Seismic Retrofit Cost Back on the Rent Stabilization Agenda! [Updated]

City Council at the July 24th August 7th study session will continue a long discussion about how to fix structural deficiencies in about 300 residential buildings identified as seismically-vulnerable. Affected are predominantly ‘soft-story’ wood frame buildings (where the building overhangs outside parking) that comprise nearly a quarter of the city’s entire rental housing stock. They also provide much of the city’s relatively-affordable housing. So the suggestion that the cost of seismic retrofit be pushed on to tenants should give us pause. What is euphemistically termed “cost recovery” in reality would make nearly 2,000 renting households investors in their landlord’s property. But we would hold zero equity. Is this the right approach for Beverly Hills?

The problem is that governmental agencies predict that an earthquake of 6.7 magnitude (like Northridge) will occur in Southern California sometime over the next 30 years with a 97% probability. That’s known as a high-impact, low-probability event: the potential harm is great yet the probability of occurrence is somewhat low (30 years is a long time!). Policymakers must weigh the cost to mitigate the risk in today’s dollars against the cost of damage to property and life tomorrow.

In terms of harm, Northridge is instructive. Residents of so-called ‘soft story’ buildings fared the worst in that quake. What is ‘soft story’? As Tuesday’s staff report notes:

A soft-story building refers to a multi-story, wood- frame structure that contains parking or other similar open floor space that causes soft, weak, or open-front wall lines, or the majority of the ground floor or basement portion of the structure contains an open floor space, and there exists one or more stories above. Many of these buildings are particularly vulnerable to major damage or collapse in a major seismic event.

A survey of city properties identified about 300 soft-story wood frame buildings and they are home to 2,000 households who happen to reside in the city’s more relatively affordable housing stock. That’s about a quarter of all renting households and rental properties in the city. The survey findings were first presented to City Council in 2016 and thereafter the seismic retrofit discussion has progressed slowly through the machinery.

While the city wants to mitigate loss, it does cost to retrofit vulnerable older structures (those built before 1978) and with more than 80% of identified soft-story candidates at 10 or fewer units each, any pass-through cost could be spread over relatively few households.

The key question for tenants: who should pay?

The question is not unique to Beverly Hills. Cities around us have already grappled with it. On Tuesday City Council will consider a draft ordinance (in the staff report) that provides an accelerated timeline — just two-and-a-half years to complete the retrofit. Later this fall, Council will discuss who should pay.

We’ve been here before! The question of whether to pass on to tenantsthe cost of seismic retrofitting was part of the rent stabilization discussion in winter of 2017. Most of us didn’t notice it because the seismic retrofit cost-recovery provision was tucked into the ‘rent adjustment’ section of the Municipal Code (§ 4–6–11) by the urgency ordinance in February of 2017. (Renters Alliance did then object to passing the cost on to tenants however.)

The rent adjustment provision expressly allows a landlord to count the expense of complying with any government-mandated program (such as seismic retrofit) against operating expense for the purposes of calculating his ‘fair net operating income.’ The purpose of the rent adjustment provision: should net operating income decline compared with the baseline year (2016), then the landlord can ask for a rent increase above the allowed amount. So the cost of seismic retrofit could indeed push rents higher…but only if the landlord could make the case his profit was harmed.

Here’s the provision regarding the mandated program:

Building improvements, the cost of any improvement mandated by any government statute, rule or regulation enacted after January 1, 2017, major repairs, replacement and maintenance, except to the extent such costs are compensated by insurance proceeds, subject to the condition that said improvements shall be amortized in years according to the schedule below, provided that the hearing officer may use seven (7) years for unlisted items, or such other period of time as is determined by the hearing officer to be reasonable. – Municipal Code 4–6–11 (emphasis mine)

If the landlord can demonstrate to the city that his net operating income has indeed declined relative to the base year he gets the upward adjustment. (Note that no downward rent adjustment is available to a tenant for any banner years enjoyed by the landlord.)

Tenants Narrowly Avoided Bearing the Cost Last Year

Last winter, tenants narrowly avoided a straight pass-through of mandated costs like retrofit. Let’s turn back the clock to January of 2017: staff supporting the Human Relations Commission had provided to a small City Council (liaison) committee a presentation about seismic retrofit.

HRC liaison agenda seismic item 2017-1-12Why include a presentation on seismic retrofit in a meeting about the rent stabilization ordinance if there was not an interest to pass on that cost to tenants? Thankfully the Council liaisons to the meeting (Lili Bosse and Kathy Reims) did not put their weight behind it. When the Human Relations Commission came back with recommendations to City Council one week later, there was no seismic cost-share item.

Yet at the February 24th City Council meeting, wherein Council reaffirmed its intent to cap the allowed rent increase for Chapter 6 tenants at 3% and to impose relocation fees, staff had tucked into the draft urgency ordinance a provision to pass on to tenants 100% of seismic retrofit costs. It comes under the provision for government-mandated programs:

Section 10. The City Council hereby amends Chapter 6 of Title 4 of the Beverly Hills Municipal Code to add new Section 4–6–11 thereto to read as follows:
4–6–11: EXPENDITURE S MANDATED BY LAW: Unless otherwise provided by law, including a requirement of the Municipal Code, the landlord may pass through to the tenant of an apartment unit the cost of any improvement mandated by any government statute, rule, or regulation that became effective on or after January 1, 2017, allocated among all the dwelling units of the building based on the square footage of the apartment units and annualized in accordance with the straight line depreciation schedules allowed under the federal income tax laws. – Draft urgency ordinance 2/24/17 (emphasis mine)

The only government-mandated program contemplated at that time was seismic retrofit. Renters Alliance spoke out against that provision.

We avoided the fate because Councilmember Lili Bosse persuaded fellow councilmembers to include it not as a straight 100% cost pass-through but rather as a capital expense that would be considered if a landlord asked for a rent adjustment. In fact, section 4-6-11 (above) was a new provision in the code for the pass-through; once it was shot down it went away and today the rent adjustment provision takes its place in the municipal code as section  4-6-11.

Another Bite at the Apple!

Now our city is coming back for another bite at the seismic retrofit pass-through apple!

Seismic retrofit ‘cost recovery’ was not included in the scope of the coming rent stabilization policy discussion this fall (which I discuss in an earlier post). The HR&A Advisors task list does not mention seismic (or any other government-mandated program cost recovery). Only this passage concerning ‘fair return’ is included:

The analysis of this [fair return] issue will also address whether there are any net operating income line items that are significantly different in CITY, as compared with the competitive housing market area, which should arguably receive special treatment in the annual adjustment formula and options for doing so. — HR&A Advisors scope of work (emphasis mine)

That could be the loophole that will allow City Council to take another bite at the cost-recovery apple. Tuesday’s study session seismic retrofit discussion, I anticipate, will lay the groundwork for including it in the fall discussion with a very likely pass-through (or cost-sharing) provision to emerge in the final rent stabilization ordinance.

You heard it here first!

But did anybody ask tenants? No. From the staff report, here is a matrix of who was allowed to have input. I’ll note that commissioners are overwhelmingly homeowners, and not tenants.

Seismic retrofit policy input matrix
Nobody reached out to tenants to ask us what we thought about seismic retrofit ‘cost recovery.’

City Council will consider it at the Tuesday, July 24th study session at 2:30 pm at City Hall. Council council will consider the seismic retrofit program at the Tuesday, August 7th study session at 2:30 p.m. in Council chambers. Do you want to lend your voice? Contact me.

[This post has been updated to reflect a postponement of the seismic cost recovery item from 7/24 to 8/7.]

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