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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. r f 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, r' 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. r r 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. r 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.) 11 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 13 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 $35,000+ 89.9 10.1 Total 56.6 43.4 Source: U.S. Bureau of the Census, 1975 Annual Housing Survey: Housing Characteristics of Selected Metropolitan Areas, "San Diego, Calif. 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CO CO ^1 CO O) | T— 1 i- CO COin in CN r-» in co O i- CN r- o o o <- t*. co in co CO CO CO r^. ^- co oo r- coCM O> O5 O CM CO tCN CN T- r-- 'sf cooo r* coCM Other Female Head<6565+"* 3 (O$ CM CO CO CO CO CO ^ ^ CO 00 O) «- U)*• inen CO CO in in in 3£ 2 o S00 8 oI < I o o 3o o 0) f« «0) 0- €=. ^S I-1.S 00 2 W ra 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