1978 with no follow-up
action. Los Angeles' moratorium was in effect until May 1, 1979,
covered nearly 700,000 rental units, and a follow-up system was
implemented on May 1.
o In April, 1979, Santa Monica passed a rent control ordinance that
freezes rents for 120 days and then rolls them back to their May 1978
levels. The measure also set up a board which approves all rent
increases, condominium conversions, and building demolitions.
o Several state bills, ranging from actual control measures through
renter rebates to other tenant-landlord issues, are under discussion
in various legislative committees.
History
Since the end of World War II, California has consistently experienced
housing shortages. Various bills relating to rent control have been intro-
duced in the legislature. In 1971, AB 84 (Burton & Brown) called for
cities, counties, etc., to establish five-person rent appeal boards to act
as rent review boards. In 1975, AB 1567 was introduced which set forward
guidelines and definitions for the adoption of rent control systems.
The bills' provisions would have to be adopted by ordinance or initiative.
Neither bill passed. While many authorities have cited the wisdom of an
overall bill establishing criteria and standards, no statewide legislation
is necessary in California because local government has complete authority
to enact rent control under the California constitution. This authority was
39
upheld by the California Supreme Court in Berkenfeld vs. Berkeley in 1976.
Owners of rental property in Berkeley had brought the case when an initiative
(1972) was passed which established rent control. The court overturned the
initiative with the following opinion:
"The Supreme Court held that the existence of an emergency is not nec-
essary for rent control when such regulation is reasonably related to the
furtherance of a legitimate government purpose; that facts established at
trial did not preclude the city from legislating on the subject of resi-
dential rent control; that state law did not preempt the field of placing
maximum limits on residential rents; that an enactment for that purpose
could properly take the form of an initiative amendment to the city charter;
but that the amendment in question transgressed the constitutional limits
of the police power not because of its objectives but because of its provisions
prohibiting any adjustments in maximum rents except under a unit by unit
procedure which entailed inevitable unnreasonable delays, were not reasonably
related to the accomplishment of its objectives and would deprive landlords
of due process of law if permitted to take effect."
The California Supreme Court found nothing in California constitutional
law, tenant-landlord law, or municipal corporation law which would prevent
a California municipality from enacting rent control either by ordinance
or initiative.
The Berkeley initiative which was on the June 6, 1972 ballot and took effect
August 2, 1972, called for a rollback to August 1971 rents which would be
subjected to individual adjustments.
The Court held that such broad powers are given to municipalities and that
they are neither restricted from the field nor do they need enabling legis-
lation. The Court found that some eviction provisions included in the
initiative (i.e., special permits from the Rent Review Board) were superseded
by the state laws relating to tenant-landlord relationships. The Berkenfeld
decision also de-emphasized the necessity of the "emergency situation". "Hie
Court stated "for constitutional purposes rent control is indistinguishable
from other types of government price regulation It is now settled
California law that legislation regulating prices or otherwise restricting
contractual or property rights is within the police power if its operative
provisions are reasonably related to the accomplishment of a legitimate
governmental purpose."
The Court found, however, that the implementation of the statute was faulty
since "the Board has no power to adjust rent ceilings on any one of these
thousands of units until it has received a separate petition for that unit
and considered that petition at an adjustment hearing." The court board
found this procedure faulty and one that would deprive landlords of due
process and so retard relief as to be confiscatory.
Preemption Bill and Governor's Veto
In 1976, AB 3788, sometimes known as the Preemption Bill, was introduced.
Ttie bill declared that the imposition of rent controls on private housing
units is a statewide concern for several specified reasons and would reserve
40
the power to implement rent controls on private housing units to the Legislature
except for subsidized housing where rents would be controlled by the relevant
agency. AB 3788 was not a rent control bill but attempted to eliminate rent
control programs on the local level by reserving the field for the state
legislature. The bill was vetoed by Governor Brown and never became law.
The proponents of the bill, while certainly wishing to forestall local
action, also felt that even localized rent control would have serious
effects on the state's money markets and investor patterns. Proponents also
felt that if regulation were to corne, the state could prescribe the best
system.
Opponents of the bill saw it as anti-rent control and local elected officials
also saw it as anti-local control. All local rent control systems in
California were enacted subsequent to the defeat of AB 3788.
LOCAL RESPONSES
Los Angeles
Moratorium. In September, 1978, the City Council of Los Angeles passed an
ordinance declaring a rent increase moratorium. The moratorium was in
response to pressure following passage of Proposition 13 and rents were rolled
back to May 13, 1978, levels. The moratorium originally was to extend from
October 1, 1978, to April 1, 1979, (6 months) but it was later extended to
May 1, 1979, and covers nearly 700,000 rental units.
Los Angeles Moratorium and Rent Regulation Program. With the expiration of
the moratorium, the following rent regulation systems was implemented:
o A 7 percent allowable increase for all units which have not been
increased for a minimum of 12 consecutive months;
o An addition 6 percent increase for each year in which rents have not
been raised (May 31, 1976-77 and 1978-79);
o If a unit had not had an increase since May, 1976, a possible 19
percent increase could be levied;
o Rents may be raised when a unit is vacated voluntarily (vacancy decontrol);
o "Good Cause" eviction, i.e., evictions only on such grounds as refusal
to pay rent, violation of an obligation of tenancy, committing a
nuisance, damaging the premises, or using them for illegal purposes;
o Appointment of a seven-member Rent Adjustment Commission composed of
neither landlords nor tenants which could hear appeals from hearing
officers' decisions;
o Civil penalties for violation of the ordinance;
o Exemption of new construction, single family dwellings and luxury accom-
modations, hotels, motels, and boarding houses; and
o Ordinance to extend for one-year term.
41
Davis and Berkeley—Rent Initiatives Tied to Proposition 13 Savings
In November, 1978, both Davis and Berkeley passed rent initiatives tied to
Proposition 13. In Berkeley this initiative was Measure I. The purpose
was to provide a portion of Proposition 13 savings to renters through
renter relief. Measure I applies to all rental units except those exempt
from property taxes, units in hotels, motels, homes, hospitals, or four or
fewer units where one unit is occupied by the owner. Subsidized units are
included unless specifically exempted by federal or state regulations.
Under the measure the rent charged on June 6, 1978, is considered as base
rent and shall be indicated as such by the landlord to the tenant before
December 31, 1978. The landlord shall then calculate the property tax
savings between the 1977-78 tax bill and the 1978-79 tax bill. Eighty
percent of that savings shall be apportioned to the rental units covered by
the bill. "The Renter Property Tax Relief for each rental unit covered by
this ordinance shall be apportioned over calendar year 1979 by reducing the
base rent of the rental unit by an amount equal to that unit's allocated
Renter Property Tax Relief divided by the number of rent payments to be
made in 1979." If rent is paid on a monthly basis, half of the unit's
allocated Renter Property Tax Relief would be the monthly rent reduction
over calendar year 1979. By December 15, 1978, or within 15 days of the
issuance of the property tax bills for 1978-79, whichever is later, the
renter of each unit covered by Measure I had to be informed of the relief
applicable to that unit by the owner and the rent in effect during 1979 as
calculated by base rent (June 1978) less relief.
As a part of the measure the owner is authorized to increase the Maximum
Allowable Rent if increased operating costs actually exceed the 20 percent
of property tax savings retained by the owner. Those operating costs for
which rent may be increased are limited by this initiative measure to:
o increased mortgage interest attributable to sale or refinancing,
o increased taxes,
o increases in insurance, maintenance, or utility costs, and
o substantial rehabilitation or capital improvement costs incurred
between June 6, 1977 and November 7, 1978; where such costs are in-
curred between November 7, 1978, and December 31, 1979, the informed
consent of all tenants is required unless these costs are incurred to
comply with legal liability requirements or housing codes.
Davis* Initiative T, also passed in November 1978, has some differences.
Unlike most rent regulation systems, this initiative includes business
rentals. In addition, the entire tax savings must be passed on to each
rental unit on a prorated share. However, in calculating base rent (also
June 1978), the landlord may add either a 4 percent cost of living allowance
or the "unavoidable increases in maintenance and operating expenses" pro-
vided this latter does not exceed November 1978 rent and the owner makes
the facts of the increases known. Certain rent increases beyond this are
allowable if they are specifically related to increases in municipal fees
or increases in property taxes. The ordinance also forbids retaliatory
42
eviction. Other particulars of the initiative are similar to Measure I in
Berkeley.
Legal action by plaintiffs declaring the Davis initiative confiscatory and
unconstitutional and appealing for injunctive relief was filed in Yolo
County, Superior Court of California, on December 1, 1978. Mb decision has
yet been made.
San Francisco
The San Francisco Board of Supervisors approved a sixty-day moratorium on
all rents in San Franciscoj a proposal for a six-month freeze was rejected.
A five-member committee was also commissioned to study new guidelines for
rent control and condominium conversions. The City has also approved a
forty-five day moratorium on condominium conversions. Fifty-three percent
of the voters had defeated a rent roll back in November, 1978, elections in
San Francisco.
Others
Rent control or rent freeze measures have been enacted by city councils
in El Monte, Beverly Hills, and Vacaville. Santa Monica voters reversed
their position in the November, 1978, election and froze rents for 120
days after which the rents will be rolled back to their May, 1978, levels.
The measure also set up a five-member rent control board that will have to
approve all rent increases and condominium conversions.
PROPOSED LEGISLATION
Possible Legislative Action Now Under Consideration
State legislation is proceeding in the two different areas of landlord-
tenant law changes and of various renter rebate proposals.
Tenant-Landlord. In the area of tenant-landlord relations, several pro-
posals controlling evictions have been suggested including:
o AB 33 (Rosenthai: Judiciary). Under current law a landlord may not
interrupt or terminate utilities and is liable in civil action for $100
per day and attorney's fees. This law would make the landlord liable
to the tenant in civil action if the landlord unlawfully removes or
excludes the tenant from the premises or wilfully causes the diminution
of any utility service. The remedies available to the tenant would be
damages equal to two months rent, or twice the actual damages, whichever
is greater, plus reasonable attorney's fees and the option of continuing
in possession or terminating the rental agreement. The bill also puts
the burden of proof for rentability on the landlord and would allow the
tenant to exercise available remedies in a greater number of situations
relating to habitability. Lastly, the bill makes retaliatory evictions
more difficult by eliminating the relevant time period (now 60 days).
The bill would provide that a landlord is precluded at all times from
taking actions against a tenant where the landlord has, as any part of
the action, retaliation against the tenant becuase of the tenant's
43
exercise of rights. Under existing law a tenant may invoke the retaliatory
provision only once in a 12 months period but this limitation is elim-
inated. This bill, while still a far way from proscribing just cause
eviction, still offers certain protections, particularly on retaliatory
evictions.
o AB 211. This bill has similar provisions to, but is not as complete a
AB 33.
o AB 779/SB 517. The "Just Cause" eviction bill prohibits arbitrary evic-
tions.
o AB 293. Regulates security deposits.
o AB 606. Requires written leases in non-technical language.
o SB 440. Prohibits discrimination against families with children.
o SB 229. Creates a rental housing construction fund to stimulate the
building of low and moderate income housing.
Renter Tax Credit. Several bills have been introduced into Senate and
Assembly committees to increase the current $37 renters tax credit to recapture
Proposition 13 Property Tax Savings:
o AB 15 would increase the $37 credit to $180 for taxable years
beginning 1979.
o AB 81 would increase the $37 credit to $300 for taxable years
beginning 1976.
o SB 164 would increase the $37 credit to $137 for taxable years
beginning 1976 and apply the rebate to each unit of rented property.
o SB 251 also increases credit from $37 to $87 for individuals
and $157 for married couples beginning with 1979.
o AB 267 amends existing law on credits to include recipients
of certain public assistance programs previously ineligible, The
Franchise Tax Board shall provide appropriate information on the credit
to the Department of Health Services so that notices may be included in
Medi-Cal mailings.
Rent Jtelief • The two major rent relief bills, AB 15 (Bates) and AB 81
(Roos) are currently being discussed in various committees. The Bates bill is
straightforward in that it allows a $300 renter relief filed with personal
income tax. Current deduction is $37. The bill would cost about one billion
dollars from the general fund. The Roos bill is more complicated. It allows a
credit of $180 but also establishes what is called "a taxable possessory
interest in real property rented for one month or more." This means that
in addition to the $180 credit, the tenant may also deduct a pro-rated share of
the rent that is allocated toward property taxes paid by the owner. This
latter provision must be approved by the IRS that it is permitted on the
44
federal level. This bill would cost about $525 million or half the Bates
bill. It is still too early to tell what the final disposition of these
bills will be. The advantage of the flat rate renter tax relief include:
o all renters are treated equally;
o the credit is progressive;
o a refundable feature ensures tax relief to the lowest income whether
a tax liability is owed or not;
o it is simply administered through the personal income tax;
o relief is direct to the renter; and
o its impact is neutral on the housing market and investment decisions.
45
CHAPTER 5
CONDOMINIUM
CONVERSIONS
Condominium Conversions
BACKGROUND
The development of condominiums is a relatively new phenomenon in Cali-
fornia and in San Diego. The following Table summarizes the growing
importance of condominium construction in the San Diego Region since 1970.
Number of Condominiums Percent of Housing Stock
1970 2,319 Less than 1.0
(Census)
1977 34,699 6.5
(Assessor's Records)
1979 47,841 8.5
(Assessor and Title
Records)
The above data include both new construction and conversions. The develop-
ment of condomiums has been considered to be both a response to lifestyle
changes and to economics. Condominiums seem to combine the obvious tax and
appreciation values of home ownership while at the same time minimizing the
upkeep and outdoor expenses of the single family unit. They have also
enabled both space and money to be pooled to provide common recreation areas
far superior to what may be provided in the single family home.
And, while costs are relative and all housing prices continue to increase
rapidly, a considerable price difference between the condominium and single
family unit still exists. A 1977 survey noted that the median sales price
on condominium units was nearly $7,000 below single family prices for that
year. Throughout the early and mid-seventies, condominiums were being built
to satisfy the demand for two distinct markets: the first home market and
the retirement market.
In the period 1972 through 1977, condominiums have been averaging anywhere
from one-third to 40 percent of the total units recorded. This condominium
development has been confined primarily to a few areas where a very large
percentage, and sometimes a majority, of all units recorded were condominiums:
the North Coast from Del Mar to La Costa, Rancho Bernardo, La Jolla, Pacific
Beach and Clairemont, Miramar and the North and East City areas of San Diego
City, Central San Diego and Mission Bay, El Cajon and La Mesa, and Eastern
San Diego County.
While condominiums continue to increase in builder preference and are the
most popular choice for the first home buyer and the retired, Assessor's
49
evidence indicates that nearly half (46.7 percent) of all condominiums are
actually rented and so supply a great part of the rental housing stock.
While condominium development has been proceeding rapidly since about 1972,
condominium conversion is a more recent phenomenon, late 1976. Most major
conversions in the County took place in 1977 and 1978. About 950 conversions
are estimated to have taken place in 1977 and 2800 in 1978, the major years
for the conversions. The conversions have mostly been in the cities of San
Diego and La Mesa. La Mesa had experienced substantial conversion activity
before its current ordinance. The City of San Diego, which has no con-
version ordinance at this time, estimates that during 1978 subdivision maps
for conversion were filed on approximately 6,500 units and in the first
quarter of 1979 maps for about 1,000 units have been filed. Leading
conversion areas are Mission Valley, West Clairemont, Pacific Beach, and
Navajo-Lake Murray. Many of these maps filed for conversion have not as
yet taken place.
The condominium conversion phenomenon presents local government with two
distinct problems. The first is the problem of assuring that conversions
meet minimum property standards. The second is the socio-economic problem
of possible loss of rental units and the corresponding increase in rents
after conversion.
The physical standards issue is met mainly by complying with requirements
of the California Subidvision Map Act which requires that a map be filed
and approval be given by the jurisdiction before a conversion can take
place. However, condominium projects which involve only the subdivision
of air space of an existing structure, without construction or addition
of new units, are expressly exempted from conforming to general and spec-
ific plans unless applicable plans contain definite objectives and policies
specifically related to the conversion of existing buildings into condo-
minium projects. For this reason, most jurisdictions have adopted some
kind of conversion ordinance to remedy what appears to be the inapplicability
of the Subidivion Map Act to conversions. Hiat would mean conversions must
conform to general and specific plans without any specific policies relating
to conversions cited in these plans.
MAINTAINING DEVELOPMENT STANDARDS
Maintaining high development standards for conversions is a matter of local
option and can be done by introducing various ordinances requiring minimum
standards for conversions. Local government can dictate the standards by
deciding whether conversions must meet current building and zoning standards.
Requiring conversions to meet current and/or special performance standards
rules out many potential conversions and also could require large expenditures
to have newer construction meet current standards. Most conversion ordinances
are related to bringing conversions up to current standards. Specific
requirements such as recreational facilities and/or storage space are often
mentioned. See Table 5 for description of San Diego area ordinances.
SOCIAL AND ECONOMIC CONCERNS
The issue of loss of rental housing which occurs because of conversions is
more difficult than physical standards. Even though many converted units
50
are ultimately rented again, rents are usually 30-35 percent higher than
before conversion. Seeking to control conversions because of loss of rental
supply is more difficult and usually requires special provisions in the
housing element and specific ordinance requirements related to vacancy,
tenant approval, set aside for low and moderate income, in-lieu fees, or
even relocation costs. Cities which have ordinances relating to some of the
above socio-economic concerns are:
Palo Alto, California
San Francisco, California
Marin County, California
Alameda, California
Washington, D. C.
New York, New York
Requires 3 percent vacancy or tw>-thirds tenant
approval.
Thirty-five percent tenant approval over 50 units;
18 months before eviction; some low and moderate
units must be retained; developer pays reasonable
relocation for low and moderate income tenants.
Five percent vacancy; 15 percent low or moderate
income.
$150 moving expenses.
Three percent vacancy or 51 percent approval in
non-high rent buildings; some low and moderate income
units retained; $125 moving expenses; developer
required to pay 2 years housing assistance
payments and city 3 more years to low and
moderate income tenants; action followed 2-year
moratorium.
Thirty-five percent of tenants must agree to purchase
units; tenant eviction delayed 2 years beyond lease,
New York State's Goodman Dearie Law.
ROLE OF THE STATE DEPARTMENT OF REAL ESTATE
In California, the Department of Real Estate functions as a consumer protection
and disclosure agent. It requires information on the condition, equipment,
status of local inspection, inspection reports on major structural components,
and data on the corporation or group converting the property. The Department
established rules for disclosure, notice of 120 days to vacate, and 60-day right
of first refusal by present tenants.
51
APPENDIX
BACKGROUND ON
RENTAL STATISTICS
r
TABLE 1
PERCENT OWNER AND RENTER BY INCOME
IN THE SAN DIEGO REGION
Income Percent Owner Percent Renter
Less than $3,000 34.7 65.3
$ 3,000-$ 4,999 24.9 75.1
$ 5,000-$ 6,999 38.4 61.6
$ 7,000-$ 9,999 40.2 59.8
$10,000-$14,999 58.1 41.9
$15,999-$19,999 77.4 22.6
$20,000 - $24,999 80.3 18.7
$25,000 - $34,999 86.7 13.3
$35,000+ 89.9 10.1
Total 56.6 43.4
Source: U.S. Bureau of the Census, 1975 Annual Housing Survey:
Housing Characteristics of Selected Metropolitan Areas, "San Diego, Calif.
Standard Metropolitan Statistical Area," Part C, Table 1.
55
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TABLE 4
PERCENTAGE OF HOME OWNERSHIP BY AREA
IN THE SAN DIEGO REGION
Area
Carlsbad
Chula Vista
Coronado
Del Mar
El Cajon
Escondido
Imperial Beach
La Mesa
National City
Oceanside
San Diego
San Marcos
Vista
San Diego County
Total
1970
53.4
56.3
34.4
44.9
59.2
63.1
33.8
63.0
44.5
55.5
56.5
66.5
66.7
59.3
51.0
1977
41.4
52.1
34.9
36.9
29.4
45.3
32.2
62.8
32.9
46.0
45.9
63.9
53.3
63.8
49.0
TABLE 5
CONTENT OF LOCAL CONDOMINIUM CONVERSTION ORDINANCES
Carlsbad
Chula Vista
Coronado
Del Mar
El Cajon
Escondido
Imperial Beach
La Mesa
Lemon Grove
National City
Oceanside
San Diego
San Marcos
Vista
San Diego Co.
Current
Standards
No Ordinance Requirements
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Extra
Provisions
X
X
X
X
X
X
X
X
X
Socio-Economic
Standards
Related to Inclusionary
Rental Supply Provisions
X X
X
X
X
Moratorium
Past or
Present
X
X
X
X
58
Notes on Table 5.
Carlsbad - Condominium construction and conversion standards are now the
same; requirements are greater than multifamily construction and include
storage, laundry, recreation, landscaping requirements.
Chula Vista - Although current standards must be met, these are the same
as for multifamily construction.
Del Mar - Ordinances not adopted yet; draft ordinance restricts condominium
construction and conversion to one area; requires 10 percent unit set aside
for low and moderate income or in lieu of payment.
El Cajon - Conversions are processed like a conditional use permit and
filed as a planned unit development and must meet same standards as current
planned unit development.
Escondido - Conversions are processed like a planned unit approval and
therefore must meet a five acre minimum except in unusual circumstances.
The effect of conversions on the City's rental supply is also cited in the
housing element.
Imperial Beach - Landscaping and parking requirements are those of current
multifamily, and additional off-street parking, recreational, fire wall,
trash and landscaping requirements are inposed.
La Mesa - After a series of conversions and a short moratorium, La Mesa
amended its ordinance covering conversions to directly relate to the supply
of rental housing in La Mesa. Under the amendment the number of converted
units in any one year is limited to one half of the average number of
apartment units constructed in the previous two years. A surplus cannot
be carried beyond two years.
National City - Following a moratorium the City limited condominiums
whether new or conversions to project having 5 or more units, citing the
special design, maintenance and space relationships not found in small
apartments or duplexes.
San Marcos - Conversions are processed as special use permit, must meet all
existing standards, plus recreation, underground utilities, trash enclo-
sures, or any other conditions of the planning commission during the
special use permit procedure.
Vista - In addition to meeting current standards, findings must be made that
conversion is not detrimental to the community's stock of lower income housing
defined as households below 80 percent of median income (Housing Element).
San Diego County - The County's recent ordinance requires all conversions
to meet current zoning and building requirements. A short moratorium
preceded this action.
59