Raising the Rent at 138 Monte Cresta 

The landlord says he's just trying to recover his costs. The tenants say he's violating the spirit of rent control. Their dispute may affect all of Oakland.

The video begins with a long shot of a cement-gray apartment building. The sun is out, and a slight breeze sways the trees. Jerkily, the camera zooms in on a view of the thirty-unit North Oakland structure. The scene is a summertime yard sale, yet the blue skies and communal appearance are deceiving. Residents are selling their possessions, but not because they want to. People look tense, and as they're interviewed we learn they're angry too. One woman says she had to leave the Bay Area to find new housing. Another shakes his head at having to search for an apartment after thirty years in the same building.

Meet the tenants of 138 Monte Cresta Avenue. What are they so upset about? In two words: Dennis Cox. Shortly after buying their apartment in May of 2007, Cox notified them that he was increasing their rent by $381 a month. He probably didn't suspect he was about to unleash a storm likely to shape rental policies for the whole city.

Many residents of 138 Monte Cresta had lived there for decades, and enjoyed rents well below market rate. The videotaped interviews barely scratch the surface of their outrage. "My home is threatened by a landlord who's scheming to get people out," says tenant Amy Pierre, who chose to stay and fight for her $699-a-month rent. "It's extremely, extremely upsetting and unsettling."

Pierre and her neighbors are irate about many things. Most view the building's massive renovation as part of a sinister plan to drive them out. They also complained that Cox failed to promptly repair a leaking sewer. Others griped about the dismissal of the apartment's on-site manager. Some disliked the building's new ban on dogs. But the rent increase dominated their complaints.

Oakland's rent-control regulations say that landlords can raise rents to cover maintenance expenses plus 95 percent of the debt service on their mortgage. However, Cox took out an unconventional mortgage, and that's where the controversy began. As such loans have become more common in the tightening real estate market, there have been at least 58 separate disputes before Oakland's rent board.

Cox eventually told the rent board that he was unable to obtain a conventional loan because of the very low rents paid by tenants of 138 Monte Cresta. Based on the existing rents, his longtime banker would only loan him half the building's value. To purchase the apartment with such a loan, Cox would have needed to make a 50 percent down payment.

So instead, he chose instead to obtain an unconventional mortgage — an interest-only loan with a high 10.5 percent rate and a short, two-year repayment period. Cox put down a quarter of the purchase price, and his private lender demanded additional collateral beyond the building itself. So he secured the loan with a second piece of property, which some tenants would later cite as proof that he was trying to cheat them.

When Cox notified those tenants that he was increasing their rent to cover his borrowing costs, they balked. Residents took their complaints before a hearing officer of Oakland's Housing, Residential Rent and Relocation Board. In a showdown on September 19, 2007, the tenants' were represented by one of their own, lawyer Martin Greenman, a resident of 138 Monte Cresta. Cox was represented by Gregory McConnell, who is notorious among tenants-rights activists for his role in sculpting the anti-rent control Costa-Hawkins Rental Housing Act of 1995.

The tenants said their landlord's costly loan was an intentional effort to undermine Oakland's rent controls. They implied that Cox had taken out a larger loan than necessary to provide the legal justification to raise their rents by more than the city's 3.3 percent rent cap. "He wouldn't have been entitled under a regular principal-and-interest loan to any increase in rent at all," Greenman said in an interview.

When the hearing officer handed down her ruling in November, the tenants scored a huge victory. In what James Vann of the Oakland Tenants Union called "a watershed decision," the hearing officer concluded that Cox' loan was not "commercially reasonable" and froze building rents at their existing levels.

"It would be against the spirit and intent of the ordinance to allow an owner to simply pass on all debt-service costs without considering whether the transaction is a commercially reasonable loan," wrote hearing officer Barbara Kong-Brown. "It would allow an owner to engage in unfettered self dealing and structure any financing arrangement."

In essence, she argued that Cox had found a loophole that he and other landlords were using to skirt the city's rent controls. "It appears the owner's intent was to purchase the subject property for speculation purposes, raise the rents ... and to refinance the property after two years at a much lower interest rate, after the tenants have left or paid the new rents," she wrote. "This scenario evades the Rent Ordinance."

But despite the ruling, the dispute is far from resolved. Cox has appealed the decision to the full rent board, and it could well end up in court. In the meantime, reverberation from the case, and dozen of others like it, has prompted the board to reconsider rent increases of this type. Observers expect the matter to come before the Oakland city council this summer.

Welcome to 138 Monte Cresta, where the conflict between angry tenants, frustrated landlords, and confused regulators captures many of the passions of Oakland's raging gentrification debate.

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