Landlords Say the Business Tax is Too High

Time and again landlords say the business tax is too high. That’s been a core argument for a 7% allowed annual rent increase. “In Beverly Hills we pay ten times the business tax that we would in Los Angeles!” one said. And yes the tax is higher in Beverly Hills. But can a 1.2% annual tax on rents somehow justify a 7% annual rent increase?

The obvious point to make is that the business tax has long been 1.2% of gross rent and it has always been levied on apartment leasing. No landlord will be surprised when he inherits a rental property; and none will be surprised when they invest in one.

More to the point, the business tax on leasing is already built into our rents!

The substance of the landlords’ argument hardly matters, though; it’s simply a smokescreen. But we tenants cannot afford to let such claims go unchallenged.

The cost of doing business in Beverly Hills may well be higher than elsewhere. But the landlords have provided ZERO evidence to support that claim. The business tax may well be higher than elsewhere, and perhaps ten times higher than Los Angeles as they say.

But we can put the business tax in perspective. The Beverly Hills Class E tax on gross rental receipts takes a 1.2 cent bite out of every dollar in rent and other revenues collected though a leasing business. That includes income from late fees and coin laundry and so on, even deposits that are not returned on move-out.

The rate landlords pay is specified in the city’s schedule of taxes and fees:

Business tax for Class-EBut 1.2% does not sound like a big tax bite. Indeed it is marginal relative to the other expenses of operating rental housing. The city’s consultant estimates that about 33 cents out of every rent dollar goes to cover the landlord’s expenses (the rest is net operating income). If 33% goes to costs and the city wants an additional 1.2% slice, is that too-high a tax burden? It is if you want to pay zero percent tax!

To put that in perspective, energy costs fluctuate year-to-year by several percentage points. The dollar change in the cost of energy alone makes the tax bite negligible. In dollar terms, the landlord renting an average apartment in Beverly Hills will pay only $27 bucks a month in tax.

The business tax picks up no small share of the costs of providing city services — fully one-fifth of all general fund receipts come from the business tax. The apartment leasing share of that is 10%. The tax that landlords pay on 1,1000 properties comes to about $4.6 million.

In fact, landlords themselves cite the excellent Beverly Hills city services as a prime reason why their tenants should not expect to pay a low rent. But they can’t have it both ways: if those city services justify a high rent, then they should also be willing to pay the tax.

A 1.2% Tax Warrants a 7% Rent Hike?

On its face the 7% annual rent increase the landlords’ want is six times the tax rate of 1.2%. That sounds silly, but in dollar terms it is even sillier. The average rent according to the rental unit registry is $2,300 per month. It will generate a tax obligation of $27 per month (2,300 X .012 tax = 27 tax).

Let’s say expenses are 33% and the landlord nets 66% of gross income. His net on that apartment is $1,518 (2300 X .66 net = 1518 net). In the next year he increases the rent by the hypothetical 7% making the new rent $2,461. The increase in net income is $106.26 (2461 – 2300 original rent = $161 difference X .66 net = 106.26).

So the landlord is reaping 106.26 more (after expenses) after the rent increase.

Of course the tax obligation increases too because it’s levied on rents. So the new tax bite is $29.53 (2461 x .012 tax = 29.53 tax). The difference is $2.53 (29.53 – 27 original tax = 2.53 difference in tax).

So the landlord is paying an additional $2.53 in tax after the rent increase.

Comparing the two, the net income has increased $106 while the taxman takes only $2.53 more. In dollar terms the added tax obligation is negligible compared to additional returns from a 7% increase. That’s because the tax rate is very low relative to the fat 66% margin ‘earned’ on the rent.

Ironically, the tax bites harder the higher the rent because it is a flat 1.2%. If a landlord wants to reduce his tax burden he should keep his rents constant and let inflation relieve his burden because the tax obligation will be the same every year.

Besides, tenants already pay for that tax because it’s built-in to the landlord’s expected cost. In fact the the landlord’s own rent roll is the only variable when it comes to the business tax. There is no uncertainty when it comes to anticipating the tax obligation.

Indeed the business tax is nothing more than a cost of doing business in City of Beverly Hills and it pays for the services the landlords clearly value.

Given that Beverly Hills has demanded little accountability from landlords over the decades, a penny on the dollar is not too much to ask to do business in such a business-friendly city. “We’ve gotten away with murder,” one landlord said. Why complain about the literal penny-ante cost of getting away with it?