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Housing Policy • November 18, 2014

An Open Letter to the Rent Board

November 9, 2014

OPEN LETTER TO THE RENT STABILIZATION BOARD

As a former Rent Board commissioner who, as a rental housing consultant, has appeared before hearing examiners many times, having been over the past 45 years a Berkeley tenant, home owner, and business owner, and being committed to upholding values that support integrity and balance in community affairs, I offer the following concerns regarding the proposed changes to Regulations 509, 524, 525, and 1018.

I accept, as I assume you do, that we should establish norms and rules that protect everyone from exploitation or harm to the extent possible.  Berkeley’s Rent Law was established in 1980 to protect tenants from excessive rent increases and from eviction without good cause.  The Rent Law was amended in 1995 by the State Law known as Costa-Hawkins such that controlled rents would not survive a change in tenancy but that tenants thereafter would be protected from excessive rent increases so long as they remained in residence.[1]

That’s the simple story.  That’s how it was supposed to be under the rent law as modified by Costa-Hawkins.  But the devil is in the details and the details provide opportunities for self-seeking behavior.

The Rent Board in 2003 passed Regulations 524 and 525 to implement the concept that only tenants who actually live in their rent-controlled apartments should be protected from excessive rent increases.[2]  The Rent Board passed Regulations 1013 and 1018 to implement the provision in Costa-Hawkins that says that rents go to market when the original tenants no longer permanently occupy the unit in question.[3]

These two sets of regulations, as I see it, say the same thing, basically – that rents are controlled by the annual adjustment mechanism so long as the original tenants live there, but that rents can go to market when the original tenants move elsewhere.  Regulation 524 uses the phrase “primary residence”.  Costa-Hawkins and Regulation 1013 use the phrase “no longer permanently reside”.  To my way of thinking, they mean the same thing, basically.

RSB staff evidently thought they meant the same thing, or nearly the same thing, because RSB staff created one petition form to deal with both topics:  the “Petition for Determination of Occupancy Status or Eligibility to Set Initial Rent”.   The Petition for Occupancy Status becomes a D-petition.  The Petition for Eligibility to Set Initial Rent becomes an IRD-petition.  Technically speaking, although on one form, they are distinct, but in practice they are not so distinct.  It is often hard to tell whether the facts conform better to the “D” or the “IRD” framework.  To my way of thinking, it makes little difference because the basic point, by either standard, is that rent protection is limited to tenants who actually live there.

When the state law known as Costa-Hawkins imposed vacancy decontrol on Berkeley’s rent control system in 1999, the Board took steps to limit rent increases on controlled units.  Annual adjustments were restricted to 65% of inflation, whereas previously they averaged something close to full inflation.  Capital improvement entitlements were stripped away by what we know as “the offset policy”.  Other previously-existing regulations were deleted or amended so that rents of long-term (pre-1996) tenants would grow thereafter very, very slowly.

In the meantime, free market rents in the Bay Area have been rising for many years.  The result has been an ever-widening gap between rent-controlled rents and decontrolled rents.  Rent controlled rents are now roughly a third of decontrolled, market rents and far less than HUD / Section 8 “fair market rents”.

The widening gap between rent controlled rents and market rents sets up strong bilateral incentives:  Property owners want long-term tenants to move so that the owner can get decontrolled rents from a new tenant.  Long-term tenants want to stay as long as possible so that their rents remain low.  These incentives are understandable on both sides.

Most property owners and most tenants play by the rules.  Tenants stay as long as they need to, then move.  Property owners are patient during this time period, then enjoy the vacancy increase when it is available.  A few owners and a few tenants, however, don’t play by the rules, and there the public policy difference becomes pronounced. 

The law comes down hard on property owners who use improper means to encourage their long term tenants to move.  The law, however, looks the other way when tenants don’t play by the rules.  Some tenants break the rules with impunity.  There are hardly any ways to discipline tenants who break the rules.  The Rent Board has strong prohibitions against self-seeking behavior by property owners, but no effective prohibitions against self-seeking behavior by tenants.

When I speak of “self-seeking behavior by tenants” I mean that increasing numbers of tenants, seeing an opportunity to game the system, contrive to retain the rent discount when they no longer actually live there.  Here are some examples:

·         Tenants sometimes move elsewhere, sublet their apartments to others, and either “launder the money” or charge their subtenants more than the rent ceiling, pocketing the profits

·         Some tenants live elsewhere while using their rent-controlled apartment for storage or business purposes

·         Some tenants use their apartment as a pied-a-terre, coming to Berkeley on vacation while actually living elsewhere

·         Tenants sometimes give their rent controlled apartment to family members or friends, concealing their own departure so that the rent won’t go up as the law provides

·         Some tenants by these or other devices save their rent controlled apartment as their future retirement home, preventing decontrol in the meantime by concealing the fact that they live elsewhere

I have included some case studies (with the facts adjusted to protect the innocent and the culpable alike) in an appendix to this letter.  I could give you many more examples.  There is an epidemic of these kinds of cases. 

Here’s the problem:  The regulation revisions that you are considering will make most of these self-seeking behaviors OK!

The proposed changes to regulations 525 and 1018 basically say that tenants can live elsewhere and sublet to others for as long as they like.  The changes basically say that it is OK to violate the lease by subletting without permission.  The changes say that it’s OK to pretend to live there when you actually don’t.  The proposed changes say that long term tenants may hang on to rent-controlled units as long as they like, that they may profit from subleasing, that they can say what they like and do as they please, legal or not legal, honest or dishonest, true or false, and the Rent Board will protect them.  Basically the Board will be saying that fraud by tenants is OK in the rent control context.  The changes staff is proposing will change the rules from

“rent protection is restricted to tenants who actually live there”

to

“tenants can hang on to their rent-controlled units for their lifetime

 whether they live there or not”.

 

The regulation changes you are considering violate the spirit of both the Rent Law and Costa-Hawkins.

·         The new construction regulation (proposed Regulation 509) says that units that are clearly newly constructed may now be denied the new construction exemption because the bureaucracy hasn’t produced the right paperwork.  Do we want to rely on reality, or do we want to rely on paperwork?  Does the fact that a certificate of occupancy has or hasn’t been issued change the plain fact that a new unit has been “created and occupied for the first time after 1980”, as the rent law says?

 

·         The changes to Regulation 525 appear to be designed to make true what isn’t true and to make false what isn’t false.  If these regulation changes are passed, you will be saying that a tenant who moves from a controlled rental unit, but doesn’t tell the owner that he or she has left, may keep his or her rent discount if he or she returns, including if he or she returns between the date of filing and the date of hearing!  You will be saying, if you pass these changes, that it is perfectly OK for a tenant to live elsewhere, secretly, in violation of the spirit of Regulation 524 for many years, then move back (or claim to have moved back) the day before the hearing and prevail.

 

·         The changes to Regulation 1018 say that fraud by tenants is A-OK under the rent law.  “Evidence that an original tenant resides in more than one rental unit is not dispositive that the original tenant no longer permanently resides in the rental unit in question.” And “Evidence of an original occupant’s absence from the rental unit during a period of time prior to the filing … shall not be considered for the purpose of making a determination under this subsection.”  These changes mean that owners cannot even bring to hearing evidence that a tenant has been living elsewhere.  What sense is there in that?  How can one possibly decide if a tenant “permanently resides” somewhere if all historical evidence is ruled inadmissible?

The memo to the Board dated 10/17/14 that proposes these changes complains that “staff began receiving voluminous documentation from property owners evidencing an exorbitant level of inquiry and investigation …”, but the memo fails to say why extensive investigation and documentation were required.  Investigation and documentation were required because some tenants, pursuing their self-interest dishonestly, were actively concealing the fact that they were violating the spirit and often the letter of Regulations 524 and 1018.  It has been utterly extraordinary to me that some tenants seem perfectly willing to lie at hearing, even under oath, even when a court reporter is taking down their every word.

It is equally extraordinary to me that hearing examiners don’t raise an eyebrow, don’t lift a finger, don’t call a lie a lie, and certainly don’t censure tenants for failing to tell the truth.  Tenants, after all, know where they live.  If tenants would just respond honestly to the simple question:  “Where do you live?” there would be no problem.  But some tenants don’t.  We then are forced to do investigations and to collect documentation in an effort to discover and establish where tenants live.  For staff to criticize property owners for investigating thoroughly where tenants live when tenants conceal and lie about their actual place of residence – considering in addition that the Board itself does little or nothing to cause tenants to tell the truth - is to miss the point completely.

Instead, staff and the Board should partner with property owners and tenants who play by the rules to make sure that the benefits of rent control go to those who really live there, not those who profit by subletting, those who violate the rental agreement by subletting without permission, or those who move elsewhere and lie about it.

The conclusion section to staff’s memo to the Board echoes the basic insight of this letter:

“Since the Board adopted Regulations 524 and 525 market rents in Berkeley have dramatically increased.  As this increase continues, there is ever more incentive for landlords to achieve Costa-Hawkins vacancy rent increases.  This pressure has led some owners and their representatives to attempt to stretch the boundaries of the “tenant in occupancy” petition process to a point beyond the regulations’ intent.”

There is some truth here, but staff’s statement leaves out completely the tenant side of this.  Property owners use the regulatory process to achieve their goals, as they should.  Some tenants, on the other hand, lie, cheat, and steal to retain rent protections to which they have no right under law.  Why does staff not focus on the real problem, instead of “shooting the messenger”?  Why does staff not take proactive steps to curb the behavior of those tenants who don’t play by the rules?

Property owners, with few exceptions, accept that rent control is here to stay.  Property owners, for the most part, abide by the rules.  If property owners think they have an entitlement, they petition the Board.  For staff to criticize property owners for filing petitions and for pursuing their interests in that way is completely inappropriate. 

Property owners are not at fault here!  Using the petition process is exactly the right way to pursue self-interests in the rent control environment.  What is not right is that some tenants pursue their self-interest by deception, in the shadows, not before the Board.  And what is doubly not right is that the staff, the hearing examiners, and the Board itself too often give tenants a free pass, allowing tenants to continue to violate the rules, thereby elevating dishonesty to a protected position in the rent control context.

There is an important public policy aspect to these proposed changes.  I believe that public policy in the field of housing favors availability of housing.  It is best, especially in a university town, if units regularly come on the market so that people who need housing in Berkeley can find it.  One of the impacts of restrictive rent control from 1980 to 1999 was that the market tightened significantly.  Tenants had a hard time finding apartments in that time period because tenants clung to their rent discounts tenaciously.  Vacancy decontrol helped a lot.  The market became far more open.

The proposed regulation changes will push things back in the wrong direction.  Fewer units will appear on the market.  More tenants will be unable to find housing in Berkeley, while the protected few will continue to use and enjoy – for whatever purpose, lawful or otherwise – apartments they no longer need or use as their primary residence. 

Do you really want to do this?  Do you really want to protect the few who don’t abide by the rules, harming all those others who might want to live here?  Think before you act.  A few dishonest tenants will be helped.  Many innocents will be harmed.  Progressive is good, but dishonesty is bad.  Tenant protections in Berkeley are strong already.  Don’t make them stronger still in this underhanded, unbalanced way.  Don’t water down regulations that were passed for good reason to control self-interested behavior by tenants who don’t really live there.  Don’t pass regulation changes that will allow tenants to violate with impunity the spirit of the both the rent law and state law.

I know that there have been committee meetings on these topics, but it is my impression that no members of the public attended those meetings.  You might want to schedule a public hearing, and advertise it widely in advance, so that the community – owners and tenants alike – can think in advance about these issues and weigh in on the wisdom of making these or other changes.  I myself have some ideas of how the regulations could be changed to make the process less burdensome to owners, tenants, and the hearing examiners.  I would welcome an invitation to present these ideas and to consider with staff and board members how to make the process more transparent and fairer to all.  Most important, further consideration by board members, staff, and members of the public might prevent passage of regulation changes that violate the spirit of both state and local law and that enshrine dishonest, self-seeking behaviors as the official policy of Berkeley’s Rent Stabilization Program.

Michael St. John, Ph.D.

Appendix

Examples of cases in which tenants don’t “play by the rules” - schemes tenants have employed in violation of the basic idea that rent protections are for tenants who really live in their rent-controlled apartments

1.                   A tenant and his girlfriend rented a two-bedroom apartment on Spruce Street not far from campus in 2000 for $1,500 a month.  Two years later, when he graduated from Hass School of Business, they broke up.  She moved to Los Angeles, he moved to San Francisco.  But they didn’t give notice to the owner that they were vacating the apartment.  The tenant, masquerading as the landlord, began subletting the apartment to undergraduates.  The bedrooms were large, so he rented the unit to four students who paid $700 a month each for double occupancy (roughly comparable to dorm rates, but nicer).  His gross income was $2,800 a month.  He continued to pay the owner $1,500 a month, so his net income was $1,300 a month, or $15,600 a year.  The property owner continued to pay the mortgage, the taxes, the insurance, and the maintenance, of course.  This went on for 8 years.  By the time the owner caught on to this, the tenant had pocketed $124,800.  When the owner filed an Eligibility Petition to raise the rent to market, the tenant submitted a 30-day notice of intent to vacate.  That put an end to the scam, but it didn’t get the stolen money back.  I asked at hearing to put the facts on the record.   The hearing examiner would not allow me to do that.  The extra rent that the tenant had skimmed from his subtenants was “not relevant”, the hearing examiner said.

 

2.                   A tenant in a two-bedroom apartment moved to Marin County, leaving her roommate in the apartment, but didn’t tell the owner about these new arrangements.  Some years later, the owner noticed someone else coming in and out.  The tenant’s bedroom had been rented out in violation of the rental agreement.  The owner filed an Eligibility petition.  It took two hearings and lots of investigations to discover the truth because the tenant was evasive about where she lived.  She claimed that the other person was her “roommate”, while in fact she lived elsewhere with her husband.  But when we did discover the truth, and when we caught the tenant in a serious lie at hearing

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