Friday, April 24, 2009

Raising Rents

An interesting case study of the provincial government’s law allowing landlords to raise rents above rent control to market rates was recently put to use with the residents of a West End apartment unit. You can read the news coverage here and here and, if you are truly interested in what is required under the Residential Tenancy Act's provision for Rental Increases, read the entire decision (pdf).

This is a bit of a long post but if you have interest in this case, you may also be interested in reading on.

In order to apply for a rent increase above the rent control limit, a landlord must show specific and comparable units whose rents are above what would be possible under normal allowed rental increases. The ruling went partially in favour of the landlords, who recently bought the units, and are looking to increase their profits.

Whether you agree or disagree with this provision in the Residential Tenancy Act is one thing. I would like to offer some commentary on how this particular case went and some observations I see ignored by the news coverage, the landlords, and the tenants.

Be Specific

It is immediately obvious the Dispute Resolution Officer (DRO) was required to use specific and comparable rents in deciding the outcome. For the most part the decision provided little in the way of specific rents from comparable units from tenants. The DRO used only a handful of comparable properties in making the final decision, all from the landlord.

In the decision the DRO has stated:

The landlords do not have to prove that the rent is significantly lower than all comparable rental units, but merely have to prove that there is evidence that in the current market, there exist similar rental units which attract a higher rent than what is currently being paid for the subject unit

An interesting interpretation of the Act; it effectively cuts the tenants from having their data used as balancing evidence. Scary perhaps. But if it's any solace most landlords don't resort to such rent increases, and not because they are bad businesspeople.

It is probably fair to say the landlords filtered units for rents that were purposefully higher than those in the units they own. It would be silly of them to present units that do not maximise the rents they can charge. But, yes, they are allowed to do this.

The tenants have learned the hard way that, while they needed to find specific and comparable examples to their units, when it came time to make the decision, it didn't seem to matter. Given all tenants in that neighbourhood have an incentive to keep their rents down, the tenants should have had no problem finding comparable rents that were not cherry-picked to be high. What I am not sure of is what burden of proof tenants are required to show to have their evidence considered and accepted. This is certainly a valuable lesson to be learned by others who may find themselves in a similar situation.

Subprime Tenants

What is often missed by looking at listing rents is that renters, like mortgage applicants, have different credit ratings. I am sure landlords will agree that there are tenants that are duds. If a landlord were to rent to such a tenant, to compensate for the added risk of taking on a deadbeat tenant, he should charge a premium.

Why this is important is that, while the Act looks at comparable rents to make a decision, no weight is given to the quality of the current tenants. It could be these tenants are “golden”; maybe they always pay their rents on time, perhaps even taking on repairs themselves since the rent is so good. The previous owner may have accepted lower rents because the risk was exceptionally low.

With new landlords, these unfortunate tenants have effectively lost their built-up credit and business relationship with the previous landlord. To be fair, the new landlords don’t know these tenants from a hole in the ground so are, perhaps a bit naively, treating them as any generic off the street renter. By raising rents to market rate, they are effectively raising rents to what they would charge a tenant with no “credit” history.

What are the current tenants to do? Perhaps they will accept the rent increase, act in good faith, and try to build up their past good favour again with the new boss. This will manifest itself by below inflation rent increases as the landlords realise the tenants are actually “prime” tenants. This assumes the landlord places value on low maintenance tenants. Not all landlords think this way, in which case I would strongly advise the tenants to find a landlord who does. There is no easy way to win a war with a slum lord, or even a landlord looking to offer a premium service for a premium price.

The problem now for the landlords, unfortunately, is that by taking an adversarial approach, they will most likely be paying more than they would should the rents have been raised at a smaller rate. The tenants who decide to stay will undoubtedly “work to rule”. Perhaps the little repairs and renovations they did to save their previous landlord money are now left to the landlord to handle. Perhaps heats are turned up a little too high.

It is hard to really know the motives of the landlords. It could be they are hardnosed businesspeople who will run this rental complex like a generic high turnover unit. This is their prerogative of course but this comes at a much higher operations cost than would a stable lot of tenants, either through higher turnover or greater wear and tear. To be fair, some landlords charge high rents but offer a high quality service to compensate. Perhaps they paid a high price for the units and the only way to stay cash flow positive is to jack up the rents. I don't know anything specific about the actual owners in this case.

All’s Fair

The third thing to note about this sad affair is that, while the Act’s arbitrator has decided for a marked rent increase, the court of public opinion is much more divided and angry. Rent control and the treatment of seniors (of which some of the tenants happen to be) seem to trigger an emotional response. I am sure the landlords have faced added stress and complications by having these tenants go to the local press. Tenants certainly played the sympathy card well, given the high level of media coverage.

I am sure readers here have an opinion on this case. It is a complex issue and I have sympathies for both sides of which I will not expand upon much. But I will say that it’s completely fair game for the tenants to have brought in the media who effectively sensationalised this story. Like it or not, a free press is, well, free to report on these stories as they see fit.

Actually, it was a decent strategic and tactical move on the part of the tenants, worthy of careful study in business schools. The landlords, while likely pissed off, should not be too surprised they are receiving such attention, as should any businessperson trying to make money through uncomfortable situations such as this one. Par for the course, guys. I doubt, though, these landlords really thought media coverage likely before they bought.

In the end, the landlords received a partial increase in rents for some of the units, to be phased in over a course of several months. But with them having an entire building of pissed off (and possibly high quality) tenants who can make the landlord's life miserable or move out and be replaced with what could well be higher maintenance and riskier tenants, I wonder if their investment is really going to be a good one in the end. It could also be that these rents were just too low.


JimTan said...

"But with them having an entire building of pissed off (and possibly high quality) tenants who can make the landlord's life miserable or move out and be replaced with what could well be higher maintenance and riskier tenants"


Sounds like the long term residents are retirees etc. The incoming tenants are likely to be professionals and foreigners. Doesn't seem like riskier tenants.

JimTan said...

There's a longer writeup from Jackie Wong of Westender at

$1,400 for a large two bedroom in the West End? Me too! Me too!

jesse said...

JT, agreed the rent seems low but, as I mentioned, if the tenant is hassle-free, it could be worth a lofty discount.

If the tenants are not risky, you can be pretty sure their rents will not keep pace with rent control limits. Being a professional myself, the rents I have had experience paying were never raised at inflation.

Strataman said...

I wonder what a comparable unit is? Is it based on Sq. Ft. or amenities or both. For instance in this case the rents are low if each suite has a built in private laundry,and some common are amenities. The rent is right on market if the suites have a common laundry,electric stoves charged to the tenants personal electric bill, and little security ie no FOB controlled access to different floors. Raising the rents as proposed will put them in direct competition with brand new strata units. So I would assume each suite has en-suite laundry, security by floor, and some amenities such as a pool?

jesse said...

Strataman, if you read the decision, the suites in question are in a heritage building and have common coin operated laundry with no balconies. They are large units, I think the 2br units are around 1200 sqft. The decision took an extremely narrow view of what was a truly comparable unit, both in terms of features and geographic location. In each case where the rent was raised, only 1 or several units presented by the landlords as evidence were accepted. In the cases where the rental increase claim was rejected, the office rejected all evidence on the grounds the units were not truly comparable.

What I would take away from this is that the landlord only needed to find a handful of examples of high rents to justify raising the rents on these units. Both the average rents charged in the area and whether the comparable units used as evidence had unreasonably high rents compared to market rate seemed to be irrelevant in the decision. Yes, the burden of proof is high, given the narrow definition of what "comparable" is, but in this case the landlords reached that requirement.

Will said...

Terrific post Mohican. While it is certainly never popular with the media or the general public to hear that long term tenants are getting huge increases or renovicted there is a simple fact here that the new owners were buying a building with rents that were so far out of line with today's marketplace.

The increase does definitely bring the rent more in line with what is being actively sought by tenants in the West End. It does not meet nor exceed those values, just brings it closer to a current reality. There are those who have rented in units for many, many years and with the restriction to annual increases capped by law make it impossible for new owners to profit or even maintain/upgrade buildings. Had the increase been rejected it would have been a clear sign to the marketplace that the purchase of whole buildings is not viable and would have froze that sector by effectively dropping values to levels that are not in line with current reality.

Yes, unfortunate for those tenants who got in early and had enjoyed a sweet ride... but such is the life of a renter. Renters are not in complete control. They have a lot of the law on their side but should never be relying on the situation lasting forever.

Strataman said...

jesse "They are large units, I think the 2br units are around 1200 sqft." Wow those are huge! In that case I would say the rent is justified as the location has a value also. Strictly speaking I think the shortage of purpose built rental units and from my experience the fact that most are terribly maintained is a result of rental controls. A true free market would not result in exorbitant rents, as the market when NOT interfered with could not exceed what people are willing to pay. The private strata condo rental market is evidence of that as rents reached a threshold a year ago and in fact have dropped in the neighborhood of 10% across the board. Sad to say but persons of low income are not as a rule entitled to live in geographical area like the West End even if they did prior.My Dad rented a small house on current Marinaside Crescent property on North False Creek is in the 30's and he told me his rent cost almost $25.00 / month. He made somewhat over $60.00 a month as a skilled tradesman! :-) He had no City supplied services! They had a garbage scow that took the waste to the current Olympic Village area! :-) My point "The world changes and nothing is permanent". Great thread.

jesse said...

"Strictly speaking I think the shortage of purpose built rental units and from my experience the fact that most are terribly maintained is a result of rental controls."I am not aware of any evidence suggesting that purpose built rentals, or other rentals for that matter, have increased at the allowed limit. Sauder rental data, which draws from purpose built rentals almost exclusively, shows rents increasing below inflation. Do you have data to suggest otherwise?

Strataman said...

jesse "suggesting that purpose built rentals, or other rentals for that matter, have increased at the allowed limit. Sauder rental data, which draws from purpose built rentals almost exclusively, shows rents increasing below inflation" MMM I thought that is what I was saying. Care to clarify? What is the "allowed limit?" Rents from my point of view should increase at or above inflation, however I have a problem with standard inflation measurements in that they do no reflect true costs, rental control in fact contributes to this.

Strataman said...

Will "Renters are not in complete control." Well I guess would you say owners are in complete control? For instance owners of North Van Single Homes several who I know have had to go for reverse mortgage to pay vastly increased property taxes due to monster M houses built on adjacent properties? Condo owners have NO control, as owners of a depreciating asset they must abide by the two thirds majority. If they want preventitive maintenance to mitigate future costs it is not there independent decision. If the majority want to flip and run that will be the end result. Renters have great control they can leave at 30 days notice owners can't!

jesse said...

"Care to clarify? What is the 'allowed limit?'".

The allowed limit is that set out under rent control guidelines. For 2009, this is set at 3.7%. For what rents have been doing according to CANSIM, see the data graphed for yourself. Rents have been increasing between 0 and 1.8% nominal in the past 10 years. If rent control is causing rent increases to be capped, we should see annual increases at the rent control cap. This is not happening.

Again, if you have data to suggest rent controls are causing rents to increase slower than the market is demanding, please cite them in the comments.

Strataman said...

jesse "Again, if you have data to suggest rent controls are causing rents to increase slower than the market is demanding, please cite them in the comments." Very interesting amazing actually so would I presume that landlords may very well know where the upper threshold is and do not increase rents above that? And no I don't have data that contradicts yours, which causes me to wonder what benefit to the landlord would result in demanding rents in excess of "real" market value? Do you have a theory on this or are we just looking at land lords that are not very "business astute"? In another words if all the present renters leave do you think this particular landlord will easily fill his/her building?

Strataman said...

Or! Did the last landlord build up a personal rapport with the tenants such that they began to NOT run the business as a business but rather as a community? I actually would strongly suspect this, as long term constant contact with clients IF you are a sensitive person may cause a landlord to become very un-business like. I know, as I am like that although in field other then land lord /tenant.

Strataman said...

As your stats indicate this is a overall return which is not unique to this particular building. Hmmm landlords that care? Or?

jesse said...

Strataman: "In another words if all the present renters leave do you think this particular landlord will easily fill his/her building?".

It is likely the landlords can fill the building at market rate. What I indicated in the post is that, depending upon how the landlords run their business, a stable responsible tenant demands below market rent because op costs are lower for the landlords.

I don't know if we can attribute low rents to a lack of business acumen. It is Vancouver, after all, so who knows! Consider, though, most of the recent returns have been through capital appreciation, not rental income. The previous landlord got out near the peak of prices. The current landlords must rely on income generation to produce a decent return, hence the desire to jack up rents.

Arwen said...
This comment has been removed by the author.
JimTan said...

“Again, if you have data to suggest rent controls are causing rents to increase slower than the market is demanding, please cite them in the comments.”

The graph shows an increase of only 0-2% p.a. in the last 15 years. By a coincidence, “in May of 1994 an interesting occurrence took place. The New Democratic Party amended the Residential Tenancy Act so as to bring back rent control de facto, but not de jure.”

Another factor to consider is variance. The rent index is an average of some kind. There are market rents for new tenants and rents for existing tenants limited by the Residential Tenancy Act.

Is there any data for the allowed rent increase? We need to compare legal vs. actual rent increases. And, against the market rent!

There are two issues.

Rent control limits the maximum rent increase for existing tenants. I would expect that rent increases for existing tenants to lag market prices (new tenants) during periods of rapid RE appreciation.

The other issue is about catch-up. How will landlords catch up with market rents after a period of rapid RE appreciation?

Legally, landlords could apply for a lump sum increase beyond the annual increase. This Seafield example case illustrates the difficulty. The tenants and tenant associations will drag you through the legal process. Many landlords don't have the stomach for this.

It will not be a coincidence that the 'weak' landlords will end up with more long term tenants paying $1,400 for 1,200 sf in the West End. The fact is that it's a scam. The rent review process is hotly contested by tenants when the status quo is in their favor. The tenants could move to Marpole or Burnaby. But, they would rather continue to rent cheaply in the West End. Hopefully, the Seafield ruling will be a turning point.

It's true that the buildings are wrecks. But, it's because of the Residential Tenancy Act as it has been applied. Why would any responsible landlord want to turn his property into a slum?

Of course, they don't. However, the Residential Tenancy Act limits the options of landlords. The long term tenants refuse to leave. In the end, owners give up and sell the property to the hard guys who are willing to squeeze the tenants.

That's the plain truth.

patriotz said...
This comment has been removed by the author.
patriotz said...

Strictly speaking I think the shortage of purpose built rental units and from my experience the fact that most are terribly maintained is a result of rental controls....

BC had no rent controls from 1983 until 2004. Do you have evidence that any significant number of purpose built rentals were built during that period? I sure don't remember any, but I do remember lots of leaky condos. Or evidence that the poor maintenance of purpose built units started in 2004?

Alberta has never had rent controls. How many purpose built rentals have been built in, say, Calgary recently?

The reason developers build condos rather than purpose built rentals is that condo buyers are willing to pay more than rental value, as we have pointed out. There isn't any more to it than that.

Oh one more thing - how can you claim that there is a shortage of purpose built rentals in the first place when rent increases in many (if not most) of them have been lagging the allowed increase?

Declan said...

On the one hand, landlords should be able to charge a rent close to the market rate.

On the other hand, people should be able to live their lives without the uncertainty of a massive increase in their cost of living occurring in any given year.

This shouldn't be that hard, really. The clause that allowed the recent decision should be removed and replaced with an allowance for greater than market rate increases (say 3.7 + 2 = 5.7%) until market rate is reached in cases where the arbitrator accepts that the current rents are significantly below market.

Arwen said...

If the median (not average) family household income is in the neighbourhood of $65K, half your families make less than that, and those that make less are more likely to be long term renters.
Rent in an expensive city still can't go much higher than 33% of gross; which means that the majority of your family oriented two bedroom rental stock should fall below $1787.

I understand and agree that indeed, the market will eventually bring rents back in line with incomes. The problem is the cost in the meantime to communities and individuals - evicting seniors who have lived in a community for decades, have all their support there, and sending them -- where exactly? -- for the sake of a bubble extracts a human cost not factored into the market forces.

The point of rent control (which, indeed, rents have been decreasing beneath), is to help hold down the human cost of speculation; it's a simple break on change and bubble mentality, gold rush ridiculousness. I've lived in the West End for years in all these old buildings, and coincident with the housing bubble it's been gentrifying to the point that now I'm hearing things like "oh, well, that's so cheap" - the Seafield wasn't really all that cheap, 6 years ago. And it won't be again when people start realizing that in Yaletown and Coal Harbor you have quiet and heat control and 6 appliances and elevators, and these old gray mares will lose their cachet again. It's utterly textbook gentrification - the only low lying fruit left was the affordable stuff.

If the bubble has showed me anything, it's that the market will work, but it doesn't mind who it drives through to get there. Deregulation causes this sort of idiocy.

Arwen said...

Of course I mean it's a BRAKE on gold rush mentality... Must be tired today.

jesse said...

"In the end, owners give up and sell the property to the hard guys who are willing to squeeze the tenants.".

I think, JimTan, this is not the last we will hear of landlords attempting to raise rents above the cap. Business can be a dirty profession but someone's gotta do it, no more evident than when margins are razor thin.

It's worth noting that tenants need not apply to the RTO for rent decreases under current regulations.