Some property owners claim rent control measure is making affordable housing crunch worse

CATHY WURZER: St. Paul is weighing two appeals to its new rent stabilization ordinance this week, including Minnesota's first-ever challenge to a rent increase by a tenant under a rent control law. It's a key test of the 3% rent hike limit voters approved last year and of the possible fate of a similar measure in Minneapolis. They're both navigating the first rent control measures ever in Minnesota that advocates say can help ease the affordable housing crunch and opponents say is making things worse.

NPR Reporter Tim Nelson's been following this issue. He joins us to talk about it. Hey, Tim.

TIM NELSON: Hi, Cathy.

CATHY WURZER: OK, explain this. What's happening right now?

TIM NELSON: Well, there's a legislative hearing today for two properties. They're owned by Dominium. It's a Plymouth developer that has filed paperwork indicating that it's raising rents by 8% at a building in the midway neighborhood and then another one over by Metro State University. Now, you may remember voters approved a 3% cap on rent increases last November.

But that's been codified by the city to include some exceptions, including a so-called self certification process. That allows property owners to impose rent increases up to 8% to recoup things like added taxes, damage repair, or improvements to apartments. There's also another exception that allows property owners to raise rents by up to 15% after a city review.

Now, Dominium is sort of a unique. It has another issue as well. It says it has a low income housing tax credit agreement on its property that predates this rent stabilization ordinance and sets rents below market. And they contend that trumps the city rent control ordinance. Now, tenants are challenging this increase saying it violates the rent stabilization ordinance. They have an attorney from housing nonprofit to help them.

And that's one part of it. Another part of it is there's an appeal going or a hearing before the city council tomorrow, and city staff have recommended approval of a 15% rate hike for new owners of another building, although the council is going to have to make that decision on its own. So it's turning out that what was supposed to be this sort of simple 3% cap without exceptions, even when new tenants move in, it's not what it initially appeared to be.

There are already more than 70 of these exception requests filed with the city since the ordinance took effect this spring. And the city expects so many of these things, it's actually hiring another staffer in city hall just to process all these exceptions. So that seems to indicate there's going to be a lot of legal arguments and maybe even some court battles over this plan.

CATHY WURZER: What exactly are they fighting about?

TIM NELSON: Well, the city has essentially put a loophole in this ordinance, described as a way for property owners to get what the city calls a reasonable return on investment. And it lists about a half dozen criteria. There are things like recouping tax increases, fixing tenant damage, and even, I'm quoting here, "the pattern of recent rent increases or decreases." And these aren't defined in great detail.

But it's a big deal. Property owners' incomes may hinge on these criteria. In the meantime, inflation is really crushing renters' buying power. Economic experts are talking about a recession on the horizon. And we've been hearing about this cooling of the housing market. A lot of people are not in the market to buy anymore. They're putting more pressure than ever on the rental market, and other people that are trying to find and keep an affordable place to live.

CATHY WURZER: Right. Now, the city, if I remember correctly, was supposedly changing the ordinance already, right? I mean, will they address this?

TIM NELSON: Well, a city working group submitted a series of recommendations for changes, not actual changes. They include things like a 15-year exemption for new construction, which could be retroactive. They also want landlords to provide what's called just cause to terminate a lease, which is likely, again, going to be open to interpretation.

They also suggest allowing property owners to bank rent increases. So if they don't raise the rent by 3%, they can sort of save that and raise the rent by more than 3% in subsequent years. Again, these are suggestions at this point.

But they're a big deal. This, like you said, is the first legally binding rent control measure in Minnesota. It's only been going on since May. You may remember Minneapolis voters approved something, but a little different. It's an authorization for the city to develop a rent control system. That hasn't happened yet. But you know that city officials, and property owners, and renters over there are watching, looking, and see what happens in St. Paul to see what lessons they can learn from this implementation.

CATHY WURZER: And what do you think people have learned so far?

TIM NELSON: Well, hard to say. There's been a number of developers St. Paul that have basically shut down their operations saying they can't make a worthwhile profit on new rental housing with a 3% annual rent growth. There's still some housing being built. If you go down to Highland Park, they're building away down there. But critics say that's going to dry up and this measure is going to backfire by limiting housing stock, particularly affordable housing stock.

There's also two property owners that have filed suit against this ordinance in federal court. Read their complaint, it says that builders are already slashing their plans in St. Paul. They say building permits for apartments have already fallen by more than 3/4 this year compared to last year.

And the complaint also says the ordinance is already driving down property values by as much as 12%, according to University of Southern California economists. Now, these property owners are going to argue in federal court that that drop in value amounts to illegal taking by the city, and that the rental increase exception is, quote, "complex and futile," and doesn't constitute due process. So they say this rent ordinance is unconstitutional for that reason.

CATHY WURZER: OK. Say, when do these hearings start?

TIM NELSON: The first one is this afternoon. It's going to be at 3:00. The city council will be considering the landlord request tomorrow afternoon at their meeting there.

CATHY WURZER: OK. Tim Nelson, that's a lot. I appreciate it. Thank you so much.

TIM NELSON: You bet.

CATHY WURZER: That's reporter Tim Nelson.