the property management shop

by Marc Wilson

What happened with Proposition 98? I thought we had a real chance to phase out rent control. What went wrong?

I’ll tell you what went wrong. The California electorate obviously loves rent control. Proposition 98 didn’t just get beat; it got creamed. In fact, 69% of Californians voted against Proposition 98.

Do you know what that means? It means that it’s not just tenants who support rent control. It means that a healthy percentage of homeowners also support rent control.

Homeowner support for rent control is something that I have suspected for some time. Think about it. Your average homeowner doesn’t own any rental property and never will. It’s difficult for most homeowners to grasp the social and economic costs associated with rent control; the costs are too subtle and the cause and effect too complicated for many to grasp. It’s hard for the average homeowner to equate the inevitable economic stagnation, reduced tax rolls, reduction of housing stock, blight and stratospheric asking rents with rent control. I think that most homeowners look at rent control as a charitable vehicle that doesn’t cost them anything. They figure, “Why not? It doesn’t cost me anything. I care about the little guy. I am a charitable person—with someone else’s money.”

It’s not just ignorance that drives homeowners toward rent control. Clearly envy is also at work here. Believe me when I say that most homeowners (in other words, homeowners who will never own rental property) could care less about your property rights. Do you think that people who will never own rental property are impressed with your success and accumulation of rental property over the years? Hardly. Rent control appeals to the average voter’s desire to “stick it to the man,” and it doesn’t matter if that voter is a homeowner or not.

To be sure, I’ve never had much faith in the electorate, particularly the local electorate. Gray Davis, Carole Migden, John Burton, Chris Daly and Proposition 98 (to name a few) don’t exactly instill confidence in the intelligence of the average voter.

Unfortunately, things appear to be going from bad to worse. I’ve never witnessed such obtuse economic demagoguery and class warfare rhetoric in all my life. It seems that anyone who dares to generate more than $150,000 in annual income or, God forbid, own rental property is on the hit list. Income redistribution and social justice are the theme songs of today. Hard work and individualism are taking a back seat.

I’ve got a bad feeling about all of this. If I voted against Proposition 98, I would definitely feel emboldened. If you can get 69% of the voters in California to vote against Proposition 98, what else is possible? Kill Proposition 13? No problem. Vacancy control? Why not? You think I’m exaggerating? Don’t bet on it.

What’s the good news? The good news is that it’s all background noise and window dressing. Despite the forces of evil, things tend to stay on track. Wasn’t it Winston Churchill who said, “Americans always do the right thing after they have exhausted absolutely every other alternative?” Carole Migden and Gray Davis come to mind.

What has rent control done to local investors? It has provided them with a very comfortable standard of living, that’s what. San Francisco vacancies are easy to rent at high rents. San Francisco apartment buildings sell for record-high prices; in fact, the highest in the nation. Think about it. Any normal market responds to rising rents with massive construction. With these rent increases, I shouldn’t be able to hear myself think with all of the apartment unit construction going on. In a normal market, jackhammers and bulldozers would be working around the clock until rents go down.

But, not in San Francisco. We actually have a net reduction in apartment units on a yearly basis. It’s absolutely glorious, a virtual wormhole in the economic universe of supply and demand: a place where rising rents are countered with reduced apartment supply. You just can’t make this stuff up. God bless San Francisco and God bless Chris Daly. I love this town.

Nobody, and I mean nobody, does as much to enrich San Francisco rental property owners as Chris Daly. His constant stream of anti-owner legislation discourages investors from building units and even discourages owners from renting their units. The resulting systematic reduction in supply is making everybody rich, and the good news is that it doesn’t look like the fun will end anytime soon.

Daly’s latest boon to rental reduction is the proposed placement of owner-occupied 2-unit buildings into the condo-conversion lottery. If passed, no longer will these buildings enjoy a fast track (I use this term loosely) condo-conversion process. Similarly, Daly is proposing the prohibition of owner-move-in evictions of units with children under the age of 18.

Talk about a case study in unintended consequences. What does Daly think will happen when the condo-conversion process becomes even more of a pipe dream? What does he think will happen when owners of 2-unit buildings are even further restricted from occupying their units? I’ve got two words for you: Ellis Act.
Daly’s proposed legislation will undoubtedly result in more Ellis Act evictions.

Owners, sellers and buyers of TIC units do not need Daly’s permission or blessings. The TIC financing market has made a joke out of the San Francisco condo-conversion process. Forcing more investors into the condo-conversion lottery doesn’t increase conversions, and it doesn’t decrease overall evictions; it just increases Ellis Act evictions. These evictions decrease rental unit supply because one can never rent units that are vacated pursuant to an Ellis Act. All Ellis Act TIC units are permanently off the rental market. Encouraging Ellis Act evictions permanently decreases the rental supply, and Daly’s proposals (past and present) have always encouraged Ellis Act evictions. This guy should definitely be on the payroll.

 

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The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Marc Wilson has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2008 SF Apartment Magazine. All rights reserved.