What Is Rent Control & How It Could Affect Apartment Building Owners
Rent control is when governmental agencies set rent thresholds or control the number of rent increases collected by owners in a specific market. Owners are then caught between a fixed amount of revenue for a property but face the rising costs of long-term ownership such as property taxes, utilities, fees, and inflation. Despite the increasing cost of living in the United States, rent control is not widespread. As we at 33 Realty know, a 2019 study conducted by the Urban Institute found that 182 municipalities in the U.S. have rent control regulations. All of these regulations are in New York, Maryland, New Jersey, and Washington D.C.
As of February 2022, there are 31 states that have laws that forbid local governments from initiating rent recall measures. However, there has been a resurgence of discussions surrounding rent regulation in recent years, especially in areas where costs of living are increasing rapidly.
As rental prices increase, it's important to understand how rent control works. It refers to an apartment that has limitations on raising rent. Government programs help to establish rental limits and the local municipalities put the laws into place. Despite rising rents, not all cities, and states have these regulations in place. Controlling rent in this way prohibits landlords from unfairly raising a tenant's rent year over year, and it often helps to keep affordable housing available to those who might not be able to afford market or above-market rates in a residential property.
As you can imagine, rent control is a controversial topic. While some people don't think twice when they pay rent, other people might be crippled by a rent increase, especially without fair notice. In the majority of cities today, rent control bans are targeted for lease renewals as opposed to new tenants. If a landlord chooses to raise rent, they undoubtedly get some benefits as they're allowed to charge as much as the market will allow.
Here are some of the main arguments against controlling rent:
- Those who enact rent control significantly reduce the availability on the housing market since landlords prefer converting a building into a condo or adapting it for commercial use rather than minimizing their profits.
- As rental prices increase, the investment in new rental housing comes to an end.
- There is less maintenance on buildings that are under rent control as there is already a poor return on investment for landlords.
As you can see, there are many downsides to a rent increase. Here are some arguments for regulation:
- The rental prices across countless U.S. cities such as Chicagoland's Logan Square are rising faster than the wages that moderate-income jobs can produce.
- With advance notice, rent control can help moderate-income families and other renters with fixed incomes to live in decent conditions without the fear of rent increasing drastically.
- Many neighborhoods become safer and more stabilized when there are long-term leaders in apartments that are rent controlled.
Currently, the state of Illinois (along with 36 other states) prohibits municipalities to pass any laws related to rent control. The 1997 Illinois Rent Control Preemption Act prohibits municipalities from enacting or enforcing measures that control the amount of rent charged for a residential unit.
WHAT IS THE ILLINOIS STATE LEGISLATURE PROPOSING?
Currently, the state legislature has proposed two bills that would nullify the 1997 Illinois Rent Control Preemption Act.
The first proposed bill is H.B. 255, which seeks to repeal the state's Rent Control Preemption Act of 1997 and was sponsored by Rep. Will Guzzardi, D-Chicago. On March 29, 2019, the House Subcommittee on Commercial Law of the House Judiciary Civil Law Committee voted on H.B. 255. Four representatives voted against the measure, two voted for it and one member abstained. The bill was sponsored by supporters of rent control who will try again to move the bill to the Judiciary Civil Committee or ultimately a full house vote.
The second proposed bill is H.B. 2192 which seeks to remove the ban on Rent Control (similar to H. B. 255) but H.B. 2192 would also establish six regional boards that each have seven members that are appointed. These six regional boards would have the authority to write regulations for the amount of rent collected and provide an enforcement mechanism for landlords who charge rent in excess of what is allowed. The bill would also collect rent control registration fees for the creation of the Small Rental Property Owners Repairs and Improvement Fund. Another provision of the bill is to establish rent-controlled capital improvement tax credits.
HOW WILL CHANGES TO CURRENT RENT CONTROL LEGISLATION IMPACT CHICAGO AND OTHER CITIES IN ILLINOIS?
- The supply of affordable housing will decrease due to diminished investment and condo conversions.
- The quality of affordable housing will decline as a result of arbitrary price caps.
- Property values will decrease which will cause the property tax base to shrink.
- Unqualified applicants will abuse the rent control system.
- Government bureaucracy will increase to administer and enforce rent control laws.
HOW WILL CHANGES TO CURRENT RENT CONTROL LEGISLATION IMPACT PROPERTY OWNERS?
- The condition of rental properties will deteriorate. Limits on the amount of income and the rent collected will decrease owners' cash flow used to repair and update properties.
- Ironically, property taxes may increase as rent control is implemented because rental income is used as a factor used to determine property assessments. If the tax revenue from the tax base decreases, then the government will need to raise taxes in order to provide the cost of basic services.
- Rent control will generate more risk for buyers of multi-unit buildings and will likely decrease the pool of potential buyers in the market.
- Property values will decrease over time due to higher operating costs, deferred maintenance, and fewer interested buyers.
WHAT IS THE TIMELINE FOR THE RENT CONTROL LEGISLATION IN ILLINOIS?
At this point, the City of Chicago can't pass any rent control because of the 1997 Illinois Rent Control Preemption Act. Any rent control laws must first overturn the state ban on rent control – legislation that will be handed down from Springfield. Newly elected Governor Pritzker has stated that he is open to rent control laws and probably will not veto rent control legislation.
Since the first attempt failed to pass H. B. 255, rent control advocates have continued to push for new legislation. If the rent control ban is overturned, the recent election in Chicago has shifted the Council in favor of rent control.
CHICAGO RENT CONTROL DISCUSSION IN 2022
Whether you're part of the North Spaulding renters association, the Rogers Park Builders Group or you're simply interested in learning more about rent increases in Chicago, we've outlined some helpful information. The Chicago City Council approved the Fair Notice Ordinance in July of 2020. It created additional rights and responsibilities for tenants and landlords with the hope of reducing rent increases throughout the city.
This ordinance increases how much notice a landlord needs to give to those terminating or choosing not to renew their lease. It also increases how long a tenant can end an eviction filing against them by paying owed rent as well as their landlord's court filing fees.
For example, if your landlord is going to terminate your lease, they need to provide at least a 60-day notice if you've lived in your apartment for more than six months but fewer than 3 years. If you've lived there longer than 3 years, the landlord has 120 days to terminate the lease. In the case that you're threatened with a rent increase, the landlord needs to provide 60 days of notice if you've lived in your apartment for over 6 months but less than 3 years, and they need to give you a 120-day notice if you've lived in your unit for over 3 years.
- Understand what legislation is proposed and the consequences of this legislation on the housing market for both affordable and market units.
- Communicate your concerns to your state representatives and senators.
- Is it time to sell? Often owners believe that they understand the value of their properties; however, items such as rent control can have a drastic effect on value.
Request a free valuation for the value of your property from one of our experienced investment brokers frequently so that you can understand fluctuations in the market and know when to sell.