Public Comment

New: Rent Board Assertion on Landlord Reinvestment Absurd

By Sid Lakireddy, President, Berkeley Property Owners Association
Tuesday March 19, 2013 - 12:44:00 PM

The Berkeley Rent Board is as is as predictable on rent control as the National Rifle Association is on gun control. In both cases, the underlying assumptions are up front and the ultimate proclamation a foregone conclusion. Stephen Barton is long-time advocate of rent control and has worked for or with the Board for years. Each of his many studies for the Board has been structured to support the program. His latest effort, a summarization of his report in the form of an article in these pages written with Rent Board Chair Lisa Stephens, is no exception. 

Even a stopped clock is right twice a day and some of what the Stephens/Barton article reports is factually correct, or at least logically feasible. Phased-in the late 1990s, the state law known as Costa/Hawkins precluded the Rent Board from setting the new rent on a voluntarily vacated apartment. It granted the property owner the right to establish an initial rent for a new tenancy at market level (not without limitation as the Stephens/Barton piece states). The current aggregate increase in all rents in Berkeley after 15 years of Costa/Hawkins is conceivably over $100 million as reported and these higher rents, roughly applying standard real estate appraisal methods, would translate into greater value for the entire Berkeley rental housing stock of over $1B. How this came about and what it means, however, is not quite what rent control enthusiasts Stephens and Barton imply. 

The legislature of the State of California has never been enthusiastic about rent control. It passed a law in 1977 which preempted local controls. Then Governor Jerry Brown vetoed this legislation stating that he thought that cities ought to be able to experiment with rent controls. This legislation was not veto- proof and the Governor got his wish. While the legislative sentiment to preclude or limit controls remained, there were two powerful Senators in key positions who were pro-controls and for two decades, they did not allow any such legislation to get to the floor of the Senate. Passage in the Assembly was always assured; passage in the upper body was probable but precluded by the efforts of Senators Dave Roberti (President Pro Tem) and Nick Petris (who chaired the Judiciary Committee and represented Berkeley). 

Once avowed Progressives gained control of the elected Rent Board, enforcement of The Berkeley rent law got more and more capricious and draconian. Senator Petris was by comparison a moderate and stories of abuse, particularly from people he know well, finally turned him around. It is the abuses of the Berkeley Rent Stabilization Board that ultimately led to the demise of vacancy controls which were mainstay of the Berkeley ordinance. Whether Steve Barton, Lisa Stephens and the Rent Board like it or not, vacancy decontrol/re-control is now the limit of acceptable rent control practice in California. Costa/ Hawkins is the result of the experimentation Jerry Brown wanted. It is also a policy that was driven by reasonableness, political compromise and, in the end, mainly by Berkeley’s own zealotry toward property owners. If any single entity was responsible for Costa/Hawkins, it was the Berkeley Rent Control Board. 

While the magnitude of rent increases reported by Stephens and Barton may be accurate, their claim that only six percent of that money has been reinvested in the rental housing stock is ridiculous. In his study, Barton takes all improvements for which permits were issued and triples the permit estimate, appearing thereby to be generous in what he credits to owners in the way of improvements. What this ignores, of course, is the much, much higher, routine expenditures on improvements which are done without permits. Sometimes owners do in fact do work without permits but much more often, the work done does not require a permit.  

To cherry out an apartment vacated by a long-term tenant, which typically could include sanding floors or new carpet, repainting, new fixtures, correcting all defects and putting in a new kitchen with new appliances, can easily run $12-15,000. None of this required a permit. I know of a building upgraded last year with a fresh exterior paint job, a new roof and the replacement of one hundred 80-year old windows. The total expenditure was over $160,000, very little of which would show up in Barton’s permit-based estimate of landlord expenditures. Only the roof required a permit. Barton’s claim that increased property maintenance since Costa /Hawkins is only $300/unit/year (6% of $100M divided by 20K units) is total unsupported by his assumptions. This claim of minimal reinvestment is the crux of his report and it is just plain wrong. 

The Berkeley rental housing market is currently strong but it is also getting more and more competitive. With thousands of new units coming on line, owners are spending freely to make their properties more competitive. Steve Barton has no way of measuring this. His use of permit data as a surrogate to determine how much is being poured back into Berkeley rental property is seriously flawed. No one knows exactly how much more is being spent since the advent of Costa/Hawkins but the owners of rental housing know individually and we have a sense as to the aggregate. Six percent does not begin to measure the improvements being made. It isn’t even close.