Tenants vs. Landlords: San Francisco Rent Control On The Books
Rent control has long historical roots, appearing in the United States during World War I in the form of “Fair Rent” activism[1]. As wartime production boomed, people flocked to cities, stressing the housing stock and sending rents skyrocketing. Legislation in New York and Washington DC tested the waters of rent control on behalf of tenants, spurring a Supreme Court battle. Lower courts initially ruled rent control unconstitutional, but the Supreme Court overturned this decision[2]. No new rent control programs were created until the 1970s. San Francisco, a strained building supply and dramatic rent hikes routinely forced businesses and individuals out. Among these displaced persons was Harvey Milk. As city supervisor, he began pushing for rent control to protect tenants from rent spikes[3]. By 1979, tenants’ rights advocates and powerful neighborhood organizations had obtained a 60-day rent freeze and subsequently managed to push through Chapter 37 of the San Francisco Administrative Code: The Residential Rent Stabilization and Arbitration Board.
Chapter 37 is designed to protect tenants from unfair rent increases, while trying to balance the interests of property owners. The Title & Findings, authored by the Board of Supervisors, states the “shortage of decent, safe, and sanitary housing” was interfering with the “necessities of life” and rent therefore must be capped[4]. This cap sits at the annual increase in the San Francisco consumer price index (CPI). The definitions listed early in the bill have become the impetus for many legal challenges and alterations, including “capital expenditure” and “rental units”. Allowances are made for a range of pass-through charges[5]. Most significant amongst these is the ability to pass-through capital expenditures[6] [7]. This is the first section, 18 pages into the legislation, where a clear concession is made to the landlords. Tenants routinely argue landlords abuse capital expenditure pass-throughs to inflate rent while simultaneously increasing the value of their property[8]. Landlords assert this ability is necessary to make property improvements cost effective and the city agreed with them in 2006. Amendments to this section expanded the ability for landlords to pass through certain spiking costs of ownership.
The Rent Stabilization and Arbitration Board is established and structured midway through the bill. This is the regulatory body that oversees and enforces rent control. All members are elected and empowered to utilize their discretion over issues that arise. Enumerated duties include periodic review of the state of rent in San Francisco, the certification of any rent increases beyond the CPI, and hearing of any complaints related to rent control. The Board also has the duty to facilitate legal proceedings in regards to any of its duties[9]. These cases are frequently bitter and of great consequence for the parties involved. That stated, there is often a strong bias towards landlords as they are typically of greater means and have more experience with the legal system[10].
Organizations like the San Francisco Tenants Union (SFTU) attempt to bridge this gap by providing legal aid and mobilize community support, much like the neighborhood organizations that championed rent control in the 1970s. “The burden of proof is on the landlord”[11] in such cases, though, which helps tenants even the odds especially in the case of just-cause evictions. Known as Ellis evictions, these range from violation of the terms of the lease agreement to landlord move-in[12]. Ellis evictions are another point of contention brought by tenant advocacy groups like the SFTU on grounds landlords can easily abuse this law to unlawfully remove tenants. Landlords counter they have the right to use their property as they see fit[13].
The wide array of amendments applied to San Francisco’s rent control serve to illustrate how politically contentious it is. The ability for tenants to claim legal fees against landlords was eliminated after property owners pushed back. Legal action against tenants was too expensive with this provision in place, forcing landlords to forgo legitimate claims. On the flipside, tenants won with the addition of the ability to file for relief of pass-through charges due to financial hardship. Passing through charges, especially capital expenditures, is constantly under fire. Evidence from Oakland[14], where these charges have become successively more limited over the last few years, suggests their time may be coming to an end.
Living In San Francisco: Rent Control in Action
The wave of rent control legislation during the Vietnam era attempted to combat a complex social, economic, and political issue. Rising costs of living adversely affected vulnerable populations, opening the door for drastic measures such as rent control. While originally intended as temporary, the housing crisis that spawned San Francisco’s rent laws persisted. Unfortunately, the scope and nature of rent make it highly resilient to a simple price ceiling. Real estate is an asset class with a market price. Deviations from that price create dramatic inefficiencies in the market. Additionally, the implantation of rent control in San Francisco left a lot to be desired. Political pressures and interest groups, ranging from developers to tenants, vied for particular phrasings or inclusions. The ultimate version of Chapter 37 is a patchwork of compromises.
The Rent Board of San Francisco administers rent control. This is a municipal governing body with the authority and mission to enact regulations pursuant to Chapter 37, conduct investigations, and adjudicate as necessary[15]. Tenants may file a complaint with the Board, whether about an illegal rent increase over the allowed maximum or an eviction. The Board then investigates and arbitrates as necessary. Additional legislation is frequently proposed to enhance the potency of the Rent Board. These range from expansion of relocation payments to evicted tenants and to elimination of capital expenditure pass-through[16]. In this capacity, the Board assures Chapter 37 is being implemented and enforced to the greatest degree possible.
Despite the genuine efforts of the Rent Board and due to the complexity of rent control, grey areas frequently arise. One such example is Mosser vs. San Francisco Rent Board (2015). The case involved a son who had moved into a rent-controlled apartment with his family in 2003. He decided to stay, with the landlord’s consent, when the rest of his family moved out in 2013. Upon their departure, the landlord attempted to increase the rent to market rates by citing all signatories of the original lease had vacated the premises. Brian and his family subsequently fought the increase on grounds Brian qualified as an “original occupant”[17] despite not signing the lease and won. This expanded the definition of an original occupant to include minors and other non-signatories who move into a unit with the signatories of a lease and the landlord’s consent.
The nature of Chapter 37 leads to intentionally selective enforcement of rent control. Many housing units fall outside the scope of Chapter 37 in an attempt to assure landlords their “fair and reasonable return”[18]. By the Rent Board’s count, it has authority over about 170,000 of the 380,000 units of total housing stock in the city[19]. Exemptions include any subsidized apartments, single-family homes or condos moved into after 1995, short-term residential hotels and other non-typical domiciles, and any apartments constructed after June 13, 1979. This final exemption has been the source of most non-rent-controlled units and much controversy.
For example, in Da Vinci Group v. San Francisco Rent etc. Bd. (1992), an industrial warehouse built in 1905 was remodeled and gained a certificate of occupancy in 1987. The owner of the property believed this qualified it for the aforementioned exemption and proceeded to charge tenants market rate rents. The tenants, in response, filed complaints and sued the owner until reaching the Supreme Court of San Francisco through a series of appeals. There, a ruling was handed down stating the construction date, not the date of the certificate of occupancy, is the date adhered to under the exemption. This expanded the reach of the Rent Board to include the large population of industrial properties across the city being remodeled into habitable units. These properties now facilitate the industrial-chic style San Francisco is known for alongside its contentious political landscape.
The commonality of complaints and lawsuits over rent control was made clear in a conversation with Natasha, the property manager of a Bay Area-based multifamily investment fund. She noted her firm has to field dozens of legal actions annually, though typically from a very select few tenants. This group, by her estimation, is about two or three percent of the total tenants, but more than 50% of the issues that arise. The typical focus is on perceived unjust rent increases based on capital expenditure pass-through. Aside from the legal burden generated by rent control, Natasha noted another issue: the disincentive for landlords to improve properties created by rent control. Maintenance and upgrades can be extremely costly. Rent control, though, prevents the immediate realization of the market value of these improvements. Even structurally necessary work may be deferred to a concerning degree because of friction landlords face in recouping the costs.
Upon the end of rent control in Cambridge, Massachusetts in 1995, significant value was added to the housing stock. Estimates place this increase at about two billion dollars between 1994 and 2004[20]. One billion dollars in value was derived directly from the 25 to 40 percent increase in rents Cambridge experienced. The other billion was an indirect increase resulting from improvements invested in by landlords. With tenant rollover eliminated as a factor, they could increase rents freely to market as they improved their buildings. Christopher, one of the authors of the paper and professor at the Haas School of Business, explained this result was not surprising at all. Rent control is a very blunt economic tool, known as a price ceiling that warps the behavior of markets. Typical economic incentives are either minimized or enhanced, creating costly inefficiencies. Many economists share this perspective. Ken, head of the Fisher Center for Real Estate and Urban Economics, went so far as to call rent control “a populist policy” that painfully damages otherwise healthy markets and drives up prices. Supply cannot catch up to demand without properly incentivized developers. They will seek returns elsewhere, removing many potential units from the San Francisco housing stock.
While these academic opinions are far divorced from those of people who desperately need rent control to afford a place to live, they make a poignant point: Unless the city of San Francisco significant steps up efforts to produce more housing units, rent will continue to increase. Carl, the Managing Director of merchant development group Tishman Speyer, gave this some personal context. He stated that, while building new apartments exempts them from rent control, costs to build below market-rate units “just don’t make sense”. Few people will rent new units in convenient areas, like the Financial District, for the astronomical rents their costs command. He postulated elimination of rent control and its associated costs would bring prices back down to Earth.
Overall, rent control is a questionably effective tool. While it helps many afford housing in high-demand areas, it warps markets and increases rents in the long run. Moving forward, the elimination of rent control in San Francisco likely isn’t a viable option. The pent up demand created by a restricted housing supply would cause rents to explode if rent control were removed over night. Many people would find their rents entirely unaffordable and be evicted. A slow scaling back would be much more viable, but still create a significant amount of hardship. Aside from this, increasing government involvement in the production could help. Additional subsidies for below market-rate housing in conjunction with rolling back rent control would provide both demand and supply side benefits to the market.
Citations
[1] J. W. Willis, “Short History of Rent Control Laws,” Cornell Law Review 36, no. 1 (Fall 1950): 69.
[2] Ibid, 71.
[3] Joe Kloc, “Go East, Young Renters,” Downtime, (April 25th, 2014): 4.
[4] The Residential Rent Stabilization and Arbitration Ordinance, SF Administration Code (File No. 188-79), Chapter 37: Section 37.1.
[5] Ibid, Section 37.3.
[6] Capital expenditures (CapEx) are physical upgrades made to a poperty, such as re-roofing a building.
[7] Ibid, Section 37.3.(a).3.
[8] “Rent Control,” San Francisco Tenant’s Union, https://www.sftu.org/rentcontrol/
[9] The Residential Rent Stabilization and Arbitration Ordinance, SF Administration Code (File No. 188-79), Chapter 37: Section 37.5 – 37.9.
[10] “Evictions,” San Francisco Tenants Union, https://www.sftu.org/evictions/
[11] The Residential Rent Stabilization and Arbitration Ordinance, SF Administration Code (File No. 188-79), Chapter 37: Section 37.8.(b).2.(A).
[12] Ibid, Section 37.9.(a).
[13] Joe Kloc, “Go East, Young Renters,” Downtime, (25 April, 2014): 7.
[14] Laura McCamy, “Oakland City Council Boosts Tenant Protections,” Oakland Local, http://oaklandlocal.com/2014/03/oakland-city-council-boosts-tenant-protections/
[15] “The Mission of the Rent Board,’ San Francisco Rent Board, http://sfrb.org/about-us#mission
[16] Bob Egelko, “Judge Tosses S.F. Law Meant to Shield Tenants,” SF Gate, 22 Oct., 2014, http://www.sfgate.com/bayarea/article/SF-s-new-law-requiring-landlords-to-pay-for-5838340.php
[17] Only original occupants are subject to rent control. A subtenant, for example, would not benefit from rent control any longer with the individual they are subleasing from terminates their lease with the landlord. A new lease, along with new rent, would be necessary.
[18] The Residential Rent Stabilization and Arbitration Ordinance, SF Administration Code (File No. 188-79), Chapter 37: Section 37.9A(a)(1)(b).
[19] “2014 San Francisco Housing Inventory,” San Francisco Planning Department, (April 2015): 16.
[20] Davir Autor, Christopher Palmer, and Parag Pathak, “Housing Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts,” Journal of Political Economy 122, no. 3 (2014): 41.
Works Cited
Autor, David, Christopher Palmer, and Parag Pathak. “Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts.” (2012): n. pag. Web.
Da Vinci Group v. San Francisco Rent Etc. Bd. Supreme Court of San Francisco. 12 Apr. 1992. Print.
Egelko, Bob. “Judge Tosses S.F. Law Meant to Shield Evicted Tenants.” SFGate. N.p., 22 Oct. 2014. Web. 02 Nov. 2016.
Kapoor-Acuña, N. (2016 Nov. 1). Personal Interview.
Kloc, J. (April 25 2015). Go East, Young Renters
Mosser Companies v. San Francisco Rent Stabilization and Arbitration Board. San Francisco Superior Court. 21 Jan. 2015. Print.
Naughton, E. (Spring 2000). San Francisco Owner Move-In Legislation: Rent Control or Out of Control?
Palmer, C. (2016 Oct. 13). Personal Interview.
“Rent Board.” The Mission of the Rent Board. City of San Francisco, n.d. Web. 03 Nov. 2016.
Rosen, K. (2016, Oct. 11). Telephone interview.
Shannon, C. (2016 Nov. 2). Personal Interview.
San Francisco Tenants Union, March 2016, Rent Control, https://www.sftu.org/rentcontrol
The Residential Rent Stabilization and Arbitration Ordinance, SF Administration Code (File No. 188-79), Chapter 37
Willis, J.W. (Fall 1950). Short History of Rent Control Laws.
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