City Council Members,
I am writing to thank Council Members Lim and Bonilla for
standing up for those in desperate need of protection from immediate displacement.
To those on the Council who shied away from the decision to even bring to vote
the idea of Emergency Protection, I implore you to reconsider.
Please commit to protecting our City’s renters. We are not
losing just the lower middle class, we are losing the entire middle class, including
teachers, city workers and pretty much anyone earning under $100,000+ a year.
If this persists, broad ranging, difficult to reverse consequences which will
negatively impact the entire community.
At this point, further study equates to inaction. Inaction
equates to continued evictions. Doing nothing, even in the name of fact
finding, is not a passive decision.
Some Basic Definitions
- Rent Control versus Rent Stabilization
I am not merely a concerned citizen, but a real estate
professional with many years of experience in residential property management.
Several of these years were spent in New York City, where I managed properties
covered under rent control and rent stabilization, as well as those without any
rental restriction.
In addition, I had the good luck of finding a room in an
apartment protected under rent stabilization. Despite working full time in a
job paying well above minimum wage, without this 7’ X 14’ foot windfall life in
Manhattan would have been impossible without a subsidy from another source, a
very common reality for many in desirable cities. These experiences gives me a
broad perspective of the various forms of rent regulation which are being
discussed.
Rent Control
Despite the outrage, no one is proposing rent control. Rent
control in New York City, for example, is only held by those individuals who
have resided in their units for over thirty years. These rents are never
increased without extreme difficulty to the long term detriment of landlords.
In one pronounced example, a studio apartment in my company’s portfolio had
been passed to a young man from his grandparents at a rate of $90 a month, less
than the cost of a 30 day Metro pass. It is for this reason, rent control has
been discredited and discontinued.
No one is proposing rent control on this order, so the hysteria
invoked around this issue is misplaced. Please ignore it.
Rent Stabilization
Rent stabilization does what is title says – it stabilizes
rent. Real estate is an inherently cyclical market, particularly in the Bay
Area, making renters vulnerable to displacement. Stabilizing rent does not
deprive landlords of all claim to profit, only creates a structure where the
ambition for oversized profit is not allowed to decimate existing communities.
Limiting annual rent increases to 10% a year, for example, would still allow
landlords to profit well above inflation while still allowing long term
planning on the part of the renters.
Stabilizing rent will prevent our citizens from receiving ridiculous
rent increases which are tantamount to eviction. This is a good thing.
Rent Stabilization
Means Market Stabilization
Less than a decade ago San Mateo suffered along with the rest
of the world due to the collapse of a major real estate bubble caused by
unrestricted real estate speculation. In the last crisis, high levels of debt
justified untenably high prices for property. In the crisis we are creating at
the moment, the upward trajectory of rent encourages speculation on a similar
order.
At the September 8th meeting there was much
consideration given to the difference between so called ‘good’ and ‘bad’
landlords. Most are pretty good. Some are very bad indeed. Unfortunately, a
laisse faire economic policy, which doing nothing surely amounts to, inherently
favors the bad one. Let me illustrate.
There are many tools a real estate investor can employ to
determine how much she is willing to spend for a property. Many are exceedingly
complex and cover thousands of inputs over dozens of spreadsheets. But a very
simply, generally accepted measure of value is using what is referred to in the
industry as a Cap Rate. A short explanation of this term, to quote developer
and columnist John McNellis, “the yield the buyer would receive by purchasing a
certain property.” Full article – http://news.theregistrysf.com
It looks like this:
Let’s use the example of a 10 unit building with 5 2-bedroom
units and 5 1-bedroom units owned by Good Landlord Smith (GLS). GLS has owned
the building for over 25 years and personally maintains it. GLS has wanted to retire
and move to LA to be closer to the grandchildren for about a decade ago, but
did not move fast enough around 2005 and the market crashed. So GLS waited.
Now, GLS can get out from under the obligation of being a property owner and
set up a few trust funds for the family.
GLS rents his 1-bedroom units for $1350 and his 2-bedroom
units for $2500. After expenses of about 35% annually the building is returning
$150,150. GLS figures the in this aggressive market investors would be willing
to settle for a 5% cap rate and does the math, putting the property on the
market for $3,000,000.
Another Good Landlord (AGL) is interesting in buying a
multi-family building. The numbers put forth by GLS are found to be acceptable
and AGL makes a full offer.
A second investor then looks at the property, So-So Landlord
Brown (SSLB). SSLB, like AGL, feels 5% is a good cap rate and sees an opportunity.
Even without pushing area rents to their limits a fresh can of paint and a 25%
rent increase per unit brings the Net Operating Income (NOI) to roughly
$187,700. SSLB does the math and is willing to go up to $3,753,750 to buy the
property but offers $3,500,000.
Keep in mind, all the while, these units are serving as
people’s homes. But we are more concerned how the math looks to them at the
moment. So let’s keep going.
Finally, consider a third investor, Big Bad Relator Inc.
(BBR). BBR is not willing to settle for a 5% cap rate. BBR also has no qualms
pushing rents as far up as they will go. Given the age and condition of the property
BBR figures it might not get 100% rent increases, but feel with aggressive
marketing a 75% increase is achievable. BBR also plans to keep a very tight
reserve fund and will therefore have expenses of only 30% a year. Based on
these projections the NOI is going to be nearly $283,000. If BBR pays
$5,659,500 for the building it will match the 5% cap rate projected by its
competitors. They offer GLS $4,000,000. If this offer if accepted and they hit
their numbers, the property will cap out above 7% annually, assuming rents
never go down.
Property values are going sky high – what can be so wrong for
the City about that, some may ask; besides the sudden mass displacement of
existing residents, or course. To this I can only respond, Lord have Mercy on
all our souls if less than a decade after an overpriced-real estate fueled economic
bubble broke we, as a society, proceed to act as if the resulting Great
Recession was already an irrelevant blip in history which could never happen
again.
When it comes to operating a motor vehicle, there are good
and bad drivers. We do not make the laws for the good ones, hoping the bad will
follow along. Rent protection is a means to reign in the antisocial practices
of bad landlords while protecting the market share of those who are good, or at
least so-so.
Just Cause Eviction
David Lim has requested a just cause eviction order, not a no
cause eviction order. The numerous drug-dealing horror tenants described at the
September 8th meeting would not be protected under such a decree.
Therefore, the notion of just cause eviction should not be
controversial, never the less construed as a frightening prospect or form of government
largesse. Just cause eviction is a critical tool towards meeting the needs of
renters in dire economic predicaments as well as an expression of humanity
towards those who are being subject to economic displacement.
Why The City Council is
Justified in Protecting its Renters?
It is understandable people like to profit from a windfall,
such as this robust rental market. But I truly believe it is the right and
obligation of the San Mateo City Council to recognize landlords are purveyors
not of a luxury good but a fundamental need. The right of people to housing
should supersede the right to aggressive profiteering in a time of crisis.
Where can one find justification for the above statement? No
less an authority than The Supreme Court of the United States (SCOTUS) has
upheld the right of legislative bodies to protect the public from unfettered capitalism
by altering contract terms which undermine the public good. In one such interpretation the Louisiana
Governor and Legislative passed an order prohibiting insurance companies from
summarily dropping citizens with month to month contracts for flood insurance after
Hurricanes Katrina and Rita, despite the terms of the initial agreement. SCOTUS
has regularly agreed that in dire times legislatures are permitted leniency in
regard to contracts.
The Ultimate Fallacy of
the Argument against Renter Protection
In order to agree with the argument against renter protection
you have to believe the owners of investment real estate in our area are currently
more vulnerable than the people dwelling in the rental units. This cannot be
true in the vast majority cases.
Conclusion
Our lower and middle classes should not owe their existence to
generous landlords who choose not to raise rents to their highest possible limits.
They should instead be protected by their Council Members who, recognizing the
value of working class families, create policies to secure their ability to
remain within city limits.
Kind regards,
Kara Cox
