Rent Control in South Portland

In November 2021, JRK Property Holdings purchased Redbank Village in South Portland for $143M. Redbank, which was built in the 1940s as affordable housing using federal funds, has always served as a place for low-to-moderate income families and individual—an important and necessary service in any community’s housing market. ?In April 2022, it notified tenants of the 500-unit housing complex that it would be increasing rents by as much as $598 per month.

Predictably, these rent increases have caused an immediate and significant backlash from Redbank’s residents and the community. This backlash, which received media attention in the first weeks of May 2022, is matched with calls for reform. On May 17, 2022, the South Portland City Council met to discuss the Redbank rent increases and hear from South Portland residents about their thoughts, many of whom called for rent control.?

It is not a surprise to hear discussions of rent control in South Portland; it was voted into law in Portland in November of 2020, and Redbank was simply a catalytic event which spurred the inevitable discussion. Now that it is being discussed, there is a political push to get rent control, in some form or another on the South Portland ballot in November of 2022. I am writing this article to discuss how rent control has played out so far in Portland, and some other ideas, so that South Portland voters may make an informed decision if/when this is on the ballot.

Our Housing Crisis

Rents have been increasing in the greater Portland area in recent years, and like any commodity, the price of housing is driven by the simple economic force of supply and demand.

Housing demand has grown sharply in recent years. The work-from-home movement enabled many white-collar workers to relocate to Maine—a more desirable place to live than the cities and urban sprawls they used to populate. Simultaneously, in 2019 Governor Mills opened up Maine’s immigration which caused a flood of asylum-seekers to come to Maine, many of whom have been placed in or around Portland. Whether relocating for lifestyle, or seeking refuge, people need housing, and this need is the increase in demand we have seen. This increase in housing demand, by the way, is showing no signs of slowing down.

Housing supply, unfortunately, has grown at an insufficient rate in recent years. The inadequate rate of housing being built is a result of multiple macro and micro-economic factors; municipal building permit caps, land use zoning restrictions, supply chain shortages, NIMBYs, and labor shortages all play a role. Each of these factors could be their own articles, but for the sake of keeping this one short, just understand that if you want to impact supply—and therefore price—these factors are the things which need to change. Exactly How short of housing supply are we? That number is difficult to quantify, but the Greater Portland Council of Governments stated in a January 2022 Bangor Daily News article that “Portland and its surrounding communities need to increase the existing ~65,000 housing units of all types by 10% by 2025.”

With housing demand increasing, and housing supply failing to match its pace, housing prices have increased. In other words, landlord have so many options for tenants that they can charge whatever they want because even at high prices there will be someone who will pay it, and this leaves people who are unable to afford these high rent prices without many options. This is the root cause of Portland is experiencing so much homelessness, and why the City of Portland has declared it can no longer guarantee housing to asylum-seeking families.

Supply and Demand

Now understanding that our housing crisis can be boiled down to a supply and demand issue, what can be done? It’s simple: decrease housing demand or increase housing supply. Decreasing demand is going to be difficult, Southern Maine seen a huge increase in population, and Portland was recently voted America’s 8th best place to live, which indicated that housing demand will continue to increase. So, the option then is to increase housing supply.

Increasing supply means building more housing units. Many entities build housing, but the most common is a developer. Developers are usually for-profit organizations or individuals who build housing and then sell or lease the housing for a business. They build where they can make money. If they can’t make money, they don’t build new housing. If they don’t build new housing, there will be no new supply. Again, if there is no new housing supply, and housing demand continues to increase, housing prices will continue to increase.

If our goal as a community is to stabilize the cost of housing, both to purchase and to rent, the ONLY way of achieving this long-term is to incentivize developers to build new housing units until housing demand meets housing supply and the price reaches equilibrium. Our market is already primed for developers; we have a market with record-setting rents with a near insatiable thirst for housing. If a developer builds housing in Southern Maine right now, it will be fully leased before construction is done. As a community, the simplest thing we can do is let them build. That means removing caps on building permits, that means expediting the building approval process, that means liberalizing land use zoning as Ryan Fecteau recently did with the passing of H.P. 1489 – L.D. 2003, that means individuals residents must take responsibility and stop NIMBYism. If we want to further incentivize developers through policy, there are other proactive policies which I will discuss in the Conclusion and Solutions section of this article.

Taking down bureaucratic red tape and letting developers build is the only way to solve our housing crisis in the long term.

Rent Control in South Portland

The Redbank rent increases have caused a call for immediate, decisive action in the form of policy from the South Portland government. It is likely that will take the form of rent control on the ballot in November 2022. We have the benefit of having a neighboring community, Portland, recently pass rent control so we may look at how rent control has impacted community similar to South Portland. In the 18 months since rent control was passed in Portland it has deterred developers, caused avoidable rent increases, and it has actually reduced the overall number of units on the market. Let’s discuss each:

Rent control has deterred developers

When a developer considers building new housing units, they look at a huge amount of qualitative and quantitative information before deciding whether to move forward with the development. Some examples of quantitative information are construction labor and material costs, achievable rents, land acquisition costs, tax implications, and future sale price of the development. Some examples of qualitative information are feasibility of a zoning change, political opposition and NIMBYism, and population demographics. The passage of rent control in Portland sent a message to developers: “don’t build in this city, because future policy changes are likely to negatively impact your development”. When developers get messages like this, they move on to other towns and cities, reducing new housing units in the rent controlled community and increasing urban sprawl and pollution. In January 2022, I wrote an article discussing Portland’s inclusionary zoning change, and how it reduced new housing development by 82%. Inclusionary zoning is different from rent control, but the message to developers is the same: “Don’t build in this community”.

Rent control has caused avoidable rent increases

In the real world, when a landlord has a tenant who signs a one year lease, they will keep them there for as long as they will stay if they are a good tenant. Most landlord will keep rent stable throughout that tenant’s time in the unit, though they may increase rent by $100-200/month if many years go by and the market increases or the landlord’s costs to own the property go up. Portland’s rent control allows landlords to increase rent for several reasons but rent increases for one year can never be greater than 10%. Landlords, therefore, are incentivized to increase rent each year by the maximum legal amount because any rent increase they fail to make in one year may not be available the next. Portland allows for “banked rent” but in a period of high rates of inflation, like we are in now, it is conceivable that the allowable rental increase each year will exceed the 10% cap. Therefore, the functionality of rent control is Portland is actually incentivizing landlords to increase rent by the maximum allowable amount each year. I have spoken to landlord who are doing this to tenants who would have otherwise had flat rent for the entire time they stayed at a property.

Rent control has reduced the overall number of units on the market

Rent control has discouraged developers from building in Portland, which slows housing supply increase and exacerbates the housing crisis, but there are some incidences where rent control and inclusionary zoning have actually reduced the number of units on the market.

A six-unit multifamily in Portland recently sold to a new owner, who upon purchasing the unit converted it to a four-unit multifamily. The new owner made the decision to make the conversion because under Portland’s rent control law, owner-occupied two, three, and four-units are not subject to rent control. By making this conversion and moving into one of the units, the new owner was allowed to work around the rent control ordinance through a bureaucratic loophole. In this instance, rent control reduced the number of units in the housing supply by two, which worsens the housing crisis has the exact opposite affect which rent control intended.

Another incidence is a developer who was planning on building a 100+ unit development in Portland, but upon the passage of the new inclusionary zoning laws decided to instead build a nine-unit condo building. Inclusionary zoning only affects developments of ten or more units, so the developer made the decision purely to work around the red tape. Portland could have had over 100 new housing units, which it desperately needs to permanently fix the housing crisis, but instead is getting only nine. Inclusionary zoning is not rent control, but this does illustrate the type of impact that bureaucratic policy change has on the very real problem of housing in Southern Maine

There are circumstances where rent control protects tenants, but those instances quick, superficial, temporary solutions to a problem that does not address or resolve the underlying root cause of the problem. Rental prices are increasing due to a shortage of housing supply. If we want to fix it long-term, the only solution is to add more housing supply. Rent control is a band-aid solution for a much greater problem.

Conclusions and Solutions

The Redbank rent increase has caused an immediate and emotional reaction from Redbank residents and the South Portland community as a whole. The backlash from the community may very likely result in new rent control policy which will be on the South Portland ballot this November. My hope is that the South Portland city council and voters don’t make a short-term, emotional decision on how to combat our housing crisis, and instead look at the long-term consequences of a potential policy change. Southern Maine is facing a housing crisis, and while policies like rent control may temporarily stop things like the Redbank rent increase, it is in inadequate way of fixing a long-term problem, and I would argue actually worsens the long-term problem. The recent results in Portland show how well-intentioned but ill-informed policies can have unintended negative consequences.

So, what policies can South Portland put in place to facilitate a long-term solution to its housing crisis? Municipal leaders need to partner with developers to develop programs and solutions that actually work! Both parties have the goal of creating more housing, so with that common goal in mind, here are a few ideas:

Rehabilitating underutilized properties through an RFP process

The City of South Portland could sell (or gift for free) city-owned properties through an RFP process with the intent of gifting the land to the developer with the best proposed use for the property. This has been done by the City of Portland in the past in several instances:

·????????The Nathan Clifford School in Oakdale, an unutilized elementary school, was sold to a developer for $1 in August 2013, who then converter the property into 22 residential units.

·????????The Thomas B Reed School in North Deering was sold to Developer Collaborative for $1. Developers Collaborative is rehabilitating the building into residential units.

·????????The old Portland Public Works building in Bayside was sold at market price in December of 2018. 52 Hanover Street, sold to developer Port Property who is developing the property into a 171-unit apartment building, including 10% workforce housing (in line with Portland’s inclusionary zoning). Whether workforce units or market rate units, every new, occupiable unit makes a difference in catching the housing supply up to housing demand and ending our housing crisis.

South Portland has a few properties which are poised for this type of rehabilitation. Mahoney Middle school, located at 240 Ocean Street, could be put out to developers through a similar RFP process.

Subsidize the cost of workforce units

The City of South Portland could provide a subsidy for each workforce housing unit built. The amount of money it costs a developer to build a workforce unit, rather than a market rate unit, is quantifiable. The city could determine what that quantifiable number is (likely $20,000-$40,000 per unit) and gift developers the amount of each new workforce housing unit. This would be an option, not a requirement, for developers. The money could come from issuing municipal bonds (say $2,000,000—which would be repaid over several years through municipal property taxes) and South Portland could advertise this fund to attract developers to building in South Portland.

Both of these approaches have been proven effective in other municipalities, compared to rent control which has proven ineffective in other municipalities. There are likely other policies which could prove effective and my hope with this article is that South Portland choses proven, long-term policies rather than short-term, superficial policies which exacerbate the problem when deciding how to combat our housing crisis.

Thank you for reading,

John Finegan

Associate Broker – The Boulos Company

South Portland Resident