Rent Stabilization Policy Options: New Construction Exemption Period – Mocofeed

This is the final of six blog posts that will cover topic areas that City Council, City Staff, and the project consultant, RSG, are exploring under the Rent Stabilization Policy Review. This final blog post covers the New Construction Exemption Period. All of the policy options being explored will be presented at a Community Meeting on October 12th at 6:30pm in the Community Center. You can participate in-person or register to participate via Zoom.

For more information regarding the Rent Stabilization Policy Review, please review materials posted on the project web page on the City’s website. 

Policy Question: How long should newly constructed rental units remain exempt from rent stabilization? 

New rental construction in Takoma Park is temporarily exempt from rent stabilization for a set period after it’s built, on the theory that developers need some period of unrestricted rent growth to make new projects financially viable. Currently that exemption period is five years for every new unit, regardless of what was previously on the site. The question is whether five years is the right length, and whether the exemption should be the same for every project, or vary based on what stood there before.

Advertisement

The Three Options

• Option 1, Maintain the Current Policy Continue the five-year exemption for all newly constructed rental units, regardless of prior site use.
• Option 2, Implement 10-Year Exemption With a Capital-Reserve Extension Exempt all new rental units for 10 years. 
• Option 3-15-Year Exemption Based on Prior Site Use Provide a 15-year exemption when the site had no occupied residential units in the previous five years, but only a five-year exemption when the new building replaced existing housing that was demolished.

The Tradeoffs of Each Option

Having a five year exemption (Option 1) would implement rent stabilization the quickest. Its main concern is on the feasibility side: a shorter exemption period provides less certainty about unrestricted rent growth early in a project’s life, which developers and lenders may weigh against Takoma Park when deciding where to build. While it is one factor, it does not provide much in the way of flexibility for builders of new housing. 

Doubling the standard exemption to 10 years (Option 2), gives projects more runway before rent stabilization applies. This more closely conforms with a typical project where a housing building will sell the completed building to a long-term holder who will manage the property for the long term. It also provides more flexibility if a project runs into challenges during the first couple of years of operation. 

Varying the exemption length based on the previous site use (Option 3) takes yet another approach. Ground-up construction on a site with no housing in the past five years gets the longest exemption (15 years), while projects that demolished and replaced existing housing get a much shorter one (five years), This is aimed at discouraging redevelopment and displacement while signaling that the City wants housing on sites that are currently underutilized or vacant. 

Advertisement

The Bigger Picture

Other jurisdictions have tried a range of approaches to this same tradeoff. New Jersey allows qualifying new multifamily properties an exemption of up to 30 years, subject to statutory filing and notice requirements. Saint Paul, MN initially adopted a 20-year exemption before later revising its approach to instead exempt properties first occupied after a fixed date, like Washington, DC and Prince George’s County. California uses a rolling 15-year exemption from its statewide rent cap.