Rent control rumored to be driving apartment sales | News

Mountain View's rent-control program has already survived political and legal trials -- but what about the business test?

An increasing number of apartment owners appear to be cashing out rather than working under the new restrictions. If the trend continues, some say it will lead to a cascade of redevelopment spearheaded by large corporate buyers. This scenario would result in older apartments being phased out and replaced with new housing that is exempt from rent control.

Those looking at the data with a more critical eye point out that sales of apartment buildings are up throughout the South Bay, and that the number of buyers indicates a healthy interest in investing in Mountain View housing, regardless of rent control.

To take one example, Fremont residents Ann and Paul Lethers decided in June to sell their 18-unit complex on Del Medio Avenue in Mountain View, which they created from separate purchases of two adjacent nine-unit buildings. They say they had to make a significant cut to their sales price, getting about $7.55 million for the property, which is subject to rent control. It's no small sum, but it's a loss compared with what they spent on purchasing one of the two apartment buildings in the complex a couple of years ago, Ann Lethers said. Now her family wants to get out of the apartment business in Mountain View.

"Only rich people or corporations can buy these apartments now," Lethers said. "My feeling is the rich are getting richer, and small fish like us are getting squeezed out."

The buyer of the complex is listed as Forest Casa Real LLC, but Lethers identified the buyer as a local billionaire, though she declined to give a name.

For tenants, the news is bittersweet. Everyone seems to agree that they had good relations with their landlords -- that is, up until last late year when the Lethers family tried to evict their tenants just before the city's rent control law was implemented.

But in some ways, renting from the new owner feels like a step backward, said Martin Cortez, a Del Medio tenant. His neighbors had to complain for weeks before maintenance workers would repair broken appliances, clean the property or take out the trash. Their annual rent is capped, but Cortez said he feels as if the writing is on the wall that the apartments will be redeveloped.

"All around us they've torn down buildings and are in the process of new developments," Cortez said in an email. "I'm sure they're going to make a ton of money in the near future."

Rent control applies only to older buildings. Thanks to the state law known as Costa-Hawkins, apartments that were first rented out after January 1995 are exempt from local rent control regulations.

Sales surge

Plenty of other sales are occurring in Mountain View, according to industry professionals who describe the activity as a direct result of the Measure V rent control law passed by voters last year. For more than a year, landlords and others have fiercely protested efforts to regulate Mountain View's rental market, saying the new rules would fall hardest on small independent property owners. Sales of apartments in Mountain View this year have been the most brisk in recent memory, said Adam Levin, senior director at the realty firm Marcus & Millichap.

Just the specter of rent control in the days leading up to the election caused Mountain View's affected apartments to drop in value by 25 percent, or about $100,000 per unit, Levin said. Even though it is a buyer's market, he says many of his clients were inclined to sell. He reports that his team's sales in Mountain View have tripled since last November..

"Rent control stigmatizes a city -- nobody likes to be told what they can do with their buildings," Levin said. "It's really bad for the rental stock in Mountain View. The only people who can pay the prices now are developers. You're going to have apartment buildings being scrapped."

Tracking this trend isn't easy, since many of the reported deals remain private or haven't been finalized yet. As of this week, there were eight apartment properties listed on LoopNet, one of which is too small to fall under the city's rent restrictions.

As for sales, a total of 24 apartment buildings have been sold so far in 2017, according to officials with real estate analytics site CoStar. If that activity continues at the same pace, the number of sales is expected to surpass 40 properties by the end of the year, said CoStar market economist Jesse Gundersheim. That's a huge increase, he said, when compared with 11 apartment building sales in 2016 and 12 in 2015.

"Apartment sales in Mountain View are on pace to reach historic levels in 2017," Gundersheim wrote in an email to the Voice. "This is far above the (market's) historical average of 21 sales annually since 1990."

For opponents of Measure V, the news that landlords were looking to get out of Mountain View comes as a "told you so" moment. Like nearly all his colleagues on the City Council, Mayor Ken Rosenberg warned that the rent control measure would be too rigid and inflexible for landlords.

"Gee, who could have seen this coming?" Rosenberg wrote in an email to the Voice. "I was never a proponent of rent control and my most oft-cited reason had to do with 'unintended consequences.'

"Well, here we are," Rosenberg said.

Reason for skepticism

Is rent control really so odious to landlords that it's driving them out of town? There's reason to be skeptical, according to some.

Gundersheim, the CoStar economist, pointed out that his data doesn't show that Mountain View's sell-off is unique. While apartment building sales are up in Mountain View, 2017 is shaping up to be a boom year across the South Bay. So far this year, there have been 250 apartment sales across the region, which already surpasses the numbers for all of 2016. As for the reported drop in sale values, Gundersheim said his data showed the average per-unit price for Mountain View apartments is actually up 11 percent this year.

Tenant advocates said that reports of landlords pulling out of Mountain View are being overblown. Long before rent control was passed, property owners were flipping and redeveloping apartment buildings, so that really isn't anything out of the ordinary, said Daniel Saver, a senior attorney with the Community Law Clinic of East Palo Alto. If anything, the robust apartment sales prove that rent control isn't deterring people from investing in Mountain View, he said.

He said he suspects that landlords and others are exaggerating the sales data in order to sway future policy decisions.

"This is making a mountain out of a molehill," Saver said. "These rumors are little more than smoke and mirrors to deflect attention from (landlords') longstanding practice to destabilize the community for a quick profit."

Redevelopment on the horizon?

Real estate agents, city officials and developers say the apartments are being purchased to be redeveloped. In particular, they anticipate that older apartments will be converted into townhouses that will be sold as ownership units.

For investors, a key component of this plan is buying up older apartments on properties zoned R-3 by the city. This zoning designation is typically for rental apartments, but it also allows townhouses. This would be an advantage for developers looking for a workaround to the rent control rules since they wouldn't need to change the land-use designation for the property, which can be a difficult and expensive proposition.

As for what would happen if a landlord tries to demolish rent-controlled apartments, even city officials say they aren't sure.

"These are brand new things for everyone," said Mountain View Housing Director Wayne Chen. "We're thinking through these issues and trying to figure out how they apply, but we might not have answers right away."

Chen said his department's staff is aware that many private parties are closely watching how city officials administer the rules. In fact, some developers are reportedly holding off on finalizing sales because they want to first see how the city's policymakers respond to projects redeveloping rent-controlled apartments. If those terms are agreeable, the potential buyers say they will immediately move to close escrow on the property.

Under state law, landlords are explicitly allowed to evict tenants if they want to go out of the rental business, but city officials can place conditions on this. For example, Mountain View already forces developers to compensate tenants who are displaced by redevelopment. Other cities also force new housing projects to offer displaced residents the first choice on any new rental units that are built.

Similarly, a plan to demolish rent-controlled units would first have to go before the City Council or city staff for approval.

It's anyone's guess whether council members would seek to preserve older rent-controlled apartments. Even before the election, city officials had signaled support for redevelopment projects that would tear down older apartments. For example, a massive project proposed at 777 W. Middlefield would build more than 700 new apartments, but it would require demolishing about 200 rent-controlled units.

It's a very complicated issue, said Councilman Lenny Siegel.

"It really depends on the property," he said. "But if it was apparent that housing was being torn down simply to evade rent control ... then I would vote against it."