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Rent Control: What it is; How to Fight it; and How to Survive it if it Comes

Photos in this article taken by Michael Kardas, Kardas Photography, This email address is being protected from spambots. You need JavaScript enabled to view it.

 

To many property owners, the battle over rent control feels a lot like the movie, Invasion of the Body Snatchers. First comes that vague feeling that something is amiss. People start acting strangely for no apparent reason – just a few at first, then more and more as the movie advances. By the time we figure out what is really happening, it’s too late. The pod-people have taken over, and there is nothing we can do to stop them!

Well, the good news is, the pod people have not yet taken over. But the bad news is, there is an increasing chance that they’re coming and that it may, indeed, be too late to stop them.

Very simply, any type of government regulation of rents can be considered a form of rent control.

This article is intended to start a conversation about how best to fight rent control in Chicago (and elsewhere in the Chicago region and beyond). But it is also an acknowledgement that we may not be successful in doing so and will have to find ways to adapt if we lose the fight and rent control becomes the new normal.

But, before we launch into a discussion of strategies to fight it or survive it, we need to understand what rent control is. Very simply, any type of government regulation of rents can be considered a form of rent control. In most cases, a local or state government will place limits on the amount of rent (or the amount of increase when a lease comes due) that a property owner can charge. Limits on rent increases are generally tied to a fixed percentage of the base rent, or to some sort of cost of living increase such as the CPI. In its most extreme versions, rent control is tied to a unit forever. In less rigid versions, rents are allowed to reset to market rate once a unit vacates, provided the tenant leaves voluntarily.

While some forms of rent control are more onerous than others, it is fair to say that all forms of rent control eventually lead to unintended consequences.

Exceptions to rent increase limits are usually made for needed capital improvements. This is intended to give property owners incentives to maintain their properties. For instance, a property owner who needs to replace a roof or a boiler can usually apply for a larger rent increase to cover the cost of the capital item. Needless to say, this can involve a lot of paperwork and subjects the property owner to the whims of government officials who may not always interpret the regulations in the same way. A good analogy in Chicago would be porch inspections. The first inspector will tell you to make a set of improvements to bring your porch up to code. Then another inspector will come and inspect the work, insist you did everything wrong, and require you to make a whole new set of repairs. With rent control as with building inspections, anytime the government gets involved, added costs and inefficiencies are almost guaranteed.

Our first priority must be to keep the existing state-wide ban in place.

Rent control is different in every jurisdiction. While some forms of rent control are more onerous than others, it is fair to say that all forms of rent control eventually lead to unintended consequences, including limiting the production of housing, driving up prices, and causing disinvestment in regulated buildings. So, with this basic understanding of what rent control is, how do we keep it from becoming law in Chicago and elsewhere in Illinois?

 

Strategies to Fight the Good Fight

  1. Focus on Springfield. We have many more allies at the state level that we do in the city. Even some of our long-time friends in the wards are going to find themselves under increasing pressure from their constituents who are heavily comprised of renters and who will more easily succumb to the siren song of public control over rents. Outside of Chicago, home-owners predominate in most jurisdictions and will be much more open to the business arguments against rent control. We must build relationships with politicians at the state level – even (and possibly especially) those who have not already voiced support for our cause (I’m thinking of you, J.B). Many state elected officials do understand the harm that rent control will cause, and have constituencies for whom rent control is not a hot-button issue. Our first priority must be to keep the existing state-wide ban in place. If this falls by the wayside, we will have a much more difficult time preventing rent control from becoming law here in Chicago.
  1. Don’t give up on education and a winning argument! In a fair and open debate, it would be relatively easy to prove that rent control is harmful to most people (including low-income renters) over the medium to long-term. It may be a good thing for a small group of renters in the short-term, but study after study has proven beyond a doubt that rent control causes widespread harm the longer it is in place, and benefits fewer and fewer low-income households as time goes by. Gentrifying neighborhoods are going to gentrify with or without rent control. To think otherwise is both foolish and naïve. We need to work with the NBOA and industry groups to develop concise and effective marketing materials and communications strategies that clearly and convincingly explain the harms of rent control, and how illusory the benefits can be. As is so often the case, the easy solutions are rarely the best. But the ball is in our court to make the case and not give up the argument to the opposition. If we can get people to listen to us, we can win this argument on its merits. The case for rent control is surprisingly weak.
  2. Gentrifying neighborhoods are going to gentrify with or without rent control. To think otherwise is both foolish and naïve.
    Yes, it takes money. No one likes to admit it, but money is going to be an important factor in determining if we win or lose this battle. Like any special interest group, we must overcome our smaller numbers at the ballot box by a singular focus on this issue, and we must absolutely put our money where our mouths are. We need to be careful about this since the opposition already portrays property owners and heartless, cruel millionaires. But this battle is too important to sit on the sidelines. We all need to get involved, and we all need to contribute money to the organizations who are gearing up to fight this battle.
  3. Don’t let the opposition frame the debate. It will come as a surprise to no one that we live in a highly polarize country. A big reason for this is that we don’t just disagree – we demonize. On both the right and the left, the most extreme voices pray on people’s fears and resentments, and paint anyone with an opposing view as not just wrong, but as something less than human. This is very clear in the rent control debate. It is not a debate about whether or not it is better to regulate rents or not regulate rents. It is a debate about how truly horrible property owners are, and how very much they deserve to be punished for their greed and cruelty. Needless to say, this is not how we, a property owners, view the situation. We need to present an opposing argument about who we are. RPBG has done an outstanding job of showing that “evil” does not always (or even often) come before “landlord.” We need to continue to demonstrate our humanity – and not be afraid to GET THE WORD OUT!

 

And If the Battle is Lost

  1. We must have a seat at the legislative table. Rent control is not one thing. It is different things in different locations. While rent control is never good, some kinds of rent control are more tolerable than others. If rent control ultimately becomes too strong a force to shut down entirely, then we must be involved in shaping the version that gets adopted in Chicago. This means maintaining our relationships with elected officials at the city and state level, and coming up with our own proposals for what is, and is not, acceptable. A specific example would be the right to re-list a vacant apartment at market rent, so long as that vacancy is voluntary and not coerced. There are many other examples of ways we can reduce the negative effects of rent control should it come to pass. We need to start thinking about this, even as we gear up to fight it outright.
  2. While rent control is never good, some kinds of rent control are more tolerable than others.
    Demand “cost control” from the municipalities that adopt rent control. One of the most powerful arguments against rent control is that increasing rents are caused, in large measure, by out-of-control costs, particularly rising real estate taxes and utility bills. Any costs that are the result of government action (i.e., real estate tax increases; utility fees specifically imposed for infrastructure improvements such as new water mains and gas lines) should be subject to the same restrictions as those imposed on rents. So, if Chicago decides that 2% is a sufficient annual rent increase for property owners, then we should demand the same 2% cap on annual real estate tax and utility fee increases. Governments at all levels seem to have no problem imposing costs on private owners, but are loathe to restrict their own ability to raise taxes and fees as they see fit. If it’s good enough for us, it should be good enough for them as well.
  3. Fall in love with condos all over again. Before the recession, condo conversions were the preferred option for any apartment unit bigger than a breadbox in neighborhoods across the city. After the recession, multifamily economics shifted dramatically, condos fell out of favor, and apartments started sprouting up everywhere. If rent control becomes law, and with Millennials getting older, the economics of apartments versus condos may shift again. On the demand side, aging Millennials starting families and wanting to stay in the city will grow out of the studio and one-bedroom apartments they currently favor; many will look to condos as the most appealing and affordable ownership option. On the supply side, owners of larger units in good locations will find condo conversion to be newly appealing.
  1. Try try again. Cambridge, Massachusetts had rent control for decades, and all of the negative impacts became ever more apparent over this period of time. The property owners in Cambridge, and elsewhere throughout the state of Massachusetts, remained vigilant in their opposition to this legislation. Eventually, they succeeded in abolishing it (ironically, they did this by getting state-wide legislation banning it, much as we have today in Illinois). We may lose the battle over rent control, but the harm it causes will become apparent over time, just as it has everywhere it has been adopted. Plunging property values and lost contributions from real estate professionals will be hard for politicians to ignore.
  2. We may lose the battle over rent control, but the harm it causes will become apparent over time, just as it has everywhere it has been adopted.
    Take a deep breath. Unlike Invasion of the Body Snatchers, life will go on even if rent control gets enacted into law. While the prospect of rent control is both frightening and infuriating, we should not lose sight of the fact that real estate investors seem to have found ways to make money and run successful businesses in cities where such legislation is part of the landscape. We do ourselves a disservice if we let panic and anger dictate our response to this crisis. Cooler heads will find better solutions and strategies to cope with this unwanted burden.

The strategies in this article are not intended as a definitive road map for what to do as we gear up for the epic rent control battle. Rather, they are intended to foster conversation about how to confront what may be the most important challenge we will face in our careers as property owners. I’d love to do a follow-up article posting your suggestions. Reach out to us with your thoughts on our Facebook page.

 

 

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