Last night’s Anaheim City Council illustrates there are no simple, easy answers to the issue of housing affordability in general and rising rents in particular, that the reality is often more complex than conventional greedy-landlord-versus-poor-tenants narrative, and simplistic solutions like rent control are inadequate and actually counterproductive.
A group of tenants from a small apartment building spoke during public comments. They’d recently been notified of large rent increases – which in the most extreme case was more than 50% – and were asking the city to help them work with the landlord.
These were working class people. Many had been tenants in the complex for 20 or more years, and suddenly found themselves facing huge rent increases and an uncertain future. It’s impossible not to sympathize them.
At the same time, closer examination reveals a situation more complex than conventional wisdom would dictate.
The apartment complex in question consists of 19 one- and two-bedroom units. It is located at 1139 W. Casa Grande Avenue, off the intersection of Katella and West and behind the Alamo Inn & Suites. One of the tenants, Emilio Moreno, told the council he’d received a 60-day notice that his monthly rent would increase from $1,205 to $1,900. He and his family had lived in the apartment for 18 years.
Another tenant, Carlos Rodriquez, has lived there for a year and said his monthly would rise to $1,350 from $990. The increases take effect on July 1.
“I wasn’t prepared for this increase,” Rodriguez told the city council. “Because I have a son in college.”
So, clear-cut case of greedy landlord, right?
There’s More To The Story
The apartment building was built in 1961 and is owned by Casa Grande LLC, which is a partnership of four couples — immigrants from Germany who bought the property in 1990 for $1.25 million. By all accounts, the building is well maintained.
The youngest partner is a 76-year old woman who lives in Fountain Valley with her husband. Their share of the revenue from the apartment, along with Social Security, are their only source of income. The older partners are about 90 years old.
After speaking to the woman mentioned, and her property manager, what emerged was a profile similar to many small apartments: owned by a family or minor partnership that didn’t really operate the apartment building like a business. Annual rent increases were in the $20 to $30 – which explains why so many tenants have stayed so long.
The cumulative effect of years of minuscule rent increase is that by 2019, the rents at 1139 W. Casa Grande were far below market rate. That’s a great deal for the tenants for as long as that lasts.
However, the owners were barely breaking even, according the my conversations. Reluctant to raise rents, they took out loans to pay for expenses such as a $40,000 roof replacement, or replacing the water heater, fixing broken pipes, etc.
Adam Ottke, their property manager, advised the owners that continuing to operate the apartment in this manner was nonviable. The rents they charged were far below market rate and didn’t allow for covering the costs of operation while still obtaining a fair return for the elderly owners. They needed to bring them up to market, which in that area is $1,900 to $2,000 for a two-bedroom apartment.
Which begs the obvious question: why not bring the rents up to market rate gradually, rather than shock the tenants with a massive increase?
Indeed, the property manager agreed this would have been preferable. Already, they were raising the rents on new vacancies. Two months ago, a new tenant rented a two-bedroom unit in the building for $1,650.
Ultimately, the likelihood of statewide rent control legislation being enacted by the end of summer – and locking in the rents at below market rates – precluded a gradual approach.
“However, given the politics and climate [in Sacramento], if rent control is passed while rents are at their current levels far below market, the apartment wouldn’t function well as a business,” said Ottke.
Rather than have Governor Newsom and the legislature decide for them, the owners ultimately and reluctantly decided to bring rents in the small complex to market sooner rather than later. Notices were sent out, and the owners went to each of the tenants to explain they couldn’t maintain the apartment building at the current rents.
The Law of Unintended Consequences In Action
Progressive politicians in state government, impelled by the need to “do something” about rising rents, do what comes naturally: impose price controls. Landlords who are charging below market rents react predictably: get rent to market rate now before state government takes that option away forever.
That’s the rational response when government telegraphs that it is going to take away your ability to set your own rents.
The irony is it is the kindly, family landlords who will now be cast as villains as this scenario repeats itself. Absent the spectre of rent control, landlords could take a more graduated approach.
Sadly, there are no good choices here. The owners of 1139 W. Casa Grande aren’t rich. They depend on their income from this property. If they had aggressively kept rents at market rate for the past 29 years, they wouldn’t be in a situation.
Now, their choices:
- Be vilified for imposing a massive rent increase.
- Pursue graduated rent increases and risk being screwed by rent control laws like AB 1482.
- Do nothing and ultimately resort to selling the apartment building to a new owner – who would then have to raise rents due to a massively larger property tax bill.
Ironically, it is the ham-handed attempts by progressive politicians to “fix” rents that sparked this rent increase. Absent rent control mania in Sacramento, the owners would have increased rents much more gradually. Left well enough alone, this would have worked itself out.
Politics and Rent Control Won’t Solve This
Naturally, Councilman Jose F. Moreno seized on this situation as an opportunity to propose a city-wide rent moratorium – a call in which he was weirdly joined by Councilwoman Denise Barnes, who has been flip-flopping around on rent control for more than a year.
Never mind Moreno’s attempt to impose a city-wide freeze on mobile home park rents died last month – he has nothing to lose and potentially much to gain politically. Using government to give away free stuff – in the case, the differential between below- and at-market rent – is how progressives like Moreno do politics.
But a rent freeze won’t fix the situation at 1139 W. Casa Grande. Most likely, it would force the owners to examine other options such as selling the property. The current annual property tax bill on the apartment complex is $16,000 a year based on the 1990 sale price of $1,250,000. A sale would trigger a re-assessment and massively larger property tax bill that would be passed along in the form of higher rents.
From the perspective of Moreno and his political allies, this is about politics. For them, the unfortunate situation at 1139 W. Casa Grande is a political opportunity.
Moreno justified it in part as a tactic to pressure the Casa Grande apartments owners to negotiate.
“I would venture that we were successful with Rancho La Paz because council was considering an action, and that perhaps pushed the owner to come to the negotiating table more openly,” said Moreno when requesting a rent moratorium.
When I spoke to them earlier today, neither the owner nor the property manager had been contacted by Councilman Moreno, his staff or anyone from the City of Anaheim.
Keep in mind that Moreno had known about this rent increase since at least Monday, and apparently made no effort to contact the owners and learn the reasons for the rent increase. It took this writer all of 30 minutes to find out who owned the apartment building and contact her. Perhaps, at the next council meeting, one of Moreno’s colleagues can inquire why he didn’t talk to the owners or property manager and determine if a rent moratorium is even applicable policy prescription.
Nonetheless, Moreno – having no knowledge of the context or underlying reasons for the rent increase – is using it as an excuse to impose rent control on every rental property in Anaheim.
Good to know Councilman Moreno wants to use the power of City Hall to leverage a a few old people who’ve been charging below market rents for years.
His allies in OCCORD are organizing and scripting the tenants. They hit the same talking points when speaking during public comments last night, and held up placards supplied by OCCORD.
After public comments, OCCORD community organizers led the tenants outside for a pep rally and strategy session. One of the OCCORD staffers was carrying a shopping bag filled with the leftover placards and sandwich tray.
One can’t blame the tenants for hooking up with OCCORD. This rent increase has rocked their world. If OCCORD organizers offer to help them stave if off, the tenants will take help where they can get it.
That doesn’t change the reality that Moreno and OCCORD are exploiting this situation to advance a policy that does nothing to fix it – acting without even attempting to ascertain the facts. And in this instance, we see once again how clumsy government attempts to control prices – rather than stimulate supply – generally backfire – and in this case, tragically.