Rental Unit Registration: Landlord Laggards

When staff presented City Council with an overview of registration data in November of 2017, it was clear just how many rental properties had not been registered with the city as required: almost twenty percent! And those properties were disproportionately small properties. We take a look at the data on non-registration to suggest what it may say about owners who have not registered.

City staff approached City Council about the extent of non-registration of rental units in November. A state-imposed deadline was approaching and it was time to consider a penalty to encourage compliance. The top-line figure got the attention: fully 20% of properties were not registered. The data was provided in this cursory breakdown:

In presenting the data, though, staff drew no conclusion about what might motivate non-compliance or how non-compliance is correlated with the size of the rental property. That’s not an academic question: small-property owners have been in the forefront of opposition to rent control generally, and registration of their property specifically. So it seemed noteworthy that such a disproportionately large share of non-registered properties were fourplexes and smaller.

In fact there was not enough data in the staff report to suggest any correlation between property size and under-registration. The report provided no numbers about the overall breakdown of the rental stock by property size. Councilmembers could draw no conclusion.

So we looked we cross-referenced the data on non-registration with the city’s a preliminary rental property inventory to infer rough rates of compliance. Here is the proportional share of non-registered rental properties by property size.

The absolute numbers of non-registered properties don’t really tell any story beyond the top-line one-in-five properties are not registered. But when put in context we can see the extent to which smaller duplex, triplex, and fourplex properties lag in registration relative to their representation in the population of rental properties.

From the proportional data in the chart above, we can see that 5-unit properties is a breakpoint: properties of four-or-fewer units are much less likely to be registered than all properties, and certainly much less likely than are properties of five units or more. No small share of small property owners aren’t registering their properties.

The correlation between registration and property size (measured by the number of rental units) is even more conspicuous when we choose 11 units as a breakpoint. Here we see that properties of 5-10 units exceed the average (81% of properties registered) by three percentage points. However properties of 11 units and larger and much more likely to be registered — exceeding the average for all properties by twelve percentage points.

Properties of 11 and more units includes some older mid-sized apartment houses but it captures the largest buildings too, those 1960s-and-later properties that span lots and were permitted with greater height. (The permissive zoning code has since been made more restrictive.)*

The larger rental properties (some as many as 40 units) are owned by corporate investors (Sterling comes to mind) and professional operators. They are more concerned with maintaining a sustainable operating margin, asset appreciation and favorable tax treatment than with putting limits on tenant protections. In other words, these operators can live with a 4% maximum allowed annual rent increase. As far as we know, none of those operators have been represented in the RSO policy process to date.

What about mid-sized properties? Registration of properties of 5-10 units is running slightly ahead of the average registration rate (81% of all are properties registered). These properties are likely to be professionally managed but less likely to be corporately owned (a check of business licenses shows many are still predominately owned by individuals and family trusts). These operators do not seem to be unduly aggrieved by the registration requirement.

Why are Owners of the Smallest Rental Properties Resisting Registration?

Why would smaller operators risk an administrative penalty of $500 per unit when the law is clear on registration?

A landlord must register every rental unit that is subject to the provisions of [chapters 5 and 6] within 30 days of receipt of notice from the city that registration is required, unless the rental unit is specifically exempt....(Only

Some smaller absentee owners may not be aware of the requirement. Probably more have started the process but found it challenging to substantially complete it. The staff report for example notes that as of September 22nd — which was the final deadline for registration — one-in-ten property registrations had started but not completed it even though the city provides hands-on help.

Is it that owners of small rental properties find registration to be so much more challenging? We don’t know because the city didn’t break out the ‘substantially incomplete’ figures.

We expected small owners to be more responsive to the registration requirement because they sometimes live in their properties; few are true absent owners. They don’t have the resources to absorb penalties. They ought to be  concerned with running afoul of the law. But the registration data suggests that’s wrong. Let’s speculate on a few reasons why.

Landlords reasonably have an expectation that there will be no fine or sanction for non-compliance. I think the city itself has established this expectation because code enforcement prefers to encourage compliance rather than penalize non-compliance. Landlords know sanctions are slow to come (witness their reluctance to get licensed and pay business tax).

It is the smaller landlords that want City Hall out of their business. They don’t like being regulated at all. Nathan Hirsh owns a duplex on Smithwood Drive and decried the “unlawful 3-percent emergency action” that he called “tyranny” in a September letter to the Courier. He claims some “rights to fair business practices in our city where we have operated for generations without cumbersome bureaucracies.”

Some smaller landlords may want to prevent tenants from gaining greater protections. Tenant stability comes at their cost, is their view. What if Beverly Hills followed the example of rent controlled cities like Santa Monica and West Hollywood? Tenants there can’t get kicked out with 60 days notice and those cities police landlord conduct closely. Landlords like freedom from “cumbersome business practices.”

Some small segment of smaller operators are simply opposed to rent control in principle. They resist the registry and sought to undermine the effort to amend the rent stabilization ordinance. (Read landlord Elia Weinbach’s reasoning on that.) This is the ideologues’ view.

This resistance motivated City Council to adopt a penalty for non-registration in December. The city faced a deadline. Some owners weren’t complaint. A few indicated to-the-barricades resistance. The data here suggest it is the smaller landlords who are those ideologues.

*An analysis caveat: I have estimated registration in these subcategories by cross-referencing registered figures for 5+ properties with the city’s preliminary rental property inventory posted in April. The city has subsequently changed how it reports properties by size groups. Until the city releases more detailed data – in early January a representative told me – the available only allow an inference as to how the 5+ unit category breaks down.