By Alan Hirsch
After years of complaining by neighbors about conversion of single family homes into Mini-dorms, the first baby steps will finally be before City Council Tuesday Night.
This is the first push back on something that is destroying Davis as a family town.
A push back on the city laisse fare attitude to date has facilitated investors…as the cost of middle class families who want to move into town.
The “Rental Industry” is the largest industry in town by far. This fact largely flies under the radar. Most of the rental units in town are in larger complexes, which are typically well run and managed; they do environmental upgrades and give back to the community. Case and point: Tandem Properties. But not to ascribe evil to them, these investors represent the 0.1%.
However, over the years a mini-dorm industry has grown up on the margins. Encouraged by tax laws, and protected by the political clout and good reputation of the larger complexes in town, it has converted thousands of single family homes to mini-dorms. Shockingly, one third of Davis single family homes are now owned by investors. Investors own not one or two, but snap up multiple homes in competition with family wanting to live here. Some investors now own over 20 single family homes….So these investors also are clearly in top 1%…and even the top 0.1%. (the 45+ single families in Davis owned by Andrew Dowling and family probably represent between $5 and $15 million in equity.
Davis Sustainability at Risk
Until now, the long term sustainability middle class in Davis being squeezed out by mini-dorm industry has flown under the radar. Only in the last few years have the alarm bells finally begun to ring due to social friction and exploitation of students by landlords due to housing crunch..
But while an impact to family-neighborhood sustainability is obvious, the economic and environmental impacts are less discussed.
Single-family homes are not designed for rentals, so they require…per unit …much more “reinvestment” and maintenance than an apartment complex with its economies of scale. This means to compete the apartment complex rental prices mini-dorm landlords must under-invest in upkeep, repairs and energy improvements—or stuff in extra, often illegal, bedrooms and car parking. This is unlike a homeowner who gets benefits from such spending via improved aesthetics or savings in their PGE bill.
The fact is mini-dorm investments usually only pay off if they exploit tax laws that allow them to shelter income taxes via tax credits, depreciation and mortgage deductions in ways not available to home owners. And they can take tax-free profit from appreciated home value by refinancing or 1031 exchanges instead of being taxed on the realized capital gains. They can even permanently avoid income taxes by step-up in basis value that is part of the inheritance tax system.
They also hurt local government sustainability by locking in lower property tax rate under Prop 13—which they can uniquely benefit from as they often hold the properties for decades…unlike owner-occupied homes that turn over more frequently when a family moves and the property tax value is stepped up. The DJUSD School Board’s new Parcel tax assessment also gave apartments another tax break relative to homeowners — a hit of hundreds of thousands of dollars to our school’s budget.
No wonder the city and schools have a financial problem: Our City’s largest industry has a tax subsidy relative to owner-occupied home owners. (And no wonder the middle class is in decline: paging Bernie Sanders.)
Is The Proposed Mini-Dorm Ordinance A Good Start?
The invisibility of this issue to date is unique to Davis: we are the ONLY significant college town without even the most basic renters-rights or Mini-dorm ordinance.
Tuesday’s Council Meeting is the first step to change this. But it remains to be seen if Council has enough courage to fully take on this industry…and if City staff is on board.
Though as I write this the Tuesday City Council Agenda, final rental regulation and staff report is not public, there is some concern as City staff has not been forthcoming about details after months of discussion and meetings that lead up to this point.
For example, I have been asking for a week now for the list of the insider group — mostly landlords I gather– who city recruited to guide the writing of the regulation. No response so far. I have also asked for the minutes of those city meetings with insider group, and was told they these minutes were “still in draft” so they did not have to be released. Convenient.
I have also heard from Brett Lee that draft regulation has been endorsed by the regional land lord/investor association, the Sacramento Rental Housing Association. That signals what we will see is a rental-industry acceptable compromise, not an aggressive stance to protect neighborhoods and renters in the unique Davis zero-vacancy market.
One test of the ordinance is to see what city staff finally decides to focus on, or omits, in its staff report. For example:
- Does report show note all the problems we are having re mini-dorms and renter exploitation so we can compare the ordinance against what it needs to do….and identify any gaps or unresolved issues for renters and neighbors?
- Does staff report highlight what was left out of the ordinance—i.e. regulations that other cities have but was not included for Davis?
- Were any of the other sustainability issues noted above discussed? For example, setting minimal energy efficiency and maintenance standards for rental housing?
- Has City staff has done any outreach to neighborhoods and renters in the ordinance drafting process, or only worked with insiders. Who exactly represented Neighborhood interests in the “insider” groups?
- Who funds enforcement mechanism? Are landlords paying enough fees to cover its upfront cost, or is the city general fund (i.e. residents) being asked to subsidize this industry—or is general fund “fronting” the cost on hope fines was will reimburse the costs.
- Is city planning to hire new staff up to begin to enforce the regulation, or is enforcement just being added to existing staff duties: Regulations are nice, but if no one’s primary job is to enforce them, they are just political eye candy.
- Is there a “next step” discussed to address other impacts of Mini-dorms industry?
The one thing is clear though: unless home owners and renters write council – or show up to testify – the City will only hear from investors and landlord and the status quo will continue.
Is Davis For Investors…or Residents?
I strongly supported Nishi due to its construction of needed student housing. I also believe providing rental housing for UC students and faculty is a core purpose—a moral purpose— for the existence of the City Davis. But there is no requirement that mini-dorm style housing be economically viable investment, particularly considering its negative environmental and social impacts and their tax-drag on our community’s finances.
Maybe if the landlords were forced to pay their true costs mini-dorms would no longer be so financially attractive.
And then maybe investors might sell them back to families.
I think this is what most Davis homeowners would think of as the ideal outcome.
And if Council and UC approved some new apartment complexes, I think students would be on board with that too.