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The McConnell Report • January 1, 2008

These Things Just Don’t Work

Recently, I read with great interest an article about the difficulty the city of Dublin is having with its Inclusionary Zoning (IZ) program.  Here is the background.

 

In an effort to increase homeownership for low and moderate income people, the city requires developers to set aside a percentage of homes to sell at below market prices in all new developments.  The first purchasers of these units must meet certain income limits. To ensure that the housing unit remains forever low income, the city requires that if the unit is ever sold, it must be sold to another low income buyer.  The city also requires that the owners of these units occupy them as their principal place of residence.  This is to prevent them from buying and then renting the units out.  To prevent low income buyers from flipping these units and getting a windfall, the city does not allow buyers of below market rate units to accumulate equity like buyers of regular units do.

 

So what happens when the market turns downward? Below market owners get screwed! 

 

In Dublin, developers have slashed prices on many of their market units to a point where the price of those units is not significantly higher than the price of below market units. So, when a below market owner has to sell, he or she is competing with developers and owners of regular units that do not have the restrictions that are placed on the below market rate units. 

 

And that is precisely when all of this “good work” unravels. When prospective buyers find out that the sales price of the below market rate unit is so close to that of a market rate unit and they examine all of the restrictions on the below market rate unit that do not apply to market rate units, guess which one they buy?

 

This has created a major problem for below market rate owners who have to relocate or who come upon a financial emergency that prevents them from being able to remain in their homes.  Simply put, they cannot compete because the law that was intended to benefit them has so many strangulation regulations. They cannot occupy the home, cannot rent the home, and, in this market, cannot sell the home because buyers are more interested in market rate non restricted housing units.  They are just plain stuck with no good solutions.

 

Dublin acknowledges these problems with its IZ program and is now in the process of considering a hardship exemption that would allow owners of below market rate units who prove hardship and who prove they cannot sell their homes to rent them until a buyer can be found.  But here is the catch, they are adding a requirement that the units must be rented to low income people at affordable rates, which, if you read between the lines, means that a low income person must subsidize other low income persons who they rent to.

 

This, to me, is another example of how unintended consequences often flow from what may be well intended policies.  The goal of the Inclusionary Zoning program is to get low income people into ownership positions.  But the reality is that the restrictions on sale, the inability to build equity, and the requirement of occupancy so they cannot rent it out really mean that these people are not owners.  Their mortgage payment is little more than rent to a bank.  So when they need to exercise the basic right that most owners have - to sell the unit - they cannot.

 

Dublin’s experience reminds me of problems associated with rent control.  Policy makers start with the noble notion that owners should be prevented from price gouging and end up with a system like Berkeley’s where every aspect of the landlord tenant relationship is regulated.  So much so that owners start looking for ways to get out of the business either through condo conversion, TIC, or Ellis Act Evictions.  That, in turn, necessitates another round of regulation intended to ensure that owners don’t circumvent the rent control law.  In the end no one is served.

 

I only know of two things that make sense.  Let the market control the price of housing and if we are to really help house low income people, mandate that all citizens pitch in through a general tax. History continues to show us that anything else will be riddled with unintended consequences.

 

2008 Looks Great!

 

If you did not attend the BPOA Holiday Dinner you missed a good one.  As usual, there were speeches aplenty.  Robert Cabrera, Claude Zamanian, and former US Congressman Doug Ose talked about the prospect of eliminating rent control in the June 2008 election.  Michael Wilson spoke enthusiastically about recent BPOA successes.  James Kilpatrick did his usual fine job as President and headmaster. And last, but not least, Nancy Friedberg did a wonderful job of making sure everything came together.

 

But what was most exciting to me was that the membership was in a very good mood.    Gone was the “woe is me” that has characterized so many meetings.  People told jokes, laughed with one another, and many wrote checks to support the rent control campaign. I haven’t seen that level of energy in a long time.

 

If BPOA can carry that optimism into 2008 it is just possible that some really good things will happen.  Here is wishing everyone a truly great 2008!

 

 

Greg McConnell is the principal consultant at The McConnell Group, a consulting and advocacy firm that specializes in housing issues and advises apartment and housing associations, property management companies, and individual owners throughout California.  For more information about The McConnell Group please visit www.themcconnellgroup.com.

 

 

ã  This article is copyrighted and cannot be republished without the consent of the author.

 

 

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