Dialogue #2: Rent Banking, Exemptions and Rent Adjustment (Recap)

Dialogue #2 was convened to address three issue areas up for discussion at City Council this fall: rent banking, exemption of certain properties from rent stabilization, and the rent adjustment process. Like dialogue #1, city consultant HR&A Advisors presented each issue then passed the microphone to tenants and landlords for comment. Like dialogue #1, this session was less ‘dialogue’ and more call-and-response to have us reflect on a set of defined policy options.

Dialogue #2 convened on August 26th in the City Hall Municipal Gallery with an introduction from facilitator Sukhsim­ran­jit Singh who set the ground rules. Among them was a maximum of an hour for each of the three issues and a gentle admonishment to keep our comments concise, focused on the available policy options, and limited to two minutes. “Try to stay civil,” he added. Singh  acknowledged the three councilmembers who attended — Lili Bosse, Bob Wunderlich and Les Friedman. (Councilmembers Gold and Mirisch have attended no dialogue this year or last.)

HR&A Advisors consultant Paul Silvern then presented an overview of their study findings (read more on our HR&A presentations page). It is worth watching the beginning of the video for an overview of the broader context in Beverly Hills.

Rent Banking

Rent banking is supported by landlords who want ‘flexibility’ to tailor increases to business conditions and so like the option of saving the allowed increase they don’t levy and carry it over to future years. Nine of 13 rent-stabilized cities allow some form of rent banking, but the devil is in the details. Watch the video segment about this issue starting at minute 17:50.

Rent banking allows landlords to reduce their risk when marketplace conditions, for example, allow only a limited increase. But by saving the un-levied increase for later, a rent banking provision would effectively shift market risk on to tenants. Carrying over the unused but allowed increase could make for sticker shock: if a landlord ‘banks some part of the allowed 4.1% allowed increase over a few years, the tenant could later face a single-year increase greater than the 10% increase when those banked increases are carried-over.

Watch the video for tenant and landlord responses. The devil is in the details when it comes to rent banking. Particulars like the total allowed increase, the carryover period, and a limit on any one year’s maximum increase with the carryover will decide whether or not the tenant could be in for ‘sticker shock’ once banked increases are carried over.

Exemptions

Landlords say that 4-unit-and-under sized properties are categorically different from 5+ unit properties and deserve an exemption from rent stabilization provisions. This is certainly the most important issue on today’s dialogue agenda! Exemption means that any household renting in that property would have no cap on the annual rent increase, be obligated no relocation fees, and could be left unprotected from no-just-cause termination (if the city eventually bans the practice).

The landlords say that 4-and-under properties are more likely to be mom-and-pops. Duplexes they say should always be exempted and 3- and 4-unit buildings exempted if owner-occupied. Some cities do allow very limited owner exemptions but impose a strict test. For example, no corporate or LLC owners can be exempted in Santa Monica. Today Beverly Hills exempts no 2-unit or larger multifamily rental properties from rent stabilization.

Watch the video segment starting at minute 60:40 for a full discussion of this very important issue.

Tenants can support no exemption from rent stabilization because 40% of all rental properties are 4-units or fewer (459 properties) and that could mean more than 900 families in rented units that could find themselves without city tenant protections. Moreover, we weren’t provided the data on how many properties are even owner-occupied today. (The city said we would get that data but we are still waiting.)

Rent Adjustment Process

Every city with rent control is obligated to provide a process through which a property owner harmed by price controls has the opportunity to ask for forbearance in the form of a higher-than-allowed rent increase. Bevery Hills has had such a policy on the books since early 2017: a landlord that can support his claim that net operating income has declined can ask for a higher percentage increase. (Likewise Chapter 5 provides for a ‘hardship’ process.)

The process has not yet been used by any landlord to ask for a higher-than-allowed increase. Most likely that is because no landlord has been harmed by the changes to the rent stabilization ordinance introduced in early 2017. Here again the devil is in the details. Watch the video segment starting at hour 2:05:58 for a discussion of policy options.

HR&A described the rent adjustment process succinctly:

Courts have consistently found that regulating rents is a proper exercise of a local government’s constitutional powers. (Tell that to the landlords!) But rent regulation systems must allow owners to apply for rent increases for a fair return… in Beverly Hills that fair return standard is based on inflation-adjusted increases in net operating income, year-over-year, compared to a base year [2016]…If a housing provider can make a case that his or her operating expenses deviate from a norm, or the historic patterns, there is a process to apply for a rent increase.

You get the picture: this is detailed policy stuff. But to a tenant who may get a greater-than–4.1% annual increase because her landlord successfully claimed he received less than a fair return, no detail is too small.

Tenants can support a policy option not included among the HR&A Advisors policy options: Retain the process framework we have but revisit the decision criteria, including adopting a more reasonable period for benchmarking (not a single year, 2016); more clearly define what is deferred maintenance and how expenses related to overlooked maintenance can be excluded from the fair return calculation; and allow a rent adjustment only if the property owner is in good standing and if he meets any habitability standards that may be adopted.

Tenants can also support mediation in the rent adjustment process, however no mediation can be effective without an end to no-just-cause termination. Today mediation is available but few tenants inquire about it: last year just 1% of calls to the city’s Rent Stabilization Program concerned mediation. And we can support an appeals process where the hearing officer’s adjudication could perhaps be referred to a tenant-landlord board.

Recap

Three hours later, we had heard plenty from landlords and tenants and the city collected written feedback on the policy options from participants. The rigid format allowed none of the give-and-take of last year’s facilitated dialogues but was intended to provide the city with specific policy options and the public’s response to them.

We invite your informed comment on these issues. Please review our preliminary tenant positions and then consult our directions for submitting your comments.

Looking ahead the next dialogue (#3) will occur on September 16th from 1–5pm where the maximum allowable annual rent increase will be discussed. Beyond that there are two scheduled City Council study sessions: October 11th at 7 p.m. and October 18th at 10:00 a.m. The agenda will be the same for both meetings. Mark your calendar! If you can make it we urge you to attend. This is the rent stabilization endgame!

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