Chicago’s Proposed Rent Increase Notification Law: Expectation vs. Reality

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At the July 25, 2018 meeting of the Chicago City Council, Alderman Moreno of the 1st ward proposed an amendment to Chapter 5, section 12 of the city code, also known as the Chicago Residential Landlord Tenant Ordinance or CRLTO. The proposed change is currently in the hands of the council's Committee on Housing and Real Estate. The amendment would require landlords to provide lease renewals to tenants with specific lead times dependent on the amount their rent will increase in the next term. The times required would be as follows:

  • Less than 5%: 30 days
  • 5-9.99%: 60 days
  • 10-14.99%: 90 days
  • 15% or more: 120 days

If a landlord fails to provide the proper amount of notice, the tenants' existing lease would be extended at the current rate until the proper notice term has elapsed. As an example, if a landlord sends a 10% increase 45 days before the lease expires, the tenant could stay on for an extra 45 days after the lease expires at the old rent rate.

This is Moreno's second major attempt at rent reform in the past four months. He first flirted with proposing a Good Cause Eviction ordinance in May. We found that idea be well-meant but near-sighted to the point of impracticality. This new proposal suffers from the same failings, and unlike its parent document it's actually made it to the table of the city council.

Capture the moment

Below is the text of the proposed law so you know what I'm talking about going forward.

2018 proposed rent increase ordinance

On the surface it looks calm

The 1st Ward is an area facing rapid gentrification and skyrocketing rents. Landlords and developers have resorted to some pretty shady tactics to remove long term renters so that they can gut or demolish their former apartments, replacing them with luxury flats. Those seeking to avoid a long and costly eviction will instead try to "encourage" tenants to leave by offering them new leases at exorbitantly higher rates.

The staggered rent increase notification schedule was originally part of the Good Cause Eviction draft. Both the original and this smaller section seek to stem the flow of unofficial pseudo-evictions through different approaches.

I can understand why Moreno thinks it's a good idea, and for a neighborhood full of flippers such as his ward it certainly could help. Landlords would still be able to price out existing tenants but at least those tenants would have enough time to find a suitable new home first.

But he keeps on forgetting

Unfortunately, while it might help improve things for tenants in the areas of Chicago that are currently facing severe gentrification problems, for the rest of the city it could make things much worse. This change would go into the CRLTO, so it would affect the majority of Chicago landlords and renters.

Turnover is a landlord's highest cost. Most landlords are not sending out lease renewals with the intention of forcing tenants out. Most landlords are not planning on keeping an apartment empty for even a day or two between tenants. It's a well-known fact that long-term tenants' rent increases at a much slower rate than apartments around them that see regular turnover.

I can understand how Moreno could look at the developers in his ward and think that everyone is working along the same lines. But by trying to solve a localized problem with citywide laws he's going to cause absolute havoc for the landlords and tenants who aren't involved in the 1st Ward dog and pony real estate show.

Snap back to reality

Now, I know that not every property management company in Chicago handles things the same way my former employer did, but several do. And besides, if Moreno is going to write city-scoped laws to serve his neighborhood specific problems, I can counter them with my own business specific scenario.

My former employer was a buy-and-hold C/D Class landlord with about 1000 apartments scattered across 60 locations on the north side. In the time that I worked there he bought 8 buildings and sold 1. He was about as far from a "flipper" as you can get. He wasn't buying old buildings to gut them and rerent them for triple the current rates. He was buying them to maintain them and keep them as homes for low to middle income renters. He had an office staff of 5 people. Other companies of that size might have more office staff but still only a handful would be authorized to handle lease renewal negotiations.

Lease expiration dates were spread evenly from March 31 to August 31, meaning that every month we had about 150 renewals to handle. Only two of us worked the monthly renewal process, and for both it was only one of many other duties. My boss would set the prices. After the 10 day deadline passed, I would follow up with the roughly 50% of the group that hadn't yet responded. This meant that in addition to showing all of the existing vacancies I had to also renegotiate contracts on about 75 apartments every month.

The CRLTO specifies that landlords cannot cannot require tenants to renew a lease more than 90 days before the current one expires. Sharp-eyed readers will already see a problem with Moreno's proposal - it basically makes rent increases in excess of 15% illegal, as they would require 120 days notice. But besides the obvious conflict in numbers, there's some issues that are less obvious to outsiders.

In an office with 1000 rent checks coming in every month there was no possible way for us to also get renewals out on the first of the month. Even after switching to online rent payments and a more robust computer system it would have been tough. Besides, most tenants would panic and leave us angry messages if we sent them out too early and the only folks looking for new apartments that early are high maintenance tenants that we didn't want. We found that 55 days early was the sweet spot for us to send them out. This would give the tenants 10 days to respond, then me about 5 days to follow up with 83 stragglers, inspect and photograph any anticipated vacancies, and then about 40 days to fill them before the tenants moved out.

Let's now take this system and paste the new law over it. With 60 buildings in 7 neighborhoods it is unreasonable to expect that every building would be increasing by the same percentage. Most of our increases were for less than 5%. Some tenants saw no increases at all. Technically we would be fine sending everything out at the 30 day mark in most months.

However, we would not want to risk falling afoul of the new law, and we didn't have the manpower to do the whole renewal process in chunks. My guess is that in order to remain in compliance we would have had to back up the entire renewal process to the 120 day mark. This means that every tenant would be getting their renewal 4 months before their lease expired regardless of the increase. The tenants would probably panic. Those aware of the law would assume that they were getting a 15% increase even if it was only a 2% increase. Those unaware of it would wonder how on earth we expected them to make a year long decision a third of a year in advance.

Clock's run out

Now there's another problem as well. Remember up above where I said we sent out renewals from March 31 to August 31? That's because Chicago has an off-season, and that off-season will conflict with the proposed law both coming and going.

As a leasing agent I was expected to work way more than full time during the summer. I was not allowed to take vacations days or even sick days during the summer. I was expected to work 6 days a week at minimum, and to be on call for the 7th day. 95% of my income was commissions from rentals, with only a small hourly wage for administrative tasks.

But during the winter there was no work for me. My weekly work schedule would drop from 80 hours to 15. There was no reason for me to be there nor was there a budget to pay me for more than that during those slow months.

If we had to send out renewals four months in advance that would mean I'd have been back to a 40 hour week by December 1 instead of February 15. That's a big difference for a small business. Besides the payroll problem there's also the issue of setting rent rates. Most renewal rates are based on comps. Off-season comps can be anywhere from 5-15% lower than peak season comps. The busiest moving day of the year in Chicago is May 1. So landlords would be setting peak season renewal and list prices for the most important part of the year in January, when there are no accurate comps for reference, except for that city law stating that 15% is fine and legal. I cannot foresee any situation where this will end well for renters.

Now let's look at the end of the summer. It was critical for us to have all vacancies filled by September 30. In fact it was so critical that we deliberately eliminated all lease expirations between September 1 and March 1. This is because an empty apartment in October had a very high chance of still being empty come April. Only the downtown luxury units can survive the off-season and even they see a big dip in demand.

Let's suppose that a landlord purchased a 30 unit building on August 1. All of the rents are about 15-20% below fair market value. The landlord would inherit all of the existing leases, but let's say that the prior owner lost his copies of 10 of them, 5 of the others contained illegal clauses, and the two basement units were month-to-month. This is not a far-fetched scenario. It happened 4 times while I was with my former employer. The first thing we did was to get everyone in that new building onto one of our leases. But under the proposed law we'd only be able to offer a 4.9% increase to these folks or we'd risk them leaving 60 days out, on October 15.

So the options would be a) don't buy the building, b) keep tenants on the existing hodge podge of semi-legal leases, or c) eat a big loss for the first six months after purchase. Basically this law would shrink the window for multifamily building sales from it's current 8 month span (February through September) to maybe 5 months (February to June).

As I see it, the new law is penalizing good landlords who actually want to keep the existing tenants in their new buildings by asking them to either endure a full off-season of supremely sub-market income, or no income at all.

It is entirely likely that the Alderman's task force sourced the text from one of the other Good Cause Eviction policies in the country. My guess is they lifted it from a city with a less severe seasonal ebb and flow.

While I'm on the subject of time, let's also consider the month to month and short term leases. We didn't have any at my old company but there are a whole lot of them throughout Chicago. The whole point of a month-to-month lease is that it can be renegotiated or terminated every 30 days. There is no point in sending a 120 day rent increase notice to a tenant who can leave in 30 days. But the law makes no distinction between a year long lease and a month to month lease, even though month to month renters are covered by the rest of the CRLTO. Once again the law authors' narrow view of the rental industry raises its head.

To want to stay in one spot

I also mentioned earlier that I "renegotiated" the lease renewal contracts with stragglers. Landlords don't simply send out renewals and insist that tenants take it or leave it. There are offers and counteroffers. There were definitely times when the tenant would come out of the lease renewal process having agreed to an even higher rent rate than we'd initially offered them. A tenant might accept a rent increase only in exchange for a dishwasher or a storage locker. They might take this opportunity to inform us that they were adding two new roommates to their 1 bedroom apartment, an arrangement we would accept only for additional rent to offset the increased utility usage and wear.

Barring the introduction of time travel, these new staggered renewal intervals would make such negotiations far more complicated if not downright impossible. Currently a landlord can bump up a renewal rent increase from 4 to 6% in exchange for a new washer and dryer at any point in the process. It's somewhat debatable if that 6% is part of the landlord's offer or the tenant's counteroffer, so it could still technically be possible under the new law. But most landlords won't know that, let alone want to risk a lawsuit to find out where that hair will split.

Farther from home

I know that not every company did renewals the way we did. Small landlords with fewer than 10 units will have no problem staggering their renewals. But the smallest landlords - the ones that work with Realtors - may have some trouble. Landlords with one or two apartments will often call up a Realtor for comps when it comes time to draw up lease renewals. But Realtors are not often trained in the latest apartment laws since they are not a Realtor's primary focus. The Realtor might toss out a number that's 10% higher than the current rent without knowing that the deadline for such an offer has already passed.

Out of state landlords working with local property managers may have some trouble as well. Property managers usually have to get clearance from their landlord clients before rent increases. Speaking from experience, it can often take several weeks for a property manager to chase down an out-of-state landlord to get a signoff on anything. I can see a whole raft of problems arising from these delays if the proposed law goes into action, especially for suburban property managers.

Then there's landlords who work with the Chicago Housing Authority. Section 8 voucher holders must have any rent increases approved by the CHA, a process which can take up to two months. No landlord is going to want to risk a tenant overstay because they were waiting on the CHA. If this law is passed, voucher holders could be getting their renewals as much as 6 months before their current leases expire.

As far as I can see there are only two types of Chicago landlord businesses that will feel very little in response to this law: the biggest landlords who basically set the prices for everyone else to follow, and the very developers who it intends to target. Big international landlords have the staff and the computer systems to handle staggered renewals, and they base their prices on projections instead of comps. As for the developers? They aren't planning on immediately filling the units after removing the current occupants anyhow. They don't have an extremely tight timetable that could result in six months without income if they're off by a week. They just have to add another few months to their construction start date, time which they will probably spend waiting for building permits anyhow.

Formulate a plot

Alderman Moreno faces a very situation-specific problem that certainly needs a solution. However, due to the limitations of his role he can only attempt to solve the problem by suggesting laws that affect the entire city. To make things even more complicated, the impact of this new law will be felt most severely not in the city, but in the even larger environs of the county courts.

People are looking to Moreno to fix these things. But if a law intended to stop bad business practices brings undue harm to other companies that are following good business practices, it is a bad law.

If Moreno wants to target the unfair rent increase practices of developers then he should target developers, and not just those who require city intervention to complete their projects as is the case with the Affordable Requirements Ordinance. The simplest fix would be to restrict this change to only those landlords who have purchased a property within the past 12 to 24 months. It should be an easy thing for the city to track since they collect taxes from every property transaction within the city limits. The ARO requires the city to track the use of compliant projects for 10 years. Two years is nothing in comparison, but it would be enough to discourage any developers from pulling shady stunts.

What do you think of the proposed ordinance? Do you think it's a good idea? How would you respond if you got a lease renewal in your mailbox four months early? Let us know in the comments, or better yet, let Alderman Moreno know.

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Published by

Kay Cleaves