Although Oakland has a rent control ordinance, a loophole in the law allows landlords to pass on some of their financial costs to their tenants in the form of rent increases. And in some instances, these rent hikes have been substantial, forcing renters out their homes. Tenants' rights groups have been working over the past several years to close the loopholes, but have faced stiff opposition from landlords and developers. And this week, the city's rent board will hold a community meeting regarding proposed changes to two of the more controversial aspects of Oakland's rent law.
Currently, landlords who purchase an apartment building in Oakland and find that the rents they collect do not cover their mortgage payments are allowed to pass on 95 percent of that debt to their tenants in the form of rent increases. Of the ten major jurisdictions in California that have rent control laws, only four allow landlords to pass on the costs of debt service. Of those four, Oakland is the only municipality that allows landlords to force tenants to pay up to 95 percent of their debt. Similarly, Oakland landlords can pass on the costs of capital improvements to their tenants.
"Tenants are not supposed to buy the owner a building and then pay rent to live in it," said James Vann of the Oakland Tenant's Union. "It's the owner's business to buy a building, and he has to make that decision based on prudent financial transactions that will provide him reasonable return."
Landlord and developer groups, however, contend that the issue of debt-service transfer is relatively rare in Oakland, and thus the city's rent ordinance doesn't need to be changed. From 2006 to 2012, about 5 percent of petitions brought to the Oakland Rent Board concerned debt service. Of those cases, the board turned down more than half of the requests by landlords to raise tenants' rent.
"When you move something forward to change a policy, it's because it's not working," said Jill Broadhurst, executive director of the East Bay Rental Housing Association. "Debt service and capital improvements were not causing anyone a problem." Broadhurst also said that eliminating debt service would hurt those who own small amounts of property the most, because they would not be able to raise rents when they seek loans to make improvements to older properties.
Much of the concern surrounding debt service stems from a high-profile court case involving tenants of a North Oakland apartment building who filed a lawsuit against their landlord, Dennis Cox, after he purchased the property and raised rents by $381 a month using the debt-service provision (see "Raising the Rent at 138 Monte Cresta," 5/7/2008). Even though tenants filed a petition with the Rent Board, which determined that Cox was only entitled to increase rent for each unit by $137, some of the tenants also filed a lawsuit against him. A court awarded the renters $1.7 million in damages for legal fees and moving costs, since the rent increase forced most of them to move out of the building (see "Oakland Landlords Put on Notice," 3/30/2011). Although the tenants eventually settled with Cox out of court, the case prompted the rent board to take a closer look at debt service.
According to Connie Taylor of the Oakland Rent Board, the board voted to eliminate landlords' ability to transfer debt-service costs to tenants in 2009, but the recommendation, which needed approval from the city council, stagnated in City Hall for nearly two years. Eventually, the board revisited the recommendation, and in April 2012, voted to amend it to allow a 7-percent cap on debt-service transfers.
In June of this year, both proposals finally came before the Oakland City Council's Community and Economic Development Committee. After hearing arguments for and against the changes from twenty members of the public, the committee voted 3-1 to have staff go back and include capital improvement costs in the recommendation and allow more time for public input. Councilwoman Libby Schaaf was the lone dissenting vote. "I feel like we often put things off that we don't feel like doing," Schaaf said at the meeting. "I think it would have been helpful to have made a decision."
This Wednesday, the Rental Adjustment Program will present the proposed amendments once again and allow tenants and property owners to provide input. Taylor said she plans to take that input into consideration when she combines the recommendations concerning debt service and capital improvements.
A coalition of pro-tenant groups plans to attend the meeting in full force to advocate for complete elimination of debt-service transfer to renters. They argue that debt service does not encourage sound business investments on the part of the property owner, since it allows them to fall back on tenants to help pay mortgages. From the tenants' perspective, the practice is unfair, because many of them already divert as much as 60 percent of their income to rent.
But Greg McConnell, president and CEO of the Jobs and Housing Coalition, contends that the issue of debt service abuse is no longer relevant, because banks are now only offering loans with stringent requirements based on income generated directly from units. "They're trying to fix the problem after the horse is way, way out of the barn," McConnell said.
But Marc Janowitz, a lawyer with the East Bay Community Law Center, believes it's time to take a holistic view of how property owners benefit from debt service and capital improvements, since the rent control ordinance does not take into account numerous tax breaks for property owners and depreciation over time.