56 SEPTEMBER 2019 • WWW.AAGLA.ORG THE RENTAL HOUSING BUSINESS AND HOW THE GOVERNMENT DISENFRANCHISES THE SMALL REAL ESTATE INVESTOR By Roderick Wright, Former California State Senator I recently saw a movie titled, “The Last Black Man in San Francisco.” What initially sounded like a comedy was, in reality, a cautionary tale about poverty and gentrification. Jokingly I called my friend Willie Brown, the former mayor of San Francisco and told him that I had just seen a movie about him. Willie laughed and said that he should have had a bit part in that movie. Looking at other cities you could have the, “The Last Black Man in Washington, DC,” “The Last Black Man in Harlem,” “The Last Black Man in Leimert Park and Baldwin Hills.” What these cities have in common is that they were all once middle class, African American communities that are now under rent control regulations and experiencing gentrification. The cost of real estate in Urban America is increasing, and apartment buildings are not immune to these increases. Ironically some of the same people who celebrate high housing prices, condemn high rental costs, not realizing they are basically one in the same. Yet, during the last 40 years, governments at all levels have vilified small rental property owners and have forced them under strict regulations and price controls. Loss of tax credits, difficulty securing building permits, rent controls and other obstacles have all but driven small investors out of the rental housing business. However, it has been these very same small investors, the very people being vilified, who kept a balance in the rental housing marketplace. As these small investors are forced to exit the rental housing business, we see the market getting tighter and more expensive. Rent Control: The True Cause of Rental Housing Issues The problem of high rents and homelessness cannot be addressed without the investment of private capital from small investors. Given the vilification of rental property owners, the small so-called “mom and pop” investors are discouraged from investing in apartment buildings, which only exacerbates the current housing problem. Unlike single family homes, apartment buildings are valued based on their income potential and to a lesser extent the income of the borrower. As restrictions on rental income advance through rent controls and other regulations, the apartment business becomes more arduous. The building of new units is diminishing, as are the number of prospective new buyers. Smart investors will always steer clear of overregulated businesses. As we have seen in cities like Los Angeles and San Francisco, rent control has reduced investment in rental housing and these cites lost rental units as owners exited the rental housing business and converted their properties into other uses such as condominiums. It was because of this that the State of California had to eliminate rent controls on newly constructed units and allow for vacancy de-control. In Los Angeles, units built after 1978 and in San Francisco units built after 1979 are exempt from rent control, and for most other cities within the State of California, units built after January 1995 are exempt. We have seen in other cities that over time, poorer renters come up the losers where rent control was enacted. One merely needs to look at Santa Monica and West Hollywood to see this example. In this article, we examine the negative, often unintended, consequences of rent control regulations. Part of the problem with the rental housing business is its perception. Many in government and the general public do not recognize the rental housing business as a business. For purposes of this this discussion a business is defined Feature Story