Maryland City Adopts Rent Control
With live events canceled, many musicians struggled financially during the pandemic. Many used that time to compose, hone their skills, or increase their repertoire. But when live concerts resumed, many musicians encountered new problems.
According to Marketplace, inflation and transportation costs were among the challenges musicians faced post-pandemic. Performance venues suffered from staff shortages because stage crew--staff found other jobs during the pandemic or required higher pay due to inflation. Plus, COVID-19 brought smaller crowds and increased crowds.
Meanwhile, due to rising fuel costs, musicians must pay more to travel to performance venues. The supply chain shortage has compounded musicians’ difficulties if they require electronic amplification or instruments that require manufacture.
Except for musicians who aren’t highly renowned, competition has increased because the pandemic afforded time for performing musicians to create new content and hone their skills. That pandemic work brought more music and musician supply to the market. Increased supply in the music market can translate to lower musician compensation.
The pandemic also hurt real estate investments. Some asset classes, like office and retail, experienced high vacancies as companies suffered financial difficulties or moved to remote work or online sales.
Multifamily suffered as workers experiencing pandemic-related unemployment moved out of apartments to live with relatives. But people need somewhere to live. So, multifamily has weathered the pandemic storm relatively well and has been able to increase rental rates as demand returned when people returned to work and moved back into rental housing.
However, due to inflation and short supply, rent increases sometimes have been significant. Concerned that they may be unable to pay increased rent, tenants in areas that don’t have rent control have advocated for government intervention.
In response, on February 21, 2023, Mount Rainier approved a rent control law, which is unique in a number of respects. This article discusses Mount Rainier's rent control law and the pros and cons of the new law and rent control generally.
Mount Rainier’s Legislation
With a population of 8,333 in the 2020 census consisting of 0.65 square miles of land, Mount Rainier is not a large city. However, as one of Maryland’s few incorporated cities, it has its own government.
The city’s population is diverse, with 47.5% of residents identifying as Black, 30.9% identifying as Hispanic or Latino, and 18.7% identifying as White and not Hispanic or Latino in the 2020 census. The census reported a 25.2% owner-occupied housing rate from 2017-2021, while 74.8% of residents lived in rental housing with a median gross rent of $1,342.
Apartments.com lists only a handful of apartment complexes in Mount Rainier. One property was built in 1943 and consists of 916 units. Another, built in 1949, has 1062 units, and a third complex, consisting of 157 units restricted to seniors, was built in 1993.
Mount Rainier's rent stabilization law will protect tenants living in properties that are at least 15 years old by limiting annual rent increases to 60% of the CPI. The law will also apply to rent increases after a unit becomes vacant.
The law doesn't apply to properties less than 15 years old, units in buildings with two or fewer units, owner-occupied properties, and short-term leases of 30 days or less (e.g., Airbnb). The law also creates a rent stabilization board (Board).
Landlords can apply to the Board for permission to increase rent above the limit if necessary to provide the landlord with a fair return on their investment. The Board is to consider the following factors when deciding whether to approve a landlord's application for an increase:
Changes in property taxes
Cost of planned or completed capital improvements necessary to comply with code requirements affecting health and safety that are amortized over time
Housing services provided
Landlord's compliance with local and state housing laws
Landlord's compliance with the lease for the unit.
Pros and Cons of Mount Rainier’s Legislation
Public reports aren’t clear why Mount Rainer's law only applies to older properties. The rationale could be that lower-income individuals, who might be affected more by rent increases, frequently live in older properties. Another possibility is that the 15-year rule is based on a mistaken belief that owners of older properties will be less burdened by rent control because their mortgages are more likely to be small or paid off.
Without discussing Mount Rainier specifically, most 15-year-old apartment complexes will have significant mortgages. Real estate investments generally produce a higher return if the investment is leveraged (the property is mortgaged). So, usually, either the initial owners have sold the properties to an owner (who put a new mortgage on the property) or have done a cash-out refinance.
Mount Rainier’s legislation addresses this concern by allowing landlords to apply to the Board for an exception to the rent increase limit to provide a "fair return" on their investment. However, the law doesn't define "fair return,” nor does it give standards for the Board to determine an owner’s fair return. So, it’s too soon to know whether the law will adequately protect landlord investment returns.
Another concern is that by the time properties are 15 years old, they may need renovation or health and safety upgrades. By setting rent limits below the annual CPI increases, landlords may be forced to cut back on amenities or renovations, which can affect tenant health and safety or result in a decline in housing stock conditions.
For instance, Maryland law requires new residential buildings to have sprinkler systems and hard-wired smoke detectors with 10-year battery backups. Properties constructed before 1990 and not renovated since 1990 might not have sprinkler systems, and unrenovated buildings built before 1975 might not have hard-wired smoke detectors. With rent control limits on revenue, landlords might defer upgrades to meet current code requirements.
Once again, Mount Rainier's legislation addresses this concern by allowing landlords to petition for an exception to the law when necessary to make certain upgrades for health and safety. Yet, the exception requires that the costs be amortized over time, which could be descriptive language explaining what constitutes capital improvements. However, the language creates uncertainty about whether landlords can recoup these costs when they are incurred or whether landlords will be required to gradually increase rents to recover these costs even though they must pay for improvements upfront.
Pros and Cons of Rent Control Generally
Rent control can help individuals remain in their apartment homes. The Mount Rainier legislation notes that "in the two census tracts containing vast majority of renters in the City . . . the median household incomes are $50,184 and $60,882," and 44.8% of renters paid more than 35% of their household income for rent. Tenants on fixed or low incomes that don’t keep pace with inflation may not have savings or excess income to absorb rent increases. They may be forced to move if their rent increases more than their income.
When tenants move, landlords experience costs to make the unit ready for new tenants. Plus, tenants must pay moving costs, application fees, and other costs associated with moving to a new apartment.
Rent control may also keep housing within reach as families grow. Without rent control, a tenant may attempt to remain in a small apartment despite adding more children to their family.
But when rent control laws limit landlords’ potential for revenue growth without regard to market factors of supply and demand, landlords may be forced to cut amenities or defer maintenance. Further, rent control limits financial opportunity and may disincentivize developers from adding new rental units to an already tight market. So rent control laws can increase scarcity and make it more difficult for people to find housing.
If rent control, such as that adopted by Mount Rainier, limits increases to an amount lower than the CPI, many landlords will be forced to limit staff salary increases, cut staff, discontinue amenities, or cut back on property maintenance. Although Mount Rainier’s law allows landlords to petition for exceptions, increased staffing or maintenance costs aren't grounds for an exception – unless the landlord can show they prevent the landlord from obtaining a "fair return" on their investment.
Rent control laws also can significantly affect the housing market and the community by disincentivizing property improvements. Landlords unable to recoup the costs of major upgrades have little incentive to advance the cash to make those upgrades. Although tenants might not experience significant rent growth, they may find themselves living in antiquated units with fewer amenities.
Rent control may result in less landlord flexibility with tenants facing financial challenges. Since it’s expensive to evict a tenant and prepare an apartment for a new tenant, under normal economic conditions, landlords have incentives to retain tenants. Some rent control laws can change landlord incentives where due to rent control laws, the landlord can charge more rent to a new tenant. Mount Rainer’s law addresses this outcome by imposing limits on rent increases for vacant laws.
Since rent control laws often focus on protecting existing tenants, many rent control laws encourage tenants to remain in housing in poor condition or no longer meet their needs. For example, the two-bedroom, one-bath apartment perfect for a couple with one child may be inadequate for a family that has grown to include three children. Those tenants may remain in the unit that no longer meets their needs if rent control results in their paying below-market rent in their existing apartment and they know their current rent can't be increased significantly.
Mount Rainier's law may minimize this issue because it applies equally to occupied and unoccupied units. So, landlords won't be able to impose significant rent increases when new tenants move into a unit.
Conclusion
Rent control measures, like that adopted in Mount Rainier, can provide much-needed relief to fixed- and lower-income individuals who can’t afford increased rent. However, rent control doesn’t prevent a landlord from evicting a tenant who doesn’t pay rent because they can’t afford it.
Despite this short-term benefit, rent control also can force landlords to reduce staffing, amenities, and property maintenance. And rent control may delay health and safety improvements.
Mount Rainier’s law is better than many. The city has made a gallant effort to address landlord concerns by permitting the Board to grant exceptions under some circumstances. However, without objective standards, it remains unclear how frequently exceptions will be permitted. So, despite the ability to obtain exceptions, in the long run, rent control may discourage upgrades, new construction, and other changes necessary for the multifamily industry to continue to provide ample, safe housing for everyone who needs it.
© 2023 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless a written contract is signed by all parties.