The Duplex Exemption from Rent Stabilization: A Clear Break With the Past

Since Beverly Hills enacted rent stabilization in 1978 the RSO ordinance has applied to multifamily rental properties of two units or more. A few rental properties escaped its reach, namely condominiums and buildings built after 1995. Now City Council appears ready to categorically exempt many more, including owner-occupied duplexes. It is a major break from precedent with real implications for hundreds of families. Here’s what a duplex exemption means for tenants.

Landlords long called for a categorical exemption from rent stabilization for mom-and-pop properties. They are not ‘professional’ operators, landlords say, and claimed inefficiencies and higher costs provide additional cause to exempt duplex, triplex or even fourplex properties from rent control. Some said older properties provide “historic charm” to the community, so the city should subsidize them (to a greater degree than other properties) with higher rents.

Though landlords offered zero support for such claims, they must have resonated with City Council because at the November 20th study session councilmembers agreed to exempt owner-occupied duplexes. The proposal appears headed for adoption at the next City Council meeting on December 18th. Are you a duplex renter? How will you be affected? Cut to the chase by scrolling down to the Tenant Impact: Duplex Exemptions section.

What Does ‘Exemption’ Mean?

An exemption from the rent stabilization ordinance means that household renting a rental apartment may be denied tenant protections such as a cap on the annual allowed rent increase and a relocation fee in the event of displacement. Even the prohibition on no-just-cause termination recently enacted by City Council would be protection on paper only. Because local tenant protections under the Beverly Hills rent stabilization ordinance end at the doorstep of exempted households.[1]

The most obvious affect on a tenant in an exempted unit is that they lose the essential cap on the allowed annual rent increase. Because state law specifies no ceiling on rent increases (with 60 days notice), that family can be hit with an unlimited increase each and every year. “The sky’s the limit,” as the Mayor said.

Maximizing the revenue from rent is only part of the appeal of an exemption for the landlord. A second benefit is that an uncapped increase effectively puts the tenancy at the discretion of the landlord. Protection against eviction for no-just-cause exists only on paper when a huge rent hike pushes the tenant out. Because that would be a voluntary vacancy there would be no relocation fee owed.

A third key benefit to the landlord is reduced city oversight. This is the holy grail for some rental property owners! For example, the rent stabilization office will have nothing to say about the unlimited rent increase or the unpaid relocation fee. And it will have nothing to say about housing service that is suddenly denied, either. The RSO office will be of no help when a parking space is taken away. The household in an exempt unit would not fall under the office’s purview.

These potential tenant harms were not discussed as councilmembers agreed to exempt owner-occupied duplexes. There was no discussion about the effect that unlimited rent increases would have on residential stability or how an exemption opens a practical door to no-just-cause termination again.

Nevertheless Vice-Mayor John Mirisch and councilmembers Lili Bosse and Les Friedman advocated for the exemption and the entire City Council concurred. (There was notable pushback from Councilmember Bob Wunderlich: “I don’t understand the rationale.”) Council agreed that the duplex exemption should not affect any Chapter 5 tenants, who tend to be seniors. However the December 18th staff report (posted after this analysis) notes that only 7 units are occupied by Chapter 5 tenants.

To me that suggests our councilmembers understand that the proposed duplex exemption would hang tenants out to dry.

Tenant Impact: Duplex Exemptions

There exist about 7,700 households in multifamily rental housing in Beverly Hills that are rent stabilized. An owner-occupied duplex exemption would reduce the number of units that fall under rent stabilization marginally: of 1,096 rental properties there are 211 duplex properties. Rental unit registry data show that 99 of them are owner-occupied today.

Ninety-nine renting households will lose tenant protections immediately. That’s because each household living in a unit adjacent to the current owner would be affected. Once exempt from RSO they will not benefit from the 4.1% cap on the allowed annual rent increase as do other Chapter 6 tenants. Instead those families will be vulnerable to an unlimited rent increase this year and every year. That would be the duplex exemption working as intended.

The affected families are much more likely to have children in the schools than are other renting households because duplex units are larger (3 and 4 bedroom apartments). Of course they fetch higher rents. While any increase on a relatively high base rent is significant — consuming that much a bigger piece of the household budget —  an increase with no cap means the rent hike can be much greater and in fact could break the bank. The city’s new ban on no-just-cause evictions is only a protection on paper if the rent can double from one month to the next.

Some unknown number of households currently renting a duplex unit will lose their tenant protections if their owner occupies the other unit. Currently 99 duplexes are owner-occupied but 112 duplexes are not (according to recent registry data). As many as 112 more households could lose their protections and face an unlimited rent increase. That would mean as many as 211 renting families could see protections go if all owners took advantage of the duplex exemption (there are 211 duplexes in all). That number is impossible to predict but it is likely that many more tenants will be affected as owners move in — or move in a relative — to gain the exemption. Again, that will be the duplex exemption working as intended.

Additionally, the motivation to take advantage of the duplex exemption got a boost recently when Council agreed to define  an owner’s ‘relative’ broadly for the purposes of owner move-in. In fact, City Council is poised to allow four generations of family members to count. That’s not only the owner but the owner’s parents, children and grandchildren. That’s a lot of potential ‘owners’ to could occupy a duplex.

For every new ‘owner’ who moves into a duplex to gain an exemption there will be a displaced household. As stated, there are 112 duplexes not currently owner-occupied according to city data. The duplex exemption provides a powerful incentive to the owner to move in (or to move-in a family member) simply to lift the cap on the rent increase. But for every ‘owner’ move-in a a family will lose their home.

It gets worse. When City Council broadened the definition of ‘relative’ to four generations, it also agreed to prorate the relocation fee when an owner moves-in: the displaced family will get only 10% of the fee for each year of tenancy. Because duplexes have relatively higher tenant turnover, many of those departing families will get only a small fraction of the fee. These harms to tenants stack up: there is the family displaced for the owner to move in and then the renting household that loses the protection of the rent stabilization ordinance.

Caveats

It is impossible to estimate the extent of the harm to tenants from the duplex exemption due to several unknowns. Ninety-nine duplexes are indicated as owner-occupied in the registry today, but that figure may only reflect units marked as ‘occupied by owner’ on the rental unit registration form. It is not clear there is any definition provided to the owner who is registering his property.

Second, we don’t know how many duplexes may qualify for the exemption even today. The proposed exemption defines ‘owner’ as a person, family trust or partnership — but not a corporation or limited liability company (LLC). We don’t know how many of the 99 duplexes indicated as ‘occupied by owner’ is actually owned by a structure not eligible for an exemption.

(The December 18th staff report includes a subtle change to the proposed duplex provision: partnerships will not qualify as an ‘owner’ for exemption purposes; and where a trust is concerned the ‘owner’ must have owned “at least a 50% interest in the property” prior to forming a trust. Unfortunately the staff report includes no accounting of how many duplex properties today would meet the revised ‘owner’ qualification.)

Conversely there are the 112 duplex properties that are not indicated as owner-occupied in city records. How many would not be eligible for the exemption because of the ownership structure? Registry data collected by the city’s consultant show approximately 18% are owned by a corporation or by an LLC. (That would limit the reach of the exemption.)

And third, we simply don’t know how great an incentive the duplex exemption will prove to be. But if it is indeed a great incentive, we will see owners moving into their properties (or moving-in relatives) to get it. We may even see LLCs restructured as family trusts (which would qualify). The stronger the incentive to exempt, the broader will be the harm visited on households that rent in a duplex apartment today.

As many as 323 households could be affected. Assume the 99 owner-occupied units per the registry are indeed occupied by owners; that means the unit adjacent to each of them would be immediately exempted (99). Then there are the 112 duplex properties not owner-occupied today; each provides a units available to owner (112 more). The unit adjacent to each new owner would then become exempt (112 more). That’s a total of 323 renting households that could affected by a relatively narrow exemption if owners really capitalize on this exemption.

Again, consider the harm. Exempt units each represent a family that will not benefit from a capped annual rent increase or a number of other protections provided by the rent stabilization ordinance. They would forfeit the longer notice period that precedes a demolition or condominium conversion (as required by the rent stabilization ordinance) and the relocation fee that would otherwise go to a household bumped for a condo conversion or redevelopment. The full year’s notice prior to a major remodeling would elude them and that family would have no ‘right of first refusal’ after the remodeled unit is returned to the market.

City Council discussed none of these consequences even though each could be anticipated. Each is a product of the proposed duplex exemption working as intended.

And on a closing note, as the staff report helpfully reminds us, an owner or a relative who meets the city’s proposed four-generation test, and who lives in a duplex today, can still move out his tenant for landlord use even without a duplex exemption. There is no great incentive to do that, however, as that relationship presumably wouldn’t permit charging the highest possible rent or pushing the relative out with a whopping rent increase.

Doesn’t that suggest that the ‘landlord’ provision is the right one for duplexes? Opening the door to an exemption from tenant protections is a needless break with the past.

[This post was updated to reflect the revised ordinance and December 18th staff report.]


  1. There exist one very significant exemption from local rent stabilization in state law now: the Costa Hawkins Rental Housing Act will not allow rent be controlled in any post–1995 building, condominium unit or single-family home. Proposition 10’s failure at the ballot box to repeal that statute means that tenants in every future apartment building in California can see unlimited annual increases in the rent.  ↩

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