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The Lofts at Farmers Market
The Lofts at Farmers Market acquired its building in St. Paul’s Lowertown after it had been operated for years by the city. However, the plaintiff alleges that the building has been much more costly to operate than what was represented. (File photo: Bill Klotz)

Landlords seek summary judgement

Apartment owners challenging St. Paul’s rent-control ordinance

Two St. Paul landlords have filed a motion for summary judgement in their federal lawsuit challenging the constitutionality of the city’s rent-control ordinance.

The case, Woodstone LP et al. v. City of Saint Paul et al., filed in June, arises from an effort last year to address the lack of affordable housing in St. Paul by enacting an ordinance that controls rents. On Nov. 2, 2021, city residents voted to limit monthly rent increases to just 3% in any 12-month period, even when tenants move out. It passed with 53% of the vote. The rent cap went into effect on May 1, 2022.

In an email to Minnesota Lawyer, St. Paul Mayor Melvin Carter’s press secretary, Kamal Baker, said that the city and the plaintiffs had agreed to file cross motions for summary judgement and that the city is revieing the landlords’ motion and will respond to the court.

Under the ordinance as adopted, landlords were able to request an exception to the rent cap by arguing that they were unable to get a “reasonable return on investment.” This had to be done through an application that was then subject to approval or denial, a process landlords attested was unclear and unpredictable. Plaintiff landlords also allege that there are only three employees who make these decisions and that “[n]one of these employees has any apparent experience in the residential leasing industry.”

Additionally, landlords who failed to comply with the ordinance were subject to civil and criminal penalties, including serving 90 days of jail time.

The city has placed a 15% hard cap on rent increases by landlords who are granted exceptions to the 3% limit. The plaintiffs object to that cap as well, noting that it was not approved by voters. The plaintiffs have asked the court to strike down the ordinance, or, at minimum, strike down the 15% cap on rent increases.

The 3% policy is strict, especially when compared with other rent-control laws in the United States. For example, in 2019 Oregon’s legislature passed a bill that made it the first state to adopt a statewide rent-control policy. Under that law, annual rent increases are limited to inflation plus 7%. Only six states in 2022 (California, Maryland, Minnesota, New Jersey, New York and Oregon), as well as the District of Columbia, have localities with some type of rent-control ordinance.

Woodstone Limited Partnership bought its property in St. Paul’s Highland Park neighborhood over 30 years ago. When it bought the property, the complaint says, it had no reason to expect that it would be subject to rent control, as Minn. Stat. § 471.9996 preempts rent-control measures unless it is approved by voters in a general election.

The second plaintiff, The Lofts at Farmers Market, acquired its building in Lowertown after it had been operated for years by the city. However, the plaintiff alleges that the building has been much more costly to operate than what was represented, as property taxes have increased by double the estimates. Both plaintiffs allege that raising rent higher than 3% is necessary to make a profit.

Calling the ordinance “draconian” and a “procedural straitjacket,” Woodstone Limited Partnership and Lofts at Farmers Market, LLC filed the 59-page original lawsuit in U.S. District Court for the District of Minnesota on June 16. They alleged that the rent stabilization ordinance is unconstitutional, violating their due process rights and the contract clauses of the Minnesota and U.S. constitutions.

The plaintiffs argue that the ordinance deprives them of their right to use and control their rental properties without substantially advancing or being rationally related to the ordinance’s stated purpose. They claimed that the ordinance did not advance the ostensible purpose of increasing affordable housing options, instead asserting that the ordinance has had “detrimental impacts” on St. Paul’s affordable housing.

“Developers have been withdrawing from the market at an unprecedented pace,” the plaintiffs say in the complaint. “More than a billion dollars of investments are estimated to have fled St. Paul and are unlikely to return.”

The plaintiffs say the ordinance addresses a real problem the wrong way. “The affordable housing crisis, which Defendants maintain is one of the reasons for the Ordinance, is largely the result of the lack of supply of affordable housing,” plaintiffs state in the motion for summary judgment.

The landlords also claimed that the ordinance impermissibly interfered with their contracts. They contended that the ordinance eradicated the plaintiffs’ ability to account for risk in short-term tenancies, as well as inhibiting their ability to negotiate and collect fees agreed upon in existing lease agreements. Late fees, for instance, would count as rent and could not go over the 3% cap absent an exception.

In September, many modifications to the rent-control ordinance were approved by St. Paul’s City Council, with a vote of 5-2. Some of those key changes include letting landlords raise rents by as much as 8% plus inflation after a tenant moves out, as well as exempting new construction for 20 years. While the 3% cap remains in place, landlords can now be granted an exemption due to inflation.

Some opposed the modifications, including the Housing Justice Center of Minnesota. It specifically took issue with the new construction exemption, claiming that it disproportionately affected disabled renters. “ADA-compliant units can be incredibly difficult for renters to find, and are more likely to be found in newer housing because of new requirements and policies,” the organization says.

This case is not the only consideration of this issue by the federal courts. In the 2nd Circuit, landlords have challenged the constitutionality of New York’s rent law, the Housing Stability and Tenant Protection Act passed in 2019. While that ruling is forthcoming, it is of interest to landlords in rent control localities who are or may be poised to contest their ordinances.

RELATED: Minneapolis, St. Paul weigh next steps in rent control

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