A few thoughts about how rent control could work or could face some significant
barriers to a successful implementation.
First, I agree with Robin Garwood's assessment that older buildings need to be
exempted. I'd even say that rent control would need to have rolling exemptions
so that as buildings get to a certain age they fall off of eligibility. I'd
hope that such a system could actually increase the value of an older building
and lower the chances for unwarranted demolition.
Once properties get old enough to need systemic overhaul, repair items like a
new roof, new heating/electrical/plumbing, paint or siding, etc. don't
generally add much value. On my home in Superior, I bought it for far lower
than the market would normally bear for a home of this size, but it needed tens
of thousands in investment on the roof, siding, electrical, and other areas
just to bring it up to a basic level of functionality. But if I were already
the owner of a 100-year-old home and already leveraged out on financing, that
repair would be more difficult to manage on a rent-control property.
Ah, but then would this two-tiered system add to the gentrification of historic
with a small h buildings? 101 Main Street for sale, property needs significant
upgrades, but in two years it comes off of rent control so the prospective
owner can make whatever repairs are needed and then set rent to cover that new
expense. Sure, this kind of happens already. But if the point of rent control
is to keep costs low for tenants, then what does it accomplish here?
The other area of concern has to do with funding streams. Most of the time,
builders and developers aren't using their own money to put up or acquire new
units. State and federal housing assistance can come into play and obviously
private market funding. And those all use some degree of net operating income
projections to decide whether to allocate funding. They'll assume that the
costs associated with owning and operating a building will rise over time -
that would primarily be taxes, insurance, and maintenance. The city could only
mitigate the cost of taxes, assuming it even wants to do that. But in those
projections that funding sources use, they also tend to assume that rents will
rise at a level equal or even slightly greater than the baseline costs.
For example:
A new construction project is expected to get $1,500 per month rent in year
one. That's $18,000 per unit in gross income, assuming no vacancy. A 5%
increase means in year 2, the unit brings in $18,900, then $19,845 in year 3,
$20,837 in year 4, and $21,879 in year 5. For a total five-year rent of
$99,461. Or an average rent over that five-year period of $1,658. That's
right around the same monthly amount as rent would be in year three.
So now I'm trying to get state or federal funding for my new building and I
keep losing out to other Minnesota cities because those funds are limited and
everyone else has better five-year projections than I do. Or I don't get
funding from private market sources at all because the numbers aren't there to
justify it. And the only way I can think of to crack that nut is to just start
my new rent at $1,650. In this scenario, sure, rent is locked in for a while,
perhaps a very long while. But in order to get there, we had to leapfrog 2-3
years of natural rent progression.
What am I missing here? Has rent control been implemented in other cities in
ways that alleviate these concerns? Am I just off-base in my assumptions? Or
if this is a fairly accurate depiction of rent control dynamics, what's
Minneapolis proposing that would make it different here?