Barring a political pirouette, St. Paul City Council will change the city’s controversial rent stabilization policy next week. Led by Council Member Chris Tolbert, the changes add exceptions to rent increase limits for new apartments, develop new rules around vacant units and clarify the role of inflation in setting rents.
When news of the amendments broke, some attorneys who had spent the previous year campaigning for the city ordinance were outraged. Passed in November with 53% of the vote, the ordinance gave St. Paul the toughest rent stabilization rules in the nation. The City Council’s list of changes brings the city’s policy closer to rent stabilization policies in other cities and states.
I’m here to assure you that the proposed changes are not bad news for tenants because the reality on the ground is more complicated than the campaign rhetoric. Housing policy is not a zero-sum game with opposing sides, winners and losers. Essentially, the amendments retain the good parts of the Ballot Ordinance (even adding new benefits, like protections against eviction for cause) while removing provisions that have already caused a divestment in St. Paul housing. . I believe the policy changes, passed by a 4-3 majority in City Council, will lead to a more flexible approach that will help people stay at home.
What is a “reasonable rate of return”?
To get up to speed: back in June 2021, a coalition of progressive advocacy groups collected enough signatures to pass a rent stabilization policy in Saint-Paul. Thanks to a state law of 1984 designed to protect landlords, a ballot measure is the only way for a Minnesota city like Minneapolis or St. Paul to implement any form of rent control.
Unlike the Minneapolis referendum, St. Paul’s ordinance appeared on the already written ballot, with the caveat that the city council could not change the language for at least a year after Election Day. This was significant because, as rent stabilization policies have become more common in US cities and states in recent years, the specifics of the St. Paul Ordinance have made it strictest in the country.
After a combative 2021 campaign season, voters approved the ordinance by a six-point margin. City regulators established new implementing rules in the spring, and they officially went into effect in early May 2022.
Almost from the start of this year-long process, a gulf opened up between promise and reality, campaign slogans and fine print. For example, most people voting on the ordinance probably saw the 3% cap on rent increases and took it at face value. But tucked away in the middle of the ballot was a reference to the “right to a reasonable return on investment,” and few people who weren’t housing lawyers (myself included) had any idea. of what that meant.
It turns out that in a country with strong property rights like the United States, this phrase has a specific legal meaning. When city staff released their 19-page implementation process in the spring, the details meant the 3% number had about as many teeth as the speed limit sign on Interstate 35E.
All sorts of justifications for rent increases appear in the rules, including capital expenditures – for example painting, plumbing, planting, foundations, doorknobs, appliances, etc. – and the general inflation rate, which remains high. The result is that landlords with good accounting or litigation can easily increase rents by up to 8% in a year without even telling the city or their tenants that they’ve exceeded the ordinance limit. This means that, for all intents and purposes, rent increases can match the Consumer Price Index (CPI), with higher increases allowed based on a list of specifics.
The legalistic bait between nominal and actual rent caps has the added effect of being opaque and confusing, likely to alienate anyone not interested in calculating interest on a depreciated investment, using Freddie’s average rate. Mac over the past thirty years. plus two percent. In practice, this bureaucratic approach benefits large institutional landlords like Dominium Apartments, which develops and manages hundreds of apartments around Saint Paul. Earlier this summer, it made the headlines raising St. Paul’s apartment rents at an all-in rate of 7.9%, which seems within their rights under the policy – that’s about $100 a month on a hypothetical monthly rent of 1 $200.
Find the right balance
Meanwhile, the more transparent effect of the city’s strict rent control regime has manifested as much as I predicted a year ago. Depending on how and when you count housing data, St. Paul has seen housing construction drop somewhere between 35% and 75%. This is in a year where housing construction across the country has surged.
(For a helpful explanation of exactly why rent control prevents new construction, see this accessible discussion set up by the Minneapolis Federal Reserve and the local chapter of the Urban Land Institute. Housing researchers from the University of California, Berkeley, who have extensive experience in rent control, examine in detail how these policies affect investment patterns and housing markets.)
The obvious solution has always been to adopt an exemption for new build, and the council’s proposal sets a rolling twenty-year exemption window, meaning flats in a building built today would enter the system city rent control in 2042. That might seem like a long time ago, but given that the alternative isn’t new rent-controlled apartments, it’s an infinitely better outcome.
The new build debate that unfolded in the council chambers last week generated a lot of bewilderment and dang on an issue where there is mostly consensus. Whether the exemption is 15, 20 or 30 years is a marginal difference, and the truth is that only bankers, pension fund managers and other real estate investors really know where the sweet spot is. To me, the proposed 20-year window seems like a good compromise in a city like Saint-Paul, which has long struggled to attract real estate investment.
Council Member Prince Changes the Conversation
The other big change to city policy came from council member Jane Prince, the council’s veteran voice and one of its two attorneys. Thanks to Prince’s amendment, and after some last-minute back-and-forth, city leaders appear to have settled on a vacancy control removal provision that will allow for larger rent increases – the consumer price index increased by 8% — when an apartment becomes vacant.
The criticism of the removal of vacancy control, as passionately articulated by Council Member Nelsie Yang at last week’s meeting, is that it could incentivize landlords to coercively remove tenants in order to increase rents. But, at least if you believe municipal regulators can be effective, Prince’s amendment solves that problem because it includes a just cause eviction arrangement. This is essential because, thanks to a trial in 2021Just cause protections do not currently exist in St. Paul.
I believe Prince’s stronger decontrol is an elegant maneuver that refocuses city politics on keeping people stable in their homes. It should prevent landlords from automatically raising rents for long-term tenants, while providing protections against forced evictions and encouraging investment in St. Paul’s aging housing stock. While I would have preferred the simplicity of Prince’s original proposal, even the watered-down compromise should reduce the complexity of the rent stabilization policy, hopefully minimizing the stream of contentious rent hearings to come City Hall.
Avoiding California Housing Policy
Of course, it’s still confusing. “I was promised affordable housing,” read the sign of a woman at a recent protest ahead of a city council meeting, one of many ongoing housing rallies that have been pushing for meaningful solutions to the city’s housing crisis.
Unfortunately, that was never a promise the city was going to be able to keep with a tool like rent control, a policy that has repeatedly proven ineffective in a country built on private market housing. Instead, thanks to City Council amendments, the end result of this long process is that the city will have a strong rent stabilization policy that focuses on tenant stability, a more achievable goal. Hope people on the rent stabilization working group in Minneapolis take notes.
The other big takeaway is that ballot metrics are a terrible way to make decisions. They should be written in a way that appeals to a wide audience, while holding up in court. Doing all of this, and also crafting a good policy, becomes a nearly impossible task, even one imposed on tenant advocates by heavy Minnesota state law.
But make no mistake, it was a big mess. There have been many unintended consequences over the past year, including preemptive rent increases in the spring and thousands of apartments that have not been built across the city. The experience clarifies why the initiative and the referendum were such a disaster in California, and hopefully St. Paul will not experience anything like it again.
The story does not end there. There are plenty of lawsuits to come, and future councils will surely continue to tweak city policy to iron out the bumps. But in the meantime, it’s a relief to see that a realistic housing policy will be in place, helping tenants stay in their homes without triggering an avalanche of divestment.