Rent Control continued from page 15
You're probably used to the fact that the Gulf Corporation is screwing you on the gasoline you buy for your car, but it may be a new idea that Gulf is also part of the reason why you pay so much rent. Gulf owns 48% of Matthew Phillips, a local landlord and construction firm, and has taken advantage of low cost FHA loans to build several apartment complexes in the area.
Just because a building has been depreciated doesn't mean it's worth less. In fact, because of inflation and speculation it's probably worth more, and as its tax value declines the landlord can be counted upon to sell it, usually for more than he paid for it.
Total return on investment-depreciation capital gains, operating surplus and the added earning power which a mortgage can give-often result in rates of return of 25-30%, although balance sheets indicate loss and landlords plead precarious cash flows. You may not have realized this was going on in the financial foundations of your apartment, but the results can be lurid. They include higher rent- to no one's benefit except poor maintenance and discouragement of new construction.
SELLING OUT THE RENTERS
Because it's profitable to buy and sell depreciated buildings and begin depreciation anew, buildings change hands frequently. Every time they do, speculation, inflation and the general housing shortage are likely to drive up the sale price, which is based on the amount of rent that can be extorted from tenants. The new landlord takes a larger mortgage from the bank, pays a high interest rate probably 10%, and charges tenants a higher rent. And as buildings change hands, renters don't just buy the building from the bank for their landlords once, they buy it over and over again at periods of about ten years, and at increasing interest rates. Once the landlord finishes buying the building, he doesn't reward them with a lowered rent. Instead, he takes the money and buys a condominium in Florida, or uses it to set up another housing exploitation on another street.
Since the free market tends to reward cutbacks in maintenance with quick rises in profits, depreciation schedules can also encourage landlords to neglect their properties. The shortage in housing then makes it possible for landlords to buy dilapidated properties at inflated prices, in the knowledge that they can make tenants pay for them anyway.
This sort of speculation not only insures that the traffic will be charged all it can bear, and then some. It doesn't just make the condition and real value of housing secondary to profit. It can also be blamed for the inflation and high interest rates which largely prevent the building of badly needed new units across the country.
"Control will cause rents to come thundering down to reality. " - an Ann Arbor landlord lawyer, over heard in the early stages of this year's rent control campaign.
Rent control doesn't just put a ceiling on rents and increases. If properly implemented, it should also encourage landlords to take better care of their property, as well as puncture inflated property values to fall to more reasonable levels. This leads, not only to lower financing costs and hence lower rent, but also to cheaper land on which something can be built besides luxury housing.
Rent control won't turn Ann Arbor into Pepperland, unfortunately. Interest rates are a national matter, for example, and dampening speculation in Ann Arbor won't reduce this single greatest impediment to the construction of new housing.
Rent control will affect demand and supply, however, and not in entirely pleasant ways. As profit margins fall, some older houses will probably leave the rental market and revert to single family. owner occupied dwellings. The scramble tor housing will probably increase with controlled rents. It may even create a black market where choice places are passed along for under the table considerations, although the law makes owners, not tenants liable for this and so gives tenants financial incentive to turn their landlords in.
Fears that rent control will discourage maintenance and destroy property are probably groundless, so long as the board acts reasonably and fairly in compensating owners for their costs. Since landlords can pass on reasonable costs but lose rent income if they don't keep up their places, the law provides an incentive for owners to watch their properties.
Some evidence is provided by New York City's experience with rent control. Two and a half years after controls were removed in 1971, rents were up 53% but maintenance down by more than a third. It was also discovered that decontrol had neither slowed abandonment of houses by slumlords, spurred renovation or stimulated new construction, the last of which seems to be determined largely by the interest rate.
Since private investors are unable or unwilling to build more housing in Ann Arbor, the only way to end the shortage may be to put up a great deal more city and University housing. Although the city's business establishment shudders at the thought, such a thing is entirely possible given imagination and will.
Short term depreciation cycles will continue to encourage landlords to cut and run but not if federal laws can be changed to stretch depreciation or guarantee it for the lifetime of the building.
And renters will continue to pay a large proportion of their rent to the city in the form of property tax, until the United States follows the lead of civilized ones and switches to a truly progressive income tax.
RENT CONTROL AT THE POLLS
Last year's HRP rent control charter amendment lost by a percentage of 58% to 42%, a result which opponents hailed as proof of overwhelming rejection, and supporters as the sign of significant inroad by a new idea.
But if rent control faces an uncertain future at the polls this year, a lot of it has to do with the Democratic Party, all but one of whose candidates. Carol Jones, say they 're against the HRP proposal. Instead, Democrats say they're in favor of doing something about the housing situation on city council, only they haven't yet yet said exactly what.
The Democrats' most widely shared argument is that the charter amendment form is too rigid. since it can only be changed by the voters through another election. The first time HRP brought up the subject of rent control, however, Democrats opted instead for a rent control study commission, the result of which which was an inconclusive, mostly useless
continued on page 26