Tenant Protections vs. Regulatory Takings- The Battle in Seattle
Housing affordability in the United States has been a problem for a long time. But some areas are affected more acutely than others. Solving affordability issues is complicated, and state and local governments around the country have grappled with how to efficiently and fairly make dignified housing affordable. Government officials have considered many solutions, and combinations of them, including, in no particular order: (1) rent control (i.e., freezing or putting limits on how much or how quickly landlords can raise rental rates); (2) government-built housing; (3) changing zoning laws to increase allowed housing density; (4) subsidized loans to builders; (5) incentives to builders for making affordable housing, such as allowing more units to be built; (6) tax breaks for new affordable housing; (7) pre-engineered building plans to streamline building permits; (8) government vouchers (such as Section 8 housing), and; (8) waived or subsidized permitting fees, etc.
Particularly in some urban markets, rising real estate values, gentrification, redevelopment, institutional investment, and concentration of ownership among wealthier individuals have quickly priced lower- and middle-income households out of the market, not only for home ownership, but for rentals as well.
But in their efforts to make society more equitable, and to put decent housing within financial reach, government regulations may have the effect (whether intended or not) of picking winners and losers, and upsetting the expectations of those who bought into the system before the rules changed. How does our legal system deal with this? Must all negative impacts of regulations go uncompensated? A recent Division I Court of Appeals case between a developer and the City of Seattle highlights the contours of the struggle to make housing affordable while not unduly burdening landlords and investors.
In GRE Downtowner LLC v. City of Seattle, the Court of Appeals considered the plight of plaintiff GRE Downtowner LLC (“GRE”), which invested nearly $40M into a low-income housing complex near downtown Seattle. GRE made these investments to qualify for the federal Low-Income Housing Tax Credit program (“LIHTC”), which was created to incentivize private developers to invest and maintain affordable housing by offering a 10-year annual tax credit in exchange for lower than market rents for low-income tenants over a 30-year period. In making its investment, GRE carefully calculated its projected revenue and expenses for the coming decades in order to make sure that the project would be financially viable. Lenders and government entities who effectively underwrote the project received and apparently relied upon these projections. Following GRE’s renovations, it began stable landlord operations for the first few years, but beginning in 2018, the Seattle City Council began enacting ordinances over a period of years which collectively eroded GRE’s ability to stay afloat. Such ordinances included: (a) the Fair Chance Housing Ordinance, which prohibited landlords from denying tenancy or evicting existing tenants based upon the tenant’s criminal history; (b) the Roommate Ordinance, which required landlords to allow certain persons who weren’t on the lease to live in the unit with the tenant; (c) the Winter Eviction Ban, which precluded most evictions between December 1st and March 1st; (d) a COVID-era eviction moratorium that lasted nearly two full years, forbidding landlords from evicting tenants for non-payment of rent, even where the tenant had not shown an inability to pay; (e) prohibitions on rent increases without 180 days’ notice; and (f) requirements for landlords to provide relocation assistance to tenants where the landlord proposed a rent increase of 10% or more.
GRE’s rental revenue and cashflow quickly plummeted. Over the course of about 5 years, its collection of maximum rental income dropped from 93 % to 44.1 %. Bad debt (unrealized rent unlikely to be recovered from the resident) surged, as well as expenses like security, maintenance, administration, marketing, and insurance. Soon, GRE was losing millions of dollars each year.
GRE sued the City of Seattle, claiming that these ordinances amounted to a regulatory taking under the Washington State Constitution. The trial court granted the City’s motion to dismiss GRE’s claims, apparently on the grounds that GRE could not prove any facts justifying compensation. The Court of Appeals reversed. In doing so, the Court noted that the Washington Constitution provides that “[n]o private property shall be taken or damaged for public or private use without just compensation having been first made.” Even though governmental regulations are generally a valid exercise of police power, they “may go overboard in [their] impact on a property owner such that [they constitute] a regulatory taking, requiring compensation. Washington Courts look to federal precedent in determining whether a regulatory taking has occurred. A regulatory regime is always considered a taking if it (1) results in a physical invasion of property, or (2) deprives an owner of all economically beneficial uses of their property. But what if the regulation falls short of meeting either of those two tests? A regulation can still amount to a “partial regulatory taking” depending upon the particular circumstances of the case. In making that determination, courts consider three factors: the economic impact of the regulation on the claimant, the extent to which the regulation has interfered with distinct investment-backed expectations, and the character of the governmental action. The overarching principle is that the Government should not be able to force “some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” If the claimant can show serious financial loss that merits compensation in light of these principles, the claimant has likely demonstrated a regulatory taking. Given the facts as alleged, the Court of Appeals held that the trial court erred in dismissing the case. This does not mean that GRE won the case; it only means that the case must proceed in court for further consideration.
GRE is a great recent case study on the line between legitimate policy power and what amounts to a taking. It highlights how many policies, well intended as they may be, can ultimately have the impact of picking winners and losers. It also shows that, in solving major societal problems, the answers often aren’t simple.
The lawyers at Beresford Booth have decades of experience in real estate matters, both in the transaction and litigation fields. Please contact us at info@beresfordlaw.com or by phone at (425) 776-4100 and we would be happy to assist you.