Is inflation lower in the Twin Cities because fewer people want to live here?
For a few months now, a common theme in the local media is that the inflation rate in the Twin Cities is lower than in comparable metropolitan areas. In October,…
St. Paul’s rent control ordinance is yet to take effect. In anticipation of the May 1 start date, the Department of Safety and Inspections (DSI), which was working towards the implementation of the rule, has proposed rules that would guide how the rent control policy is enforced.
Among some things, the rules have proposed conditions under which landlords can apply to be exempted from the 3% rent hike cap. Landlords can apply to raise their rents to somewhere between 3% and 8% or even above 8% if they meet certain standards.
What are these standards? One important factor to be considered is a Reasonable Return on Investment. But how to decide what’s a reasonable rate of return? Well, the DSI would apply a bunch of complicated calculations to see if landlords are making enough to cover their expenses as well as make some profit — which in this case, would be the reasonable rate of return.
To put it simply, the DSI or landlord would have to select a base year, which would be the year of comparison. For standard, the rule selects the year 2019 as the base year. This means any landlords applying for the exemption would have to show that without this exemption, they would not make the same profits as in 2019 — when expenses and inflation are taken into account.
Of course, landlords are also free to argue that they did not get a reasonable return in their base year. Proving that would also be another complex process involving adjusting expenses or accounting for special circumstances. And to the extent that a landlord is allowed rent hikes of over 8%, allowable rent hikes in a 12-month period would not exceed 15%. This is to ensure that landlords do not pass on rent increases “which are not affordable” to renters. Instead, any rent hike exceeding the 15% limit would have to be deferred to a later period.
Other factors which will be considered for exemption include capital improvements. For these, landlords have to follow specific amortization rules put up by the city. Other factors include changes in the number of tenants, as well as changes in the services or spaces provided.
Navigating all of these rules requires a lot of hours of work. Currently, the city of St. Paul has budgeted nearly $650,000 to hire five full-time employees to enforce the ordinance this year. Both of those numbers would potentially have to go up in light of these new, additional complexities.
Unfortunately, this does not only spell trouble for the city of St. Paul. Landlords would also have to invest resources to navigate the legalese and apply for these exemptions.
This would be especially tough for small landlords who will likely be unable to afford the resources necessary to navigate the regulatory landscape. Worst case scenario, corporate landlords would be able to take advantage of this complex exemption system, while small landlords would be unable to make returns on the city’s 3% cap.
Given the myriad of exemptions and the complexity of the rules, it makes sense to just raise the cap from 3% to a much more reasonable rate that would apply to everyone. This would enable landlords to make profits on their investments without jumping through hoops.
But whatever changes or exemptions, nothing will beat scraping off the rent control ordinance altogether.
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