Amid construction slowdown, St. Paul considers sweeping changes to rent control

The proposal includes exemptions for new construction, an option for landlords to ‘bank’ rent increases and rules on utility payments

By: - August 3, 2022 11:41 pm

St. Paul City Council Member Chris Tolbert introduced a package of changes to the city’s rent control ordinance on Aug. 3, 2022. Photo by Max Nesterak/Minnesota Reformer.

The St. Paul City Council took up a sweeping set of rent control changes on Wednesday in its first attempt to address the numerous issues that have arisen since residents passed the ordinance through a citizen-led petition in November.

The ordinance is one of the most stringent in the country, capping rent increases at 3% a year for all units across the city, and has led developers to halt construction of new housing and some landlords to sell off their portfolios.

Renters, meanwhile, have complained landlords are exploiting loopholes in the ordinance by adding new charges for utilities or jacking up rents as much as 8% through the city’s exemption process. Landlords “self-certify” that increases beyond 3% are necessary for a “reasonable return on investment”; the city automatically approves them subject to an audit, like a tax return.

Council members and city staff have frequently voiced their frustration with the policy that was drafted and approved without their input, which they must now figure out how to implement and improve without subverting the will of the voters.

The package of amendments, authored by Council Member Chris Tolbert, would exempt low-income housing, as well as new construction for a period of 20 years.

Tolbert’s proposal also aims to disincentivize landlords from automatically increasing rent by 3% each year by allowing them to “bank” those increases for a substantial hike in rent after a tenant moves out.

Tolbert said during Wednesday’s council meeting he hoped the package would be a “consensus amendment” but acknowledged his proposal is just an opening gambit.

In the coming weeks, council members will offer their own amendments and receive input from the public.

Council Member Mitra Jalali, who has championed other renter protections, said she recognized “hard fought compromises” in the package of reforms but said she could not support them as written. She said many of the proposals go further in carving out exemptions to the policy than was recommended in July by the 41-member work group of renters, landlords, developers and advocates appointed by Mayor Melvin Carter.

The one thing that will not change in the policy is its signature 3% cap on rent increases, which does not change with the rate of inflation, unlike other cities and states that regulate rent. That figure was selected by rent control advocates based on the average rent increase in Minneapolis in previous years, but came before inflation reached a 40-year high.

In amending the ordinance, council members hope to win support from both renters and landlords to avert litigation that could unravel their efforts.

Under state law, cities may not enact rent control unless approved by a majority of voters in a general election. The only language governing citizen-led petitions in the city charter, which is like a constitution, says the council cannot repeal them within the first year.

Tolbert’s amendments wouldn’t take effect until Jan. 1. The council will take up amendments to Tolbert’s proposal at their Aug. 17 meeting, when they will also schedule a time to receive public testimony.

Exemptions for new and affordable housing 

Since 53% of St. Paul voters approved the rent control ordinance, building permits for new apartments nosedived, and developers halted projects in nearly every corner of the city.

At the massive, mixed-use Highland Bridge development on the site of the old Ford plant, developer Ryan Companies put some apartments on hold. Elsewhere, a developer backed out of a deal to purchase land from Luther Seminary for affordable housing.

Developers say without an exemption for new apartments — common in other rent-regulated states and cities — they can’t find investors to back their projects.

In February, Carter called on the council to immediately pass an exemption for new construction.

But the city attorney advised that council that they could not legally make significant changes to the ordinance within the first year of its passage.

The 41-member work group convened by the mayor recommended a 15-year exemption for new construction. Tolbert’s proposal pushes the exemption out five years further to apartments less than 20 years old.

Older buildings that are converted to apartments would also be exempted from rent control for 20 years.

That proposal seems to have broad support on the City Council, with members saying the city cannot inhibit development when affordable housing is already in such short supply.

“We have a moral imperative to produce new housing, and the data out (show) that that is not happening right now,” said Council Member Rebecca Noecker.

Jalali expressed reservations about a blanket exemption for new buildings without offering those renters some protections.

“Despite the perception by some that they are heavily upper-income, white, single, young professional renters, this just isn’t the case,” Jalali said. “These are diverse, new groups of renters and families that look like our city.”

She said many of the newly constructed apartment buildings in her ward serve low-income renters, and the city has already received a number of complaints of poor management, discrimination and exorbinant rent hikes.

Jalali said the city should work to pass “safe housing tenant protections.” St. Paul did pass a slew of tenant protections in 2020 but then reversed course and repealed them after a landlord group sued the city.

Under Tolbert’s proposal, all low-income rental properties would be exempt from rent control, including Section 8 properties and those financed through low-income housing tax credits or other government subsidies.

Jalali took issue with that proposal as well, arguing the exemption for all subsidized and income-restricted housing was too broad.

“These are the renters who need rent stabilization the most, and they’re being cut out,” Jalali said. “Not all government subsidies equate to rent stability.”

Tenants in some affordable housing developments have seen significant rent hikes even after the rent control law took effect.

The affordable housing behemoth Dominium raised rents nearly 8% in all of its units across St. Paul. The ordinance passed by voters provides an exemption for subsidized apartments where tenants’ pay a set portion of their income. Dominium also raised rents nearly 8% in its non-subsidized units, using the city’s “self-certification” process that allows landlords to exceed the 3% cap if they document the increase is justified.

Council Member Jane Prince said the self-certification system is ripe for exploitation by bad actors, but said they had no other choice because the city can’t afford to hire the staff it would take to thoroughly review each exemption request.

“To say that the rent stabilization ordinance that the voters passed is working for either tenants or landlords in our community is a delusion,” Prince said. “This ordinance is severely hurting us.”

Deferred rent increases 

The 3% cap on annual rent increases currently applies regardless of whether landlords raised or didn’t raise rent in previous years and applies even when the unit turns over from one tenant to the next.

That’s led many landlords to institute automatic 3% rent increases, so as not to fall behind in the market and to hedge against future unexpected costs.

Tenant advocates behind the rent control ordinance were aware of this possibility and countered that at least a 3% annual increase would give renters predictability.

Under Tolbert’s proposal, landlords would be able to defer rent increases for as many years as they choose. For example, a landlord who doesn’t raise rent one year could raise it roughly 6% the next year.

The change is meant to disincentivize landlords from hiking rents in lock step each year, while also giving them the option to retain long-term tenants with modest or no rent increases.

The deferred rent increase is contingent upon tenants leaving for so-called just cause — such as not paying rent, damaging the rental property or leaving of their own accord — so that landlords cannot force tenants to leave in order to hike up the rent.

Jalali said she would like to see a limit placed on how much a rent increase landlords can bank.

Landlords may not add utility charges 

Facing soaring inflation and energy costs, some landlords have tried to skirt the city’s new rent control law by charging tenants for utilities that used to be included in the rent.

That’s resulted in some tenants’ housing costs increasing by more than 10%.

Under Tolbert’s proposal, landlords must establish who is responsible for paying utilities in the lease agreement. If the landlord chooses to begin charging a tenant for gas, electric or another utility, the landlord must decrease the rent to account for new utility expenses.

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Max Nesterak
Max Nesterak

Max Nesterak is the deputy editor of the Reformer and reports on labor and housing. Previously, he was an associate producer for Minnesota Public Radio after a stint at NPR. He also co-founded the Behavioral Scientist and was a Fulbright Scholar to Berlin, Germany.