M1 Built on False Pretense

M1 Built on False Pretense

 

One of the pillars of Measure M1 is that it preserves landlord profits at May 2015 levels. A facile analysis shows this is false. Imagine a unit that generates $10,000 in annual revenue: $6,500 for operating expenses and $3,500 gross profit (this is the industry average margin). Capping rent increases at 65 percent of consumer price index (CPI), thus allowing the $6,500 to grow with inflation, steadily reduces gross profit margin every year as the maintenance costs take up a bigger and bigger piece of the pie. 

Profits are preserved only in the sense that the number of dollars of gross profit remain constant over the years. After 20 years (assuming 3 percent inflation), what started as a 35 percent margin has been reduced by a third, down to 23.79 percent. Furthermore, the purchasing power of that $3,500 has been reduced by more than 45 percent, a clear and dramatic reduction in profits! 

There is nothing to dispute this analysis — it is a simple projection of the data. But this model, like all models, is overly simplistic. The implications are not as dire for landlords as the model suggests, for two reasons: 

  • As tenants vacate their units, the landlord is free to reset rents to the market rate, restoring their profit levels. This is hard to quantify because there is no easy data on average-tenancy duration in Alameda. But because high market rates in Alameda will make it difficult or impossible for rent-controlled tenants to move within the city, 20-year tenancies aren’t so far-fetched. M1 will be a fabulous success if it enables these renters to stay in their homes for 20 more years, so these are not ridiculous numbers. They are the intended result of M1. 
  • M1 allows landlords to petition for higher rent increases, if they can justify them. This means that every year, for every affected apartment in Alameda, a landlord petition will be eligible for review based on the slippage of their profits, simply to maintain purchasing power and margin at last year’s levels — a costly administrative nightmare. A counterpoint is that the property appreciation should be more than enough to compensate for some slippage in profit. 

This will be no solace to anyone who lives on the revenue generated from their rental properties in Alameda, perhaps purchased to secure retirement income. They will see a steady decline in disposable income, something tenants feeling the squeeze can definitely relate to, and may feel more than a little schadenfreude about, but is no fairer to a retiree than a renter. Many will anticipate this and choose to exit the rental market altogether, investing instead in an asset that produces income that does keep up with inflation, permanently removing another unit from the rental housing stock in Alameda. 

M1 accomplishes a lot of important things for Alameda renters, but the 65 percent CPI cap on rent increases is a mistake, and a totally avoidable one. Capping increases at 100 percent CPI would allow small landlords to preserve their margins and purchasing power, but it is too late for the organizers of M1 to acknowledge this and make an adjustment. The law says what it says. This isn’t meant to be some fatal-flaw revelation of M1, but is one of many things that must be balanced against its other pros and cons. 

The stated goal of the Alameda Renters Coalition is to keep Alamedans in their homes (a goal I completely support). However, it should be done in a way that is also sustainable for small landlords. As written, and for all the things M1 does accomplish for renters, it fails in this regard. 

 

 

Richard Thomas lives in Alameda.