Berkeley has its hands full with a lawsuit alleging a city ordinance requiring mitigation fees for the demolition of rent-controlled units is unconstitutional.
The lawsuit stems from the initial approval in June 2015 of a rental housing project which will replace 18 rent-controlled units at 2631 Durant Avenue with 56 new units. Of these new units, only four will be let to low-income renters. In a typical move for the Bay Area, the approval was met with multiple appeals — one of which, unusually, came from the building’s owner.
The owner claims the affordable housing mitigation fees and construction mitigation fees imposed by the city for the demolition of existing rent-controlled units unconstitutionally prohibit rental property owners from developing their property without expending massive preliminary costs to the city. The construction mitigation fees, which specifically charge owners for the demolition of below-market units, differ from the affordable housing mitigation fees, which charge for the absence of below-market units in newly constructed buildings. Both types of fees apply to the redevelopment at Durant Avenue.
Although the construction mitigation fees have yet to be determined due to the very recent inculcation of the ordinance establishing them in February 2016, affordable housing mitigation fees alone will cost the owner $28,000 per unit.
Of course, the previous tenants who previously occupied the building — which has been vacant since mid-2014 after the expiration of all active lease terms held by its residents — claim the owner intentionally let the building fall into uninhabitable disrepair to justify the subsequent demolition and redevelopment of the site.
Thus, the argument goes, if the building owner prevails and is released from paying their obligatory mitigation fees, landlords and owners throughout Berkeley will follow the owner’s lead, deliberately letting rental properties go fallow to escape rent control limitations.
Rent control and development fees: helping or hurting the Bay Area?
Berkeley’s struggle with the demolition of rent control properties is a new example of an old issue: are development fees and rent control actually harming urban housing markets rather than making them more accessible to all?
The answer seems increasingly affirmative. The more Bay Area cities that impose rent control ordinances and increase development fees for new construction, the longer California’s housing supply crisis will last. These short-sighted solutions invariably forebode significant consequences, as developers brainstorm ways to evade such fees — whether by petitioning voters or building elsewhere. Either way, this leaves financially tortured renters in the lurch.
Once developers leave, tenants who are unable to pay excessively high rents in the city will follow. Naturally, when working tenants flee, businesses follow the labor force out of necessity. Without employees, businesses can’t function and therefore don’t earn profits — and when employees move due to lack of housing, many businesses can’t survive the financial effect of a severely diminished workforce (and consumer base).
Rent control further harms businesses and local economic conditions by limiting the intermingling of residents at various income levels. Although rent control is often cited as the lone deterrent to gentrification, a balance of residents at all socio-economic income tiers is necessary to ensure communities thrive. Otherwise, neighborhoods atrophy and become stuck in a stasis which divides low-income residents from middle- and high-income residents who might elevate the community with their expendable incomes.
However, landlords, property owners and managers need to ensure rental units (rent controlled or otherwise) are maintained in habitable condition for tenants. Uninhabitable conditions in rental units expose landlords and property managers to sizeable maintenance costs and even lost rents if their tenants have fulfilled the recourses available to them, like the repair-and-deduct remedy.
Thus, the resolution of Berkeley’s mitigation fees dispute with the owner at Durant Avenue will set a high-stakes precedent for rent control demolitions and the redevelopment of below-market units. Although not the first situation to raise the issue in the Bay Area, the outcome in Berkeley will answer a critical question: is a property owner entitled to redevelop their property (i.e., their investment), regardless of the effect on rent conditions and the accessibility of housing in the immediate area?