It was a painful slog for Mountain View's Rental Housing Committee on Monday night as they waded into the delicate issues of pricing and profit under citywide rent control.
At the June 19 meeting, the five-member committee worked to figure out how landlords of rent-controlled apartments would be guaranteed a "fair rate of return," as specified in the language of the rent control measure. But it soon became clear that "fair" meant wildly different things to the people in the room.
Through a debate that stretched nearly to midnight, a split committee voted 3-2, with Vanessa Honey and Tom Means opposed, to develop a basic system to allow landlords' profits to increase only by inflation. The system -- dubbed the Maintenance of Net Operating Income (MNOI) standard -- received strong endorsement from tenants' advocates as well as city staff, who described it as the least risky option.
Even the supporters were lukewarm. Committee member Evan Ortiz championed the MNOI standard even as he acknowledged its flaws. But he urged his colleagues to get an imperfect system in place so that it could be tweaked as needed in the future. He pointed out repeatedly that nearly all California cities with rent-control laws also followed the same MNOI standard.
"If this is part of the growing pains of implementing the law, so be it," Ortiz said. "If we were to pursue something that no one else has done that would open us up to litigation and more uncertainty and ambiguity."
It was a complex debate, and the city's team of three attorneys often had to re-explain how the rent-control system would operate. Under the measure, landlords would typically only be allowed to raise rents according to annual inflation, as determined by the Bay Area Consumer Price Index. For the upcoming year, the amount has been set at 3.4 percent.
The law gives some wiggle room for special cases, such as when extra repairs or maintenance issues pop up in decades-old apartments. For those cases, landlords can seek to raise rents higher, but they have to go through a petition process and provide an itemized list of expenses to a city hearing officer. This same petition process is also supposed to be used by landlords if they need to raise rents because they aren't turning a profit from their investment.
Exactly how much profit was fair? In talks prior to the meeting, landlords insisted they should get a fixed return of 12 percent on their investment. As in other recent similar meetings, a large group of apartment owners came to the meeting to highlight their challenges under the new law. All of them warned that simply tying profit to inflation would be disastrous.
"If the return isn't adequate then our alternative is to redevelop," warned apartment owner Elizabeth Lindsay. "It makes no sense to remain in an area that's not fair market, and we'll have to relocate to another area."
It remains unclear whether city officials would allow property owners to redevelop rent-controlled apartments as a way to circumvent the new rules. Any apartments first occupied after February 1995 are immune from rent control measures due to the Costa Hawkins Act. But tenant advocates say the city could force developers who demolish rent-controlled apartments to include just as many price-restricted units in a new housing project.
Some on the committee sympathized with landlords dealing with the new rules. Honey and Means both insisted that landlords deserved to increase their rent by more than the annual CPI because their investment was riskier. Ditching the staff suggestions, Means tried to craft his own fair-rate standard based on apartment owners routinely reappraising their buildings. He warned that the petition process would be too cumbersome for landlords since they would have to present invoices and expense summaries to justify their rent increases.
"That's a high burden of proof," he said. "I'd like to take the assessed value and add in a fixed rate of return, rather than going through this morass."
City attorneys urged the committee not to jury-rig a new system on the spot. Other red flags appeared when attorneys from tenant groups hinted they would sue if the committee veered too far from the spirit of the rent-control law.
The swing vote of the night was committee member Matthew Grunewald, who originally wanted to split the difference and meld multiple systems. As the night went on, he sided with Ortiz and committee member Emily Ramos in supporting the MNOI standard, but he indicated he wanted a "generous" list of capital improvements that would be covered under the petition process.
The committee's 3-2 votes directs city staff to draft a full policy for a fair-rate of return standard. That draft will be brought back to the committee in early July.