Allowed Rent Increase for Chapter 6 Rises to 4.1%

Today City of Beverly Hills announced a bump-up in the allowed annual rent increase for Chapter 6 tenants. Effective June 12th the cap was raised from 3% to 4.1% – a one-third larger allowed increase. While that may come as a surprise to some, the Municipal Code allows the allowed annual rent increase to rise with the percentage change in the Consumer Price Index (CPI-U) for the Los Angeles-Long-Beach-Anaheim region. As calculated by the Bureau of Labor Statistics that was 4.1% hence the rise in the allowed rent increase from 3% to 4.1%.

Tenants who receive the Renters Alliance email newsletter know that the current 3% cap on annual rent increases for Chapter 6 tenancies was never permanent. It was adopted by City Council in January of 2017 in response to tenant complaints about getting priced out of Beverly Hills, yet it was simply a placeholder until Council decides on a final allowed increase. That could be a percentage increase or a formula tied to consumer prices (tenants have argued for the latter). As the city’s website explains, Chapter 6 tenancies were established at a rent of $601 or more per month.

As the city explains in a press release, the bump-up is baked into the Municipal Code:

On June 12, 2018, the Bureau of Labor Statistics published the local CPI for May 1, 2018, which showed an increase of 4.1% over the local CPI for May 1, 2017. Therefore, the maximum annual allowable rent increase for a rental unit subject to Chapter 6 of the Rent Stabilization Ordinance that is imposed after June 12, 2018, is 4.1% (See B.H.M.C. § 4–6–3).

Turning to Municipal Code Chapter 6 section 3 we see the provision (with my emphasis):

Only one increase shall be permissible within any twelve (12) month period…Such increases [sic] shall not exceed the greater of: 1) three percent (3%) of the rental rate then in effect, or 2) the percentage equal to the percentage increase, if any, of the consumer price index for the Los Angeles/Riverside/Orange County area, as published by the United States department of labor, bureau of labor statistics between May 1 of the then current year and May 1 of the immediately preceding year. — Municipal Code 4–6–3 ‘RENTAL INCREASES’

The Bureau of Labor Statistics (properly capitalized!) calculated a 4.1% increase in consumer prices for the year ending this past May. It reflects the change in costs for products and services costs purchased by ‘urban consumers’ in our Los Angeles-Long Beach-Anaheim region and in fact represents the largest annual jump in many years. Because the allowed annual rent increase is tied to this index (CPI-U) some tenants have, or will,  see a commensurate increase in rent.

To be clear, this represents not a change in the ordinance or in some city policy. The provision was already on the books. Come summertime every year the allowed increase will change with consumer prices (unless and until the ordinance is changed).

As for Chapter 5 tenants, they are seeing the largest allowable annual rent increase in… well… forever! Scroll down for more about it.

How a Tweak in the Original Ordinance Made it Happen

Tenants faced with the maximum rent increase from June forward will pay more due to a little-noticed change made in the rent stabilization ordinance last year. Let’s go back to January of 2017 when City Council adopted an urgency ordinance. Council reduced the allowed rent increase to 3% from 10%. In that ordinance there was no provision to tie the increase to the change in consumer prices. It was a flat 3%. Here is what the original urgency ordinance said:

Paragraph B of Section 4–6–3 (“Rental Increase”) of the Beverly Hills Municipal Code is hereby amended to read as follows: Such increases shall not exceed a maximum amount of three percent (3%) of the rental then in effect.

Tenants who joined me in chambers that night will remember the elation as the clock approached 1 a.m. City Council was finally looking out for residents who rent in Beverly Hills. Not only was the annual increase capped at 3% but relocation fees took effect too, and the fee topped out at $21,650 for a 2-BR unit. (More on that soon.)

But the good feeling didn’t last long: the next month City Council revisited those changes and slashed the top relocation fee to $14,394 (a reduction that I then called “half a loaf” for tenants) and, at the same time, allowed the rent increase cap to float as high as inflation may take it. The amended language:

The City Council hereby amends Paragraph B of Section 4–6–3 (‘Rental Increase”) of Chapter 6 of Title 4 of the Beverly Hills Municipal Code to read as follows: Such increases shall not exceed the greater of: (1) three percent (3%) of the rental rate then in effect, or (2) the percentage equal to the percentage increase, if any, of the consumer price index….

That language remains in the ordinance today. The provision was adopted with virtually no discussion (though I did raise concerns). Also included in that February urgency ordinance was a ‘rent adjustment’ for landlords: if their profit declines relative to year 2016 they can ask for an increase even higher than what the ordinance permits them.

For landlords a variable cap limits their risk because the allowed rent increase will never trail a rise in consumer prices. But Chapter 6 tenants never had such protection: inflation was relatively high when the 10% cap was set by ordinance in 1986 but, as deflation threatened, the costs of operating rental housing were just about flat. The costs of borrowing declined precipitously; gas and oil prices declined; and the economic crisis made for a buyers’ market for labor.

Yet there was no break for tenants. Where landlords today benefit from a cap that rises (with no ceiling), for decades tenants faced a high allowed increase and the floor was very high.

Consumer Prices Are Likely to Continue to Rise

Consumer prices are rising and they are forecast to continue to rise. Growth was on the increase and the Republican tax law further stoked what economists call a late-cycle economy. Where growth could have moderated and inflation tamped down, the additional investment incentive means that growth and inflation should march upward.

Indeed the trend is clear according to the Bureau of Labor Statistics press release: after years of fluctuation in consumer prices year-over-year, the annual increase has climbed from an average of 2% for our region to 4.1% in May.

Bureau of Labor Statistics Los Angeles-Long Beach-Anaheim CPI-U-trend chart
The upward trend in prices for urban consumers in the Los Angeles-Long Beach-Anaheim area shows an uninterrupted upward climb over the past year.

The steep climb began a year ago in May 2017 and shows no sign of flattening. The change in prices is the benchmark to which our annual Chapter 6 rent increased is tied.

Did Anyone See It Coming?

City officials knew an increase in the percentage was coming and I did too. But the 4.1% increase probably took all of us by surprise. A couple of months ago, the city signaled an increase in some taxes and fees by 3.6% – the rate of change in prices for urban consumers in the Los Angeles-Long-Beach-Anaheim region. (Council just adopted the 3.6% increase this month.)

If taxes and fees increased by only 3.6%, why did the allowed annual rent increase jump one-third more to 4.1%? Inexplicably our city calculates these year-over-year changes in consumer prices differently. More precisely according to different calendars. I had to go back to the taxes and fees discussion to understand that the fee schedule is indexed to the annual change in consumer prices published by BLS in November. The allowed rent increase is on a May-to-May calendar. In November the published annual rate of change was 3.6%. Six months later, though, consumer prices were rising and the annual change was calculated at 4.1%.

A smart landlord would closely read the rent stabilization ordinance and would have known that the allowed annual rent increase is calculated each May. As inflation was long forecast to rise, a savvy landlord would have waited for the higher allowance to take effect. So a tenant who received a maximum increase prior to June 12th dodged a bullet: her increase was 3%. If her neighbor is noticed for a maximum increase afterward will see an increase one-third higher (4.1% instead of 3%).

CPI Adjustments: Harm or Benefit?

Tenants who chafe at the new 4.1% cap could feel that indexing the rent allowance to the change in consumer prices was a bad idea. However tenants have argued for precisely that: rather than establish a fixed percentage cap, tying the rent cap to consumer prices is more prudent from a policy perspective. That’s what most rent-stabilized cities do, for why should controlled rents be allowed to rise much faster than other consumer goods and services?

Supporting that policy position is the Bureau of Labor Statistics itself. Notably the ‘CPI market basket’ includes the cost of shelter but not the price of providing housing. “Shelter, the service that housing units provide their occupants, is a major part of the CPI market basket—the goods and services that people need for day-to-day living,” BLS explains.

Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items. Spending to purchase and improve houses and other housing units is investment and not consumption. Shelter, the service the housing units provide, is the relevant consumption item for the CPI. The cost of shelter for renter- occupied housing is rent. — Bureau of Labor Statistics (April 2009)

Tenants accept that view. Landlords, however, object to tying the allowed rent increase to CPI because, they say, CPI doesn’t properly represent the change in their costs. As explained above that’s because they’re looking at a their investment; tenants pay for shelter.

The compromise could be to both tie the allowed rent increase to the change in consumer prices and establish a base percentage change. I would argue that we are at that compromise now. Given the increment upward in the current allowed increase to 4.1%, today we find ourselves halfway to that 5% compromise number that the dialogues facilitator pressed so hard for last summer. (Read my recap.)

So as we look ahead to Council’s rent stabilization discussion this fall, and as tenants contemplate yet another bump-up in the CPI-linked rent increase next June, we should ask whether tenants should support the current ordinance’s allowed increase at 3% or the change in CPI.

A couple of reasons suggest it may be prudent. First, it’s easier to negotiate from a current provision than to propose something different and persuade City Council to agree. That is, the current language is already on the books. Second, the current ordinance suggests a middle-ground between the CPI-linked increases calculated by other rent-stabilized cities (for Santa Monica and West Hollywood that’s about 2%) and our landlords’ call for 8%.

Does the current 4.1% CPI-linked increase sound like a workable compromise? Contact me with your view.

What About Chapter 5 Tenants?

Left out of this discussion are the 3% of renting households that fall under the city’s earlier Chapter 5 rent stabilization ordinance. Those lucky folks get a much sweeter deal than most: their rent has long increased by only 1% on average every 12 months and even dipped below that some months in our low-inflation environment. In recent months it was pretty steady at about 1.7%. Why? Because Chapter 5 calculates CPI monthly from BLS price data.

However due to the increase in consumer costs the news is not good for Chapter 5 tenants either: come August they will see an increase of 3.3%. Whoa, that’s nearly double the allowed annual increase for Chapter 5 published on the city’s website published nearly every month for years.

Chart of Chapter 5 allowed annual increase through August 2018Between the 3.3% annual rise for Chapter 5 and the 4.1% annual rise for Chapter 6, for the first time the spread is quite narrow: only .8 of a percent. In the past that spread was nearly ten percentage points.

The spike in the Chapter 5 increase is a mystery to me. When I earlier tried to use CPI data in the city’s complex Chapter 5 formula I could not reproduce the city’s posted figures. You can try this at home! Find the CPI figures here for the LA-Long Beach-Anaheim region. Then plug them into your spreadsheet and apply this formula:

The proper method for computing such an increase in the CPI shall be as follows: The latest published CPI figure shall be added along with such figures for the preceding eleven (11) individual months, and, from the sum reached, there shall be deducted the sum of such figures for the twelve (12) months further preceding the last such twelve (12) months. That remainder shall then be divided by the lower of the two (2) sums heretofore mentioned, and the resulting figure shall indicate the permissible maximum percentage by which the base rent may be increased by virtue of the rise in the CPI. — Municipal Code § 4-5-3

Easy, right?

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