would be restricted to existing, non-luxury residential units (i.e., new construction would be exempt). Guidelines would be developed to allow for cost pass through of local tax, wage and other cost increases, as well as adjustments for capital improvements and inequities created by past inflation and the freeze of Phase I. 3. The coverage and guideline program of Option 2 but substituting for the voluntary compliance feature a federal enforcement structure that relies on a network of regional and local rent boards to handle the actual complaint load that surfaces. Wherever possible the actual complaint workloads of these regional and local Federal boards should be shifted to already existing local control mechanisms (e.g., NYC's Housing and Development Administration). This administrative economy, however, would not necessarily imply accommodation of Federal guidelines to local program objectives as in Option 2. Each of these local Federal boards would be tri-partite, with representatives of the Federal government, local government and local landlords groups implementing the broad guidelines received from the National Rent Board. IV. Analysis Except for its indirect roles in "getting labor to cooperate" and in "making people feel the overall program is equitable," there is little to recommend the Federal government entering the morass of rent control in Phase II. Any extensive federal control mechanism (Option 3) that is set up will be, for political reasons, difficult to dismantle. Also, the possible effect on building maintenance investment incentives are so ominous given the current state of physical decay in most inner cities, that Option 2 should definitely be considered a "live" possibility. It will be argued that under Option 2, to assure voluntary landlord compliance and local board cooperation, the standard would have to be so liberal as to run the risk of tenants concluding that the whole effort is nothing but a sham. There is, of course, this type of risk in any voluntary guidelines approach to price control. However, it is also likely that landlord associations will set up self-policing mechanisms of their own, in order to head-off the imposition of more stringent controls. V. Recommendation This is an extremely difficult choice situation. The best we can do is to narrow the choice down to what we consider to be two viable alternatives, and then list the various competing value criteria that the President should consider in making his choice. First we would rule out Option I on the grounds that: (1) something must be done to secure labor's durable cooperation in the whole Phase II enterprise and (2) the "closeness" of residential rents to the consumer's pocketbook means that a quick catch-up spurt in rents at the end of the freeze could cause a significant upward increase in the monthly rate of the CPI. This combined with the complete absence of any special government program for rent might cripple the credibility of the whole Phase II operation before it got off the ground. This narrows the choice to Options 2 and 3. Either a voluntary guidepost-type program (with some likelihood of local self-policing organizations), or a guidepost system with a federally supervised complaint-oriented enforcement mechanism attached. Option 2 has the smallest potential for distorting building maintenance investment incentives and would be the easiest to "self-destruct" during or at the end of Phase II. Option 3 has the greatest potential for helping to secure labor's cooperation and to maintain overall credibility. General Issue: What should be the Nature of a Program to Control Rents? Background: 1. It may be necessary to have something more than a purely voluntary approach to rents to secure labor cooperation in a fairly stringent program for wages and prices. 2. Rent is a highly visible and sensitive item and controlling rent has an inherent political popularity, even though it accounts for only about 5 percent of the CPI. 3. Rent control has deleterious effects on the housing stock, and may tend to reduce new housing construction commitments even if controls are not initially applied to new housing. 4. Because of its popularity, rent control is difficult to phase out. 5. Because there are large numbers of rental units and landlords, comprehensive program of rent control would require a more extensive bureaucracy than for prices and wages. Issue #1: What should be the Coverage of Rent Control? Recommended Approach 1. Non-residential rents would not be covered since they were not covered under previous programs, they normally account for only a small fraction of business costs, and commercial space does not appear to be in short supply. 2. Rent control would not apply to residential space occupied by tenants for the first time after August 15, 1971, mainly because coverage of new units might seriously decrease new housing construction. 3. Luxury units would not be exempted from rent control, since only a very small fraction of residential rental units would be affected by a reasonably high ($300 or $400 per month) cutoff. 4. Vacancies in existing units would not be exempt from rent control. Permissible increases in rents for them would be treated in the same way as for continuously occupied units. 5. One and two family units would be exempt from rent control. 6. Terms for new leases would be treated in accordance with the cost passthrough formula (below, issue #2). 7. Sales of single family housing would be exempt from controls. Issue #2: What Pricing Formula and Procedures Should be Used? Recommended Approach The formula for permissible rent adjustments should be based on a dollarfor-dollar pass through of cost changes. Cost changes that would be taken into account would include: 1. Maintenance and services 2. Interest 3. Utilities 4. Taxes 5. Insurance 6. Improvements The procedures that would be followed in applying the formula are: 1. Evidence on cost changes in the above six categories must be submitted to the tenant in justification of proposed rent increases. 2. The evidence must include as an offset any decreased costs associated with reductions in services. 3. Complaints by the tenant contesting the evidence would be made to the Service and Compliance Administration. 4. If the evidence in support of proposed rent increases is incorrect, this would constitute a violation. Sanctions could be applied to the landlord and rent increases exceeding the cost pass-through formula would not be permitted. Issue #3: How should the Rent Control Program be Organized? 1. There should not be a separate National Rent Board. Rent control would be administered by the Prices, Costs and Profits Commision. 2. Complaints and disputes concerning rents would be handled by the Service and Compliance Administration. However, efforts on the part of local real estate boards and the like to enlist voluntary compliance would be encouraged. 3. There would be no automatic formula or mechanism for termination of the rent control program. * EXEMPTIONS Cost of Living Council Issue Paper November 3, 1971 Issue #1: Should rent control be eliminated for commercial, industrial, or farm property? Background: 1. Rents on these properties have rarely been controlled historically. 2. These rents comprise only a small fraction of the costs of doing business. Discussion Pro: 1. Commercial space is currently in ample supply in most cities. 2. These tenants are not thought to lack bargaining power. 3. Most industrial facilities are owned. Con: 1. Exempts some rents from control. 2. Discriminating or preferential treatment might be alleged. Options Exempt the entire class, some categories, or none. Recommendation Eliminate rent control for commercial, industrial, and farm property. Issue #2: How should rent properties owned by public bodies, or subject to rent regulation by State, local, or Federal agencies, be treated? Discussion 1. Exempting these categories would reduce administrative burdens and eliminate overlapping control programs. 2. Exempting these categories might permit disparities in standards. 3. But differences in standards might be appropriate for widely different circumstances. 4. Tenants sensitized to rent control might generate more complaints. Recommendation These categories of rents should not be specifically exempted from control. It is recommended that the Price Commission initially accept the existing standards and procedures of the relevant public bodies and regulatory authorities observe the operation of these standards and procedures, and retain the right to modify them when and if it should become necessary. Issue #3: Should rents for newly constructed residential property be exempt from control? Discussion 1. A high volume of new housing construction is essential both for a strong economy and to meet housing needs. 2. Substantial new housing construction will facilitate the phasing out of rent control. 3. Exemption of new housing does not adversely affect tenants in previously existing dwellings. 4. Newly constructed residential units were exempt from rent control in the Korean period. Recommendation Exempt newly constructed or substantially rehabilitated dwellings offered for the first time after August 15, 1971. "Substantially rehabilitated" means a rehabilitation cost of at least 3 or more of the total value (including costs of rehabilitation) of the rehabilitated property. Issue #4: Should high priced or luxury unit be exempted from control? 1. Exempting rental units above some cutoff would not be symmetrical with the treatment of pay. 2. Exempting luxury units might be viewed as encouraging housing rehabilitation for the well-off as compared to the poor and middle income tenants. 3. A fairly high cutoff would lead to only very small effects on rents. 4. Rental value data show fewer than 5% renting for $200/month or more, and fewer than 15% for more than $150/month. Recommendation Luxury residential rental units should not be exempted from control. Issue #5: Should decontrol of rents be tied to local or area vacancy rates? Discussion 1. Where vacancy rate is high, rent control is less necessary. 2. Vacancies may, in some instances, be heavily concentrated among substandard units. 3. Vacancy trigger would provide automatic mechanism for decontrol. 4. Procedures for vacancy determination would need to be established. Recommendation Do not establish a decontrol procedure based on vacancy rates. Issue #6: Should decontrol of rents be tied to achievement of a specific infla tion rate, such as 3%? Discussion 1. Would automatically terminate rent control at some point. 2. Would leave timing of rent decontrol outside of direct policy control. 3. Not consistent with policy on duration of controls. Recommendation Do not tie rent decontrol to a specific inflation rate. It is recommended that rent controls expire no later than the expiration of general price controls and that this be announced when the Rent Board is appointed. |