The Problem with Takoma Park’s Rent Control

One of the nice things about living in Takoma Park is that nothing ever really changes. Right? The houses are old and generally well kept. We’ve got a huge old forest canopy that adds graciousness and helps cool our city. Crime has declined steadily for years. Most vacant and boarded houses have been gradually absorbed back into normal occupancy. 

Imagine you have been away for twenty years and just returned. You’d notice the new Community Center, a lot more sidewalks, brighter street lamps, more traffic calming devices, and you’d find that most of the stores have changed. But otherwise, it’s pretty much like you remembered it. 

There’s comfort in that notion. A lot of residents love this city for that reason, including me. Progressive values remain true and so does the City’s political influence as a thought leader on state and municipal policies. 

But physical appearances are one thing. Takoma park faces some serious, but well recognized, issues that may be less visible: steadily rising property taxes and tax assessments, and regular increases in utility and storm water bills that pinch those on fixed incomes; overcrowded schools and  insufficient classrooms; and, of course the worsening traffic around and through Takoma Park. None of this should be news to anyone in our town.

Often going unmentioned, however, is a hugely critical issue: Takoma Park’s rent stabilization ordinance. This is news. Adopted with acclaim in 1981, nearly 40 years ago, it no longer is benefiting our city. In fact, it’s hurting us. In Takoma Park the topic of rent stabilization is treated as sacrosanct. Almost no one, I find, is willing to talk about this problem, at least publicly. And, understandably, why should they? Tenants living in rent control units have got a great bargain. Home owners seem to have little interest in the practical effects of the policy.

Well, landlords want to talk about it and developers do too. But who pays any attention to landlords and developers?

The Good News

First, before going any further, let’s acknowledge that rent control has for decades preserved affordable housing in Takoma Park. It’s said that Takoma Park (almost 18,000 persons) contains the lion’s share of affordable housing in a county of over a million people. Arguably it has enabled much of the city’s ethnic diversity that we are proud of. It’s assured that affordable units have remained affordable as they have turned over. That part is what we do talk about. 

Second, later on we address possible solutions, which may allow us to make rent control work for the better interests of multi-family property owners, developers and the city as a whole.

The Problem

The part we don’t talk about is Takoma Park’s aging rental housing stock. As any homeowner well knows, it costs more and more to keep an old house up. Meanwhile, no replacement or new housing has been built in decades . . .  a longer period than perhaps 90% of the residents have lived in Takoma Park today.

It might help to think of landlords as small business owners who have invested heavily into Takoma Park

In this town, as in many places, the word “landlord” is often used as a pejorative. It’s like if you are a landlord, your motivations are suspect. A stereotype is: “They don’t live here and they’re just in it for the money,” implying “they don’t have a stake in our city.” That characterization is completely wrong.

It might help to think of landlords (multi-family property owners) as small business owners who have invested heavily into Takoma Park. True, landlords are indeed “in it” for the money, but so is every business in town (and so is every household whose breadwinners are “in it” everyday to make a living). The only difference is that landlords make huge investments to acquire or build a multi-family property, which becomes a 365 day a year operation. 

Owning an income property is by any measure a long term, illiquid investment. Thus, in order to protect the investment over the long term, the investor has to keep up regular maintenance, modernize as appropriate and replace things that wear out. He has to allow for lost rents due to vacancies; the cost of evicting tenants who cannot pay; the added expense of repairing tenant-abused units; plus pay for common area maintenance both indoors and on outside grounds maintenance. Rental income has to cover the debt service of his mortgage, property taxes, insurance, license fees, accounting and legal services; the salary and benefits of maintenance and management personnel, water and sewer, gas & electricity, stormwater fees, extermination and refuse collection.

You might be thinking as you read this, “Gosh, there must be an easier way to make a living.”

Explaining Rent Control

In 2017 the City hired a consultant, The Cloudburst Group, to prepare an analysis of feasible housing and economic development strategies. The City Council wanted outside expertise to lay the foundation for developing policies. Cloudburst’s study makes frequent mention of the downside problems associated with rent control, which we cite here. 

Cloudburst erred, however, when it asserted that “because the city is mostly built out, there is little new residential construction” (page 3). That’s not accurate. There are plenty of opportunities for constructing new housing in Takoma Park. Density has very little to do with it as we see in Arlington County and Washington D.C. which are “mostly built out,” yet redevelopment proceeds at a steady space. The real reason has primarily to do with the financial impracticality for a developer to build multifamily housing under a rent control regime.

Rent control has one purpose: to prevent rents from rising too rapidly beyond what the average occupant can afford to pay. To put it differently: to prevent displacement due to rent. Rent control means that an affordable unit remains affordable for the next occupant.

Rent control is a governmental technique to intentionally intervene in the local housing market. The normal supply-demand model for pricing rental housing is discarded in favor of government controlled pricing. While we happily live with the normal supply-demand model for private home purchases and non-residential uses, rental housing sometimes falls victim to government intervention.

About 47% of housing units in the city are rentals. Most of these (60%) are rent-controlled. (Many others are subsidized by the Low Income Housing Tax Credits (LIHTC) and Housing Choice Voucher programs. Only 9% of the rental stock is market rate.) Unfortunately a lot of the rent controlled units are in old buildings. Takoma Park ties allowed rent increases to the annual Consumer Price Index-Urban (CPI-U) for the Washington-Baltimore area. For the current 2019-20 fiscal year the allowed rental increase is 1.6%. Other sample years: in the 2016 FY it was 0.2%; in 2012 = 2.2%; in 2009 = 0.2%. Percentage increases jump up and down with no predictability.

Special provisions allow owners to seek supplemental increases if they have made depreciable capital improvements. This requires submittal of a complex set of documents to justify the application with no certainty of outcome. 

There are 157 municipalities in Maryland and Takoma Park is the only one having rent control. 

During WWII, President Roosevelt established the Office of Price Administration (OPA) to intervene significantly in the nation’s economy so as to conserve desperately needed resources to fight the war. Officially the OPA’s task was “to stabilize prices and rents and prevent unwarranted increases in them; to prevent profiteering, hoarding, and speculation; to assure that defense appropriations were not dissipated by excessive prices,” among other objectives. At war’s end in 1945 most price controls and rationing were ended. New York State and the City of New York have continued rent control, but the respective laws have been modified numerous times including 2019 to make them much more workable for property owners.

The Economic Consequences

Virtually all economists view rent control as unworkable or a bad idea for a lot of reasons as discussed in a recent Washington Post opinion piece by Megan McArdle. [https://www.washingtonpost.com/opinions/2019/06/15/comeback-rent-control-just-time-make-housing-shortages-worse/]

Primarily rent control greatly discourages the construction of new housing and the upgrading of existing units. Why is that? The answer may be obvious.

Who would open any business if they were not free to set their own prices?

Any real estate developer knows that in order to obtain construction and long term financing, he has to prove his bank that projected rental income will be adequate to pay the mortgage and all the other expenses with a margin to spare. Not just for the first year but for the entire term of the loan. If the developer/landlord can’t be in control of rent charges, he cannot take the risk. That’s common business sense. Who would open any business if they were not free to set their own prices? By the same token, the lender must examine the projected future cash flow (net operating income) for reasonable assurance its loan will be repaid on schedule. A bank cannot, as a rule, support a commercial loan when the borrowers’ income will be constrained by law. The same holds true for significant remodeling.

I don’t think it’s a coincidence that construction of multi-family housing ceased in Takoma Park at about the same time as the rent stabilization ordinance was adopted. No new housing has been built here since the 1970s, except for a handful of infill houses.

Walter Block, a libertarian economist says, 

“One effect of government oversight is to retard investment in residential rental units. As a result, the quantity of apartments for rent will be far smaller than otherwise. And not so amazingly, [this] holds true not only for the case where rent controls are in place, but even where they are only threatened. The mere anticipation of controls is enough to have a chilling effect on such investment.” Block says that other land uses like condos, commercial space, offices, warehouses get built because they are never subject to rent control and no one fears they will be. These land uses have healthy turnover and, he says, “extremely slowly increasing rental rates while residential space suffers from a virtual zero vacancy rate in the controlled sector and skyrocketing prices in the uncontrolled sector.”  [https://www.washingtonpost.com/opinions/2019/06/15/comeback-rent-control-just-time-make-housing-shortages-worse/ ]

Studies have shown that when rent control is first adopted, tenants clearly benefit from the reduced rents for a period of years. That stands to reason. However, problems accrue over time. Because market rents rise faster than controlled rents, the growing separation becomes obvious to existing tenants. According to the Cloudburst study (page 3), “the median rent in Takoma Park in 2017 was 22% lower than surrounding areas, and nearly 50% lower than in Montgomery County” as a whole.

Tenants in rent controlled units thus have a bigger and bigger incentive to stay put, if their personal circumstances permit. Those who might otherwise want to relocate choose not to, perhaps realizing they cannot “afford” to move. The net result is that healthy vacancy rates disappear and unit turnover tends to stagnate. Worse, this compounds into another problem. Newcomers wanting to find affordable housing in Takoma Park can’t because of the lack of available vacancies. In 2015-16 vacancy rates in Montgomery County and Takoma Park where 2% and 1%, respectively.

This defeats the original purpose of rent control. What good is it to have cheap rents if you can’t find one to rent?

According to Robert Murphy at the Foundation for Economic Education, 

“There are further, more insidious problems with rent control. With a long line of potential tenants eager to move in at the official ceiling price, landlords do not have much incentive to maintain the building. They don’t need to put on new coats of paint, change the light bulbs in the hallways, keep the elevator in working order, or get out of bed at 5:00 a.m. when a tenant complains that the water heater is busted. Furthermore, if a tenant falls behind on the rent, there is less incentive for the landlord to cut her some slack, because he knows he can replace her right away after eviction.”  (Foundation for Economic Education, “The Case Against Rent Control,” Robert P. Murphy 11/12/14)

We obviously know that as things age they deteriorate, whether it’s living things like oak trees or manmade things. Our old growth tree canopy is disappearing because it’s aging out. Even indomitable white oaks poop out after 150 years. Apartment buildings that were 40 years old in 1981 when rent control took hold are now about 80 years old. For apartment buildings that normally receive above average wear and tear, that’s a much a bigger challenge. Factor in, as well, the expectation of central air conditioning, more stringent life safety laws, ADA standards and energy conservation requirements that did not exist in the 1980s, much less in the 1930s and 1940s when these structures were built. 

The Cloudburst consultants summed it up nicely: “Takoma Park has leverage to control property value increases, through rent stabilization programs, but it creates the risk that new construction, combined with stagnant rental incomes when property values and taxes are rising, would initiate a cycle of disinvestment. Aggressive use of rent stabilization will reduce the interest of developers in building mixed-use, mixed-income projects in Takoma Park.”

The rent stabilization ordinance is not the only thing discouraging redevelopment for more and better housing. One landlord/developer who owns properties both within and outside the city, explains, “The City property tax burden on individual property owners in 50% greater than for similar properties located outside the city.”

Another significant reason applies to the whole county. It is the time it takes for most any development — even retail, office and mixed use projects — to gain Montgomery County’s approval. This is the opinion of experienced developers I’ve spoken to. As one developer told me, this challenging process is causing developers to leave the county. As currently organized, the development review process enables a handful of opponents to stymie the normal process over and over again, even if the objections are insubstantial or misinformed, and even when the great majority of nearby residents support a project. 

Still, it remains important that opponents, no matter how few their numbers, have the opportunity to be listened to. But once opposing views been taken into account and validated, there’s no reason not to speed the process forward. 

Considering Takoma Park’s smallness (2.4 square miles), it is easy for a potential developer to read the tea leaves and decide to look not too far away in order to build housing to avoid dealing with the peculiarities, uncertainties and delays in Takoma Park and Montgomery County. 

We see this, of course, all around Takoma Park. The stark reality includes major projects just inside the D.C. line near the Metro station; surrounding the Prince George’s Plaza Mall, and on New Hampshire Avenue just one block south of Eastern Avenue in D.C.

So How Do We Address the Rent Control Problem?

Just as the problems with our Rent Stabilization Ordinance have emerged over the years, Adjustments to rent control have to be instituted gradually. Outright cancellation is neither called for nor necessary. Abolishing rent control would create chaos for tenants and landlords alike, such as mass dislocations.

A first step would not be to quickly hire an outside consultant. Instead, we have the expertise and experience among many capable landlords in our city. So the city council can appoint a “select” committee or task force comprised of landlords representing both large and small building owners and developers, tenant representatives, and some residents at large. Let that group bring in the outside experts to talk about possible changes and how other jurisdictions do it.

Multiple solutions are at hand. Here are just a few ways to modify rent control:

(1) Consideration of household income limits for tenants. Once a tenant’s annual income exceeds a certain limit, they would have to move out, thereby freeing up a unit. (2) A city-run housing voucher system could provide a subsidy to poorer households so that they could afford a larger inventory of units; (3) rent control can apply to designated units within a building; not necessarily to the entire building.

(4) The City could establish two or three tiers of controlled rents (including outright exemptions) depending on the age of the building, the number of units and the condition of the structure. That makes more sense than superimposing one rate of increase for every rent-controlled building. 

(5) The city could set rent increases for periods of two or three years on a rolling basis so that landlords can plan ahead more easily.

(6) Landlords could receive certain financial benefits from the city for having rent controlled units. This would effectively provide compensation for a “partial taking.” The “taking” is the loss by the landlord of the right to set rents. It’s like eminent domain. But under national laws, a government’s right to take property (for a public good), must be accompanied by compensation. Rent control in Takoma Park does not do this. 

(7)  In order to revive developers’ interest in constructing new housing, the city needs guarantee the developer that rent controls of any sort will not be imposed for a period of, say, twenty to twenty-five years.

(8) For landlords who have performed (or plan to perform) major improvements to their properties, and need to increase rents above the stipulated increase to cover the costs, the paperwork is complex. This burdens city staff to review the work and rent increase justifications. Approval is not always assured. An easier process would benefit both parties and facilitate improvements.

(9) The CPI-U index for setting rent increases could be discarded and replaced by a different method that is more sensitive to Takoma Park. The property assessment process and the County and City tax rates are completely out of the control of landlords and the annual property payment has little to do with a regional CPI index.

There are doubtlessly many other methods that can be researched and considered.

Finally

If the City fails to address this issue on a city-wide basis, two outcomes seem probable. Neither is good. First, very little, if any, new rental housing will be built in our city for the foreseeable future. This, notwithstanding the City Council’s earnest desire to encourage construction of affordable housing. The city’s coffers are not big enough to financially incentivize new construction. There might be some sort of special subsidies or agreements worked out for the Recreation Center site that the city owns and can thus control. Otherwise, every prospective developer that is not a non-profit will know that “that dog has fleas.”

Second, at some future point the City may find itself standing alone before the state legislature or a state court, defending its ordinance brought by frustrated landlords who see unfairness in the city’s out-dated rent control mechanism.

On October 16 of this year the City’s Council formally adopted its long-range Housing and Economic Development Strategic Plan. To read it, click here.  The Plan does not dwell on the rent stabilization policies, but the Plan references the importance of dealing with it in its very first “Strategy” on page 5, Objective #1, Strategy A:  “. . . Assess the existing rent stabilization program and consider modifications to enhance its effectiveness.”

This is an important policy statement and bodes well.