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HB 2192: The Rent Control Act


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A careful read of State Representative Mary E. Flowers’ proposed Rent Control Act (a/k/a House Bill 2192) is an eye-opener. A highly similar version of this bill was circulated in 2018 by State Senator Mattie Hunter as Senate Bill 3512. Both Representative Flowers and Senator Hunter are Democrats representing areas predominantly located on the South Side of Chicago and in the South and Southwest suburbs. As of the writing of this article, hearings on the proposed bill are scheduled for Thursday, February 14. This is a developing story. The Newsletter will keep a close eye on how this bill fares. Updates in future Newsletters are a certainty.

In the event that this bill is adopted into law, Illinois would immediate transform from a state in which no local unit of government is permitted to enact rent control, to a state in which no unit of local government is not subject to enforcement of a rent control measure that is at least as restrictive as what is proposed in this bill.

While passage of this bill is far from certain, it should serve as a wake-up call to property owners who will surely be surprised to learn how radical this rent control legislation is, and the lengths to which proponents of rent control, both in Chicago and in Illinois, are prepared to go.

Just a few of the highlights include the following:

  • Rent increases would be strictly regulated by six regional “Rent Control Boards” covering all 102 counties in Illinois.
  • The Rent Control Boards would consist of seven members. Five of these members would be comprised of tenants (three members), or individuals who work for tenants’ rights organizations (two members). Just two members would be property owners. That’s 71% of the voting rights to tenants and their supporters, and 29% to property owners, all but insuring that tenants’ groups would have full control over these Rent Control Boards in perpetuity.
  • Rent increases would be allowed to occur “no more than once every twelve months” and not by more than the “Consumer Benchmark for the same twelve-month period” as set forth by the Rent Control Board for that region.
  • The once-every-12-month rule would apply whether a unit vacates or not.
  • Rent can only be increased by the amount of the “Consumer Benchmark” over the previous year’s rent. While the Rent Control Board will set which benchmark to be used, it is fair to assume that this benchmark will approximate the rate of inflation. The Act goes on to say:

    “No more often than once every twelve months, upon 90 days’ written notice, a landlord may increase the rent for a dwelling unit in which a tenant resides by a rate no greater than the rent stabilization rate currently in effect. A landlord my not increase the rent more often than once every twelve months or at a rate greater than the rent stabilization rate then in effect regardless of whether a tenant moves out of, or is otherwise displaced from the dwelling unit, another tenant moves into the dwelling unit, or ownership or management of the dwelling unit has changed. If a landlord has not increased the rent within twelve months before a tenant moves into the dwelling unit, the landlord may only increase the rent to the extent allowed by the rent stabilization rate currently in effect.”

    This provision is one of the Act’s most radical and damaging requirements. It essentially bars any rent increases, beyond the permitted annual inflationary adjustment, for all time. This legislation allows for no “mark-up-to-market” when one tenant leaves and another moves in. Under this legislation, once a unit is rent controlled, it is rent controlled forever.

  • Perhaps the most shocking requirement of the Act is the following:

    “A board shall enact regulations that require landlords to create and maintain a reserve account for repairs and capital improvements. A landlord must deposit, at least monthly, 10% of the landlord’s rent proceeds, after monthly expenses are paid, into the reserve account.”

    The only exception to this requirement is for property owners who satisfy the following requirements: (1) the property owner owns no more than twelve dwelling units; (2) the property owner must live in one of the twelve rental units as his or her principal residence; and (3) the property owner must charge rents that, on average, do not exceed the applicable Median Area Rent.

  • No unit of government – not even those governments with “home rule” – would be exempt from HB 2192. Home rule governments could enact more stringent rent control regulations, but “may not regulate rentals of dwelling units in a manner inconsistent with this Act.”
  • Naturally, property owners would be required to pay annual fees in the form of a Rent Control Registration Fee for each rental unit they own. These “registration fees” would be to fund the activities as set forth in this Act. While the amount of these fees is left to the discretion of the local Rent Control Boards, they could be substantial and are payable on an annual basis.
  • The Act requires relocation assistance in the amount of $3,000 or three month’s rent, whichever is greater, in several instances where a property owner either wants, or is required, to recover possession of a unit. This relocation assistance must be paid no more than 14 days before a tenant’s lease expires. Any failure to do so can result in double penalties.
  • The Act provides considerable detail about how and by what means a tenant or their representatives can file complaints to the Rent Control Board regarding rents, affordability or quality of the dwelling units that are under the jurisdiction of the Board.

    The Act makes provisions for what a property owner must pay a tenant in the event he or she is found to be in violation of the Rent Control Act. These damages are “three times the total monthly rent charged, together with the actual damages, the tenant’s costs, and reasonable attorney’s fees.” As property owners, we have been to this movie before.

    Representative Flowers justifies the need for her legislation in the Findings section of the Act which states that “many” Illinois households are rent burdened, and “some” are even severely cost-burdened. No effort is made to quantify these findings, or to match the degree of rent distress to rental rates. In fact, a closer examination of the DePaul Institute for Housing Studies data, on which these findings are based, reveals that the large majority of rent burdened households suffer from too little income, and not from overly burdensome rents. Thus, the very foundation of the argument Representative Flowers uses is flawed, and the solution bound to fail before it is even implemented.

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Representative Flowers also states in the Findings section of the Act, “Regional boards and local communities are best positioned through collaborative administration to implement rent control and address barriers to affordable housing in their communities.” This is another way of saying that local government is better suited to determining market rents for apartment units than the market itself.

This is a surprising statement, considering we live in a market economy and have long pointed to our entrepreneurial system as being one of the primary reasons why we have been so successful as a country and as an economy. It is doubly-surprising, coming from an Illinois politician in a state where our current governmental system has produced a pension deficit that has swelled to well past $100 billion (and rising), where two recent governors are currently behind bars after being found guilty of corruption, and where more than 30 Chicago Aldermen have been convicted of crimes since 1970 (and several more now under investigation).

Left unaddressed is how a property owner is supposed to be compensated for making capital improvements to a property over and above basic maintenance and repair. Although not specifically stated, the Act appears to imply that the mandatory 10% replacement reserve is to be used to fund such capital needs. This is problematic and leaves unanswered a number of questions.

  • Is a property owner expected to obtain Board permission to use these funds for capital work?
  • What incentive is there for a property owner to undertake such improvements if rents are always and forever limited to a cost-of-living increase over the previous year’s rent?
  • What if a property owner refinances a property and uses excess loan proceeds to invest back in the property? Can the property owner get any increased rent for the money invested in the property? If not, what is the property owner’s incentive to do this work in the first place? Indeed, why would the property owner ever pay more than the bare minimum required to keep a building operational?

It is notable that, even in New York City, where Rent Control and Rent Stabilization have long been the law of the land, property owners are allowed to charge additional rent if they make capital improvements to their properties. By contrast, Representative Flowers’ bill presumes that the 10% deposits of after-expense rent proceeds will be sufficient to cover all future capital needs.

The Act was clearly written with great concern for tenants and considerable attention to what they are “owed” by property owners in all manner of circumstances. It would have been nice if the Act had paid half that much attention to the needs of property owners and how they can expect to be compensated for the considerable money and work required to maintain and improve real property, particularly in light of ever-increasing real estate tax burdens, utility costs, and other government mandates. It goes without saying that this was not a primary concern of this legislation, or the person or persons who authored it.

To say that this Act is unworkable is an understatement. If enacted, it could easily plunge the already feeble economy of Illinois into a deep freeze. Faced with onerous restrictions on rent increases, severe penalties for violations, and absurd fees and self-funded reserve requirements, property owners will be motivated to convert their rental units to condominiums, sell at fire-sale prices, or simply hunker down for a protracted fight with the pro-Rent-Control forces, investing only what is absolutely required in their properties and keeping a low profile as the economic damage unfolds.

In summary, this Act is a recipe for disaster. It is a case-study in governmental overreach and anti-market hysteria. It paints tenants as helpless bystanders in need of the severest of government protection, and property owners as evil predators deserving of special government oversight and punishment. This Act is divisive, economically unsound and doomed to fail.

It is possible that this legislation is intended simply to scare property owners and the real estate industry into supporting Representative Will Guzzardi’s less-awful-by-comparison proposal to remove the state ban on local rent control legislation.

It is true that Representative Guzzardi’s proposal is less awful than HB 2192. But, make no mistake. If either the Flowers or Guzzardi proposals are passed, the economic fallout will be severe, and the impact on property owners will be dire. Both measures deserve our full attention. Both must be strongly opposed.

 

 

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