America's Most Controversial Rent Control Law Is Getting a Hasty Makeover

A collapse in new development activity followed St. Paul voters' approval of a strict, vaguely written rent control ordinance. City and state officials are scrambling over how best to fix the new law. 

By Christian Britschgi of Reason.

"As a controversial new rent control law in St. Paul, Minnesota, nears its implementation date, politicians are scrambling to define the terms of the vague new policy, mitigate its worst effects, or even overturn it entirely.

Tomorrow the St. Paul City Council will discuss the details of implementing Question 1, a brief, voter-passed ordinance that caps annual rent increases at 3 percent and which includes none of the typical exemptions or allowances for new construction, vacant units, or inflation.

The policy isn't scheduled to take effect until May 1. Nevertheless, its strictness has seen developers flee the city almost immediately after its passage in November 2021. Thousands of planned new housings units have been put on hold or canceled, and the number of new multifamily building permits issued by the city has plunged.

St. Paul's ordinance does allow landlords to request exemptions to that 3 percent cap pursuant to their "right to a reasonable return on investment." But what counts as a reasonable return on investment and how they'd go about requesting that exemption go undefined in the text of the initiative. Even some basic terms, like what counts as "rent" subject to that 3 percent cap, aren't spelled out.

That lack of definitions has been a major source of frustration for both rent control critics and proponents.

The latter group complains that landlords are trying to subvert the law by jacking up utility costs or charging separate fees for repairs and property improvements. Some state legislators have pointed to the vagueness of the law as a reason for repealing it entirely.

"They don't even have their terms defined. They don't even have what rent is defined yet," said state Sen. Rich Draheim (R–Madison Lake) last week. "Does it include utilities? Does it include parking? Does it include internet? Lot of questions."

Draheim made those comments at a hearing for the Minnesota Senate's Committee on Local Government Policy, where his bill nullifying St. Paul's rent control ordinance and banning all other cities from imposing rent control in the future was being discussed.

At that hearing, Draheim and other opponents of rent control stressed the damage that St. Paul's rent control policy was doing to new development in the city.

The senator referenced Census Bureau data showing that new multifamily building permits had fallen 80 percent year-over-year in the months after St. Paul passed rent control. In neighboring Minneapolis, new multifamily permits are up 60 percent. Nationwide, 2022 is looking like a blockbuster year for apartment construction. Cecil Smith of the Minnesota Multi Housing Association said at the same hearing that developers had canceled or suspended their plans to build around 3,100 units in St. Paul since the ordinance passed.

On the St. Paul City Council's Wednesday agenda is a pair of ordinances intended to clear up ambiguities in the new law and provide some certainty for property owners and tenants. The first ordinance would establish basic definitions for terms like "rent" and "rental unit." The other would direct St. Paul's Department of Safety and Inspections (DSI) to articulate what a reasonable rate of return for landlords will be and establish a uniform process for requesting exemptions.

The latter bill would still require some rule-making from DSI, which city staff say will last into April.

That leaves more time for even larger changes to St. Paul's rent control policy. The city's mayor, Melvin Carter, has asked the council to exempt rental properties less than 15 years old from the 3 percent rent cap. That exemption wouldn't kick in until January 2023.

State-level rent control policies passed by California and Oregon in 2019 include an identical 15-year exemption for new construction. The idea is to allow developers price flexibility so as not to deter new supply.

There's reason to believe that even a rent control law that includes an exemption on new construction will still reduce some developers' incentive to build. Obviously, all new, unregulated development becomes old, rent-controlled housing stock over time.

California and Oregon policies also include a number of other exemptions to their state-level rent control laws. They allow property owners, up to a point, to add inflation to allowable rent increases. They both allow landlords to raise rents as high as they want between tenants and have higher caps on rent increases: 5 percent in California and 7 percent in Oregon.

A city-assembled stakeholder group has discussed making those exemptions to St. Paul's law, but no one has offered a formal proposal yet. Activists who got rent control on the city's ballot last year are deadset against even an exemption for new construction.

They've also criticized the idea that rent control is causing the collapse of development activity in St. Paul.

"It's the industry's jobs to adapt to market conditions, not to threaten cities with disinvestment," Tram Hoang of St. Paul's Housing Justice Center said at the Senate committee hearing last week. She said that supply chain issues and a labor shortage are the real reasons developers are delaying construction.

It seems that developers are adapting to market conditions by not building housing. It's true that lots of market factors go into when and where developers try to build. But the fact that new building permits are up in neighboring Minneapolis suggests rent control is playing a bigger role in reducing supply than rent control advocates would like to admit.

The chances are slim that St. Paul's rent control initiative will be overturned in its entirety. The MinnPost reports that Draheim's bill faces long odds in Minnesota's Democrat/Farm Labor-controlled House of Representatives. Even some Republican senators questioned whether it was right to retroactively overturn the will of St. Paul voters.

Rent control advocates have stressed that point as well.

"We cannot spread the message that community building is the problem," said B Rosa, an activist with the Housing Equity Now St. Paul, at the committee hearing on Draheim's bill. "Taking away the right to organize your community is not only irresponsible, it goes against democracy."

In this case, rent control advocates' version of building community seems to be coming at the expense of building buildings."