Idea Floated to Move “Licensed Beds” for Conversion of EL Houses from Rentals to Owner-Occupied

East Lansing’s City Council has directed City staff to research the feasibility, legality, and finer details of a program to transfer rental licenses from some Chesterfield Hills houses to other rental houses, in an effort to improve situations for homeowners and landlords alike.

The idea floated by several politically-active homeowners from the neighborhood — including Diane Wing and Mark Terry — would be targeted at student-rental houses located rather incongruously in areas that are otherwise all owner-occupied. 

The idea is to remedy conflicts that occur in near-university neighborhoods like Chesterfield Hills between noisy student life and quieter owner-occupied life by moving the licenses from the “island” rental houses to rental houses in student-saturated areas, rehabbing the “island” rental house for owner-occupancy, and selling it for owner-occupancy with a deed restriction that prohibits rental for at least several decades.

Take for example, 306 Kensington Road, shown in our lead photo and in the map above, taken from the City and annotated by ELi. 

This is a duplex rented out by CRMC, which owns many student rental houses around town. With the rental income this house at 306 Kensington Road brings in, the house is worth too much for the market to allow conversion to owner-occupied, particularly given the upgrades someone owning a house would expect to put in. It’s simply too valuable as a rental to convert to a house someone would buy, fix up, and occupy in Chesterfield Hills.

Under the idea proposed, the City would allow CRMC to move the rental licenses for the “beds” in the “donor” house at 306 Kensington (which is west of Harrison Road) to other rental houses that could reasonably absorb more tenants than they are currently licensed for (say, in the “Delta Triangle,” the student-heavy side of Chesterfield Hills east of Harrison Road). 

For example, a “receiver” rental house with four bedrooms licensed for only two people could be granted a license for two more tenants from the “donor” house, making the receiver house more valuable for the landlord. With the loss of the rental licenses, the donor house would drop in value and be cheaper to buy and rehab.

The license-donor house would then be fixed up using funds from a revolving fund and sold for owner-occupancy with a deed restriction. The funds recouped would be put back in the revolving fund to do it again with another house. This would further concentrate student housing in areas that do not include owner-occupied houses.

Why is this being considered for Chesterfield Hills, specifically?

This proposed transfer of rental licenses is a possible program to use $300,000 that had been specifically set aside as part of a settlement between the City and the developer of Campus Village, across Michigan Ave. from Chesterfield Hills. 

The money is legally restricted to use for conversion of rental houses to owner-occupied houses in Chesterfield Hills, and the scheme being considered is meant to maximize the utility of the program by creating a revolving fund, rather than simply expending funds to convert one or two houses. If the idea works, it could be used for other neighborhoods if funds were to become available.

The basic concept of some conversion program for Chesterfield Hills was previously discussed by Council in February with representatives from the Capital Area Housing Partnership.

Last Tuesday, East Lansing Director of Planning, Building and Development Tom Fehrenbach provided an update on the ongoing discussions. He asked for guidance from Council on three specific policy questions:

1. Should staff explore creating a program strategy that allows for the transfer of licenses from one property to another area?
2. Should staff update the program parameters to give priority to low-to-moderate income purchasers?
3. Should the program parameters focus on a specific time for an owner-occupied deed restriction?

Council members were broadly in favor of prioritizing low-to-moderate income purchasers and maintaining owner-occupancy deed restrictions. But there were a couple of concerns raised.

Mayor Pro Tem Jessy Gregg wondered if the owner-occupancy restrictions might become detrimental in the future if they are for as long as 30 years. Fehrenbach said staff will look into getting data about how long people are living in East Lansing.

Council member Dana Watson — who praised the overall emphasis on low income housing —  questioned whether the baseline prices of houses in a neighborhood like Chesterfield Hills would even be accessible to people with a low-to-moderate income, even with assistance from the City. (The legal settlement does not say that the conversion program should be for income-restricted uses.)

The first question — about whether the staff should continue work on a program to transfer licenses — generated most of the discussion. 

Mayor Aaron Stephens asked Fehrenbach about the general interest from Chesterfield Hills residents and from companies/landlords with rental licenses in the neighborhood. According to Fehrenbach, the idea of transferring the licenses was favored by people in the neighborhood, and the City had been in contact with a rental company that was open to moving their rental licenses to other properties in the City. 

Fehrenbach also added that transferring the licenses elsewhere, and not effectively buying landlords out of them, could allow the City to use more of the $300,000 on rehabilitation and other work on properties through a revolving fund.

“If you feel that it’s possible, and you feel that we might be able to move forward with something like this, especially if the neighborhood is on board,” Stephens said, “I think this is a cool thing to look into.” 

Purely from the perspective of converting rentals in Chesterfield Hills, transferring the licenses is an attractive option, but there are some notable snags. 

First, it isn’t clear that it would be so easy to find “receiving” neighborhoods where all owners would be comfortable with this plan. City Manager George Lahanas noted that the City explored a program like this roughly a decade ago, but didn’t pull the trigger due to neighborhoods not wanting to be “receivers,” along with perceptions of the City playing favorites.

“So, the people who were losing the licenses [i.e., nearby rental houses] benefitted, but the perception from the people in the area who received the licenses felt they were being harmed by that,” Lahanas said. “So that’s always been the problem to this transfer of license issue. That was the problem ten years ago when we got up to the doorstep of doing it.”

Responding to Lahanas, Gregg noted that just because something didn’t work ten years ago doesn’t mean it won’t now. She said that it was worth exploring a plan to transfer licenses now. 

Gregg elaborated that she imagined this program expanding the licenses on some existing rental properties rather than creating new rental properties around the city.

“This isn’t necessarily a case of Chesterfield trying to transfer their beds to Bailey,” Gregg said. “There’s possibly even properties within the Chesterfield neighborhood that could accommodate one additional tenant,” such as houses in the Delta Triangle section of Chesterfield. “And if we can extend that relatively small amount of money to extend our aim, to have a greater impact, I think it’s worth exploring, understanding it’s not a simple proposition.”

The exact legality of transferring “bed” licenses — or how it would even work — is not yet clear. As part of the direction provided on Tuesday, Council members advised staff to first start their research with the City Attorney, so that if there is no legal pathway to do this, they don’t waste too much time. 

“What we would look at is, whether or not in the context of, say, rental licensing, some sort of transfer program could occur,” City Attorney Mike Homier said. He then added his own view of the matter: “I tend to agree, generally, somebody’s ox is getting gored when you’re transferring these from one location to another. It just depends on where they’re going, what the impact might be.”

If the concept is legally possible, it might require Council to enact an array of changes to the zoning code.

There is no deadline or specific timeline of when the $300,000 needs to be spent, Fehrenbach said, and given the amount of research to be done, it’s not entirely clear when this draft program will come back before Council.