Chapter 6 ordinance examined
Commentary 

Tenants Positions on Key Rent Stabilization Issues

Mark Elliot

Here we present tenant positions on the eight key rent stabilization issues identified for discussion by City Council. These include no-just-cause termination, relocation fees, habitability standards, exemptions from RSO, maximum allowed annual rent increase, Ellis Act termination regulations and more.

Preliminary Tenant Issue Positions

The format for the presentation of these positions corresponds to that of the HR&A issue memos: a description followed by numbered policy options. (For more information see the memos and the presentations on our dedicated HR&A materials page.)

Our positions reflect on the numbered policy options because that’s how the city wants to receive our comments. When possible please identify your favored policy option by its number. If you like you may elaborate on your reasoning. Scroll down for more about how to comment on the policy options presented by HR&A. The city is accepting input until the close of business on Friday September 21st.

No-Just-Cause Termination

Tenant position: All residents in rental housing should be protected from eviction for no good cause.

No-just-cause termination policy options (watch the presentation):

  1. No policy change. Tenants cannot support this option. The current policy does not protect tenants and city officials themselves acknowledge that no-just-cause termination discourages tenants from reporting health-and-safety issues. The policy must change.
  2. Allow no-cause evictions for Chapter 5 and Chapter 6 tenancies, but continue to require relocation fees. Tenants cannot support this option. this is actually an expansion of the existing polity that would allow no-just-cause termination for Chapter 5 tenants too. Bad!
  3. Expand eviction protections for families and educators residing in Chapter 5 and Chapter 6 rent regulated units. Tenants cannot support this option. This is merely a carve-out that would protect one class of tenants but do nothing for most tenants and actually end protection against no-just-cause termination for Chapter 5 tenants.
  4. Enact a Just-Cause Ordinance for Chapter 6 Tenants and eliminate no-cause evictions for all units covered under the RSO. Tenants support this option. We must put a stop to landlords ending tenancies without a reason and with no legal process.
  5. Enact a Just-Cause Ordinance for all rental units in the City. Tenants prefer this option. It is preferable to option #4 as it would protect from no-just-cause termination all residents of housing constructed for residential rental purposes. It falls short of West Hollywood and Santa Monica (those cities prevent no-cause evictions throughout their entire rental markets) but it would expand protection to tenants in buildings from 1995 onward and any new rental building constructed going forward.

Relocation Fees

Tenant position: Relocation fees should reflect the estimated actual costs of securing replacement housing and should be paid at the time the landlord notices an involuntary termination. No notice of involuntary termination should become effective until the fees are paid into escrow.

Relocation fees policy options (watch the presentation):

  1. No Policy Change. Tenants support this option. However we do want to see a new 3-bedroom tier added to the fee schedule; and an additional $2,000 paid for any senior, minor or disabled resident in the household (a supplement that should also be indexed to the change in consumer costs or CPI).
  2. Alter Fee Amounts to Account for Additional Criteria. Tenants cannot support this option. Tenants do not support any diminution of the relocation benefit nor do we support a reduction in applicability or eligibility. Note: policy alternative (b) proposes a temporary relocation per-diem benefit for repairs of 30 or fewer days. Tenants do support temporary relocation fees. Temporary relocation fees should be obligated once the city accepts the a Construction Means and Method plan.
  3. Eliminate Relocation Requirements and Fees. Tenants cannot support this option. Tenants will not support any reduction in the relocation assistance whether in fee amounts or scope of the program.

Ellis Act

Tenant position: Prohibit no-just-cause terminations and then adopt restrictions or conditions (longer notice, penalties if proposed development does not occur, etc.) when any tenancy is involuntarily terminated according to Ellis Act provisions.

Ellis Act policy options (watch the presentation):

  1. No Policy Change. Tenants cannot support this option. Households in Beverly Hills rental housing should be protected when eviction for redevelopment, condominium conversions or any other use of the property removes them from their home under the law.
  2. Expand Ellis Act Protections for Chapter 5 Tenants. Tenants cannot support this option. This policy option would better protect only those few households (less than 4%) that already have some protection but leave the rest of us out.
  3. If a Just Cause Evictions Ordinance is Adopted for Chapter 6, Expand Ellis Act Provisions to Apply to Chapter 6 Tenants. Tenants support this policy option. Please bring Beverly Hills in line with most other cities that have rent stabilization on the books.

Habitability Standards

Tenants position: Establish habitability standards that go beyond the state law minimums (for example, a timeline of required renewal of floor and window coverings and interior paint and replacement of fixtures consistent with IRS schedules for depreciation) and implement a mandatory inspection program for all multifamily dwellings.

Habitability standards policy options (watch the presentation):

  1. No Policy Change. Tenants cannot support this option. Tenants need higher habitability standards and we recommend that inspection responsibilities be mandatory and conducted by professional inspectors trained for the task.
  2. Establish a Self-Certification Process. Maybe: Tenants could support a self-certification process with conditions. But it must be backed-up by a periodic inspection program and strict penalties are specified in local ordinance for misrepresentation.
  3. Establish a Habitability Proactive Inspection Program. Tenants support a routinized inspection program. Even better, it should be conducted by housing inspectors (not Code Enforcement officers). For this purpose tenants can support cost-sharing.
  4. Expand the Habitability Standards Similar to West Hollywood. Tenants support a mandatory replacement schedule. That includes fixtures and treatments in line with IRS depreciation schedules.
  5. Establish a Reduction in Rent to Habitability Violations. Tenants support making rent reductions. When ongoing and uncorrected habitability violations impair our use of the property, we should not have to pay full freight.
  6. Create a Mediation Board. Tenants support a tenant-landlord representative body. We believe that the majority of issues can be resolved positively in a dispassionate environment.

Banking of Annual General Adjustments

Tenants position: Rent banking may allow a landlord to accommodate his pricing practices to market conditions with relatively little risk at the present, but tenants bear the risk of unpredictable and perhaps unaffordable rent increases later. We see no rationale for allowing rent banking unless strict conditions are in place to mitigate against that risk. The key concern is the magnitude of the allowed annual rent increase.

Rent banking policy options (watch the presentation):

  1. No Policy Change. Tenants can support this option. Rent banking for Chapter 5 exists today but has little practical effect; there is no rent banking for Chapter 6. We see no need to put the program on the books for Chapter 6 when it might introduce uncertainty and risk for tenants in contravention of the City Council’s interest to enhance residential stability.
  2. Remove the Current Multi-Year Lease Term Restriction on Use of Banking for Chapter 5 Tenants. Tenants cannot support this option. City Council has identified residential stability as a top concern. Rent banking opens the door to unpredictable, even possibly excessive, annual rent increases and that leaves tenants unable to anticipate housing costs from one year to the next. That would be a significant concession by Chapter 5 tenants, and there are relatively few of them so why make the change at this time.
  3. Adopt a Banking Provision for Both Chapter 5 and Chapter 6 Tenants Without Limitations. Tenants cannot support this option. The issue is risk: carrying over banked increments from several years (or more) could push-up any single-year increase beyond the tenant’s ability to pay. It is a risk that escalates with a higher cap on the allowed annual rent increase and the length of the period during which the landlord can carry forward banked increments. That’s why all cities but those with the lowest annual increase caps put tight limits on the program. (This option is apparently provided to make other policy options more palatable.)
  4. Adopt a Banking Provision, but Limit the Total Amount that Rent May be Increased Annually and/or Apply Other Limitations. It is impossible to evaluate this option because no policy particular is included here for consideration or analysis. (Notably the HR&A memo includes no analysis of applicable parameters such as annual cap, term or total cap on carried-over increments.) We cannot recommend that tenants support a provision without the information to properly assess it.

Exemption from Rent Stabilization of Properties With Four Units or Fewer

Tenants position: The memo shows that 9 of 13 rent control cities in California have some exemption in place. Criteria under which an exemption may be offered most commonly include owner-occupation (typically restricted tightly). However the memo provides no data on the extent of owner-occupation of multifamily properties in Beverly Hills at any property size. Tenants do not generally support exemptions. The proposal to exempt 4-unit-and-fewer properties regardless of ownership, for example, would exempt 40% of all residential rental properties comprising 1,344 units of rental housing — a big segment of our rental housing stock for which the city would then take no responsibility to regulate. If Beverly Hills offered an exemption it should exempt only duplexes where owner-occupiers primarily reside — and only for natural persons while they reside there. No LLC or other non-individual ownership entity need apply.

Exemption policy options (watch the presentation):

  1. No Policy Change. Tenants support this option. We believe the city should regulate all residential rental buildings through the rent stabilization program including properties of 2-units and more that are currently regulated. We don’t support any exemption.
  2. Exempt Only Duplexes and/or Triplexes with No Limitations. Tenants cannot support this option. It would take away tenant protections from as many as 612 renting households if triplexes were exempted. This policy option opens the barn door: one-quarter of all Beverly Hills landlords would escape regulation as a provider of rental housing.
  3. Exempt Duplexes, Triplexes and Quadplexes with No Limitation. Tenants cannot support this option. So many properties would escape regulation that it’s tantamount to the open barn door swallowing the barn. Fully 459 of 1,096 currently regulated rental properties (42%) would no longer fall under rent stabilization. That would strip some or all tenant protections from 1,344 households and 28% of them have children in the school district. (This option is apparently included to make the following option more palatable.)
  4. Exempt or Modify Provisions for All or Some Combination of Duplexes, Triplexes and Quadplexes, But Only with Specified Owner Limitations. Tenants cannot support this catch-all option. The option does not include enough specifics to property evaluate it. “Some combination” of unit sizes and “one or more of the onsite owner residency or related requirements” employed in comparison cities informs an option seemingly crafted to invite policymaker proposals rather than provide a basis for tenant-landlord discussion.

Rent Increase Application Process

Tenants position: Tenants favor some changes in the way the provision is applied to Chapter 6 tenants, but favor not change in the current application to Chapter 5 tenants. Namely, the rent stabilization ordinance provision that allows a landlord to demonstrate that his ‘fair return’ has been negatively affected by rent control should not use year 2016 as an income benchmark but instead let’s look at how neighboring cities implement their version of this state-required provision.

Rent adjustment policy options (watch the presentation):

  1. No Policy Change. Tenants cannot support this option. That is, if it leaves Chapter 6 rent adjustment provisions unchanged. The HR&A study shows that Chapter 5 tenants have benefited from far lower rents over time, so we see no need to extend the Chapter 6 adjustment provisions to Chapter 5 tenants (which today bases discretionary increases primarily on hardship and property tax hikes).
    1.5. Tenants support an option that is not provided: option 1.5. We call it the ‘mend it, don’t end it’ option: don’t fundamentally change the framework of rent adjustment but instead reexamine the criteria under Chapter 6 that are used to determine if a rent adjustment request is supportable. Tenants have recommended that the city use a more reasonable period for benchmarking any change in net operating income (not simply year 2016). We recommend the inclusion of a criterion that defines deferred maintenance and distinguishes it from current or ongoing maintenance and improvements for the purpose of allowable expenses for the purpose of calculating net operating income. We also recommend that adjustments be granted only if the property owner is in good standing with regards to code or housing-related violations. And related, that a landlord be in compliance with any habitability standards that may be adopted. (See option #5.) Tenants continue to support the inclusion of seismic retrofit costs as an allowable expense in the rent adjustment determination.
  2. Implement a Uniform Rent Increase Application Process for Chapter 5 and Chapter 6. Two sub-options are included: (A) Apply the current Chapter 6 process to adjustment applications under Chapter 5; and (B) Allow landlords to pass through to Chapter 6 tenants the same automatic/default charges that get passed to Chapter 5 tenants. Tenants do not support this option. While a uniform rent stabilization ordinance may be commendable, merely making a rent adjustment process uniform for both Chapter 5 and Chapter 6 tenants does not get us there. More important, tenants do not support any discussion about mandatory pass-through charges in the context of rent adjustment.
  3. Create a Rent Control Board to Respond to Appeals of Hearing Officer Decisions. Tenants support this option. The creation of a tenant-landlord representative body has precedent in Beverly Hills. Moreover, there should be an appeals process within the city and this kind of board would appear to be the appropriate venue.
  4. Provide Optional Mediation Services in Advance of the Hearing by a Hearing Officer. Tenants support this option. Mediation in principle, and its application to the rent adjustment process in particular, is commendable. However no mediation can be effective without an end to no-just-cause termination. That is suggested by the very few inquiries to the city for mediation services.
  5. Expand the Range of Factors Under Consideration in Rent Increase Application Process. Tenants can support this option with conditions. Tenants can support a criterion that ensures that the landlord is in good standing with regards to his business license and code enforcement; and that he has complied with city habitability standards (should any be adopted). These are checkbox criteria, however, not substantive factors. The focus should continue to be on the ‘fair return’ principle and change in net operating income criterion.

Maximum Annual Rent Increase

Tenants position: Tenants have consistently called for indexing the allowed annual rent increase to the change in consumer prices (as 12 of 14 rent control cities currently do). Up for discussion is the appropriate percentage of CPI, however, as the percentages that those cities employ ranges from 65% of CPI to 100% (as Beverly Hills does today). The key is indexing the allowed annual increase to a measurable standard and not an arbitrary percentage as was long the law for Chapter 6 tenants.
Also proposed for discussion is the passing-through of the landlord’s cost of doing business. Tenants should resist adding additional pass-through expenses. We can agree that certain pass-through costs may be permissible, the scope should be limited to mandated government expenditures or utility penalty surcharges but NOT any cost of operations for which rent is already paid. Tenants can agree to share the cost of a fee imposed by the city to operate the Rent Stabilization Program or mandatory habitability inspections, for example, and any allowed increase should be contingent on the landlord meeting a habitability standard (if adopted).

Annual rent increase policy options (please refer to the presentation and memo posted to our HR&A materials page) for the complete text of these policy options:

  1. No Policy Change. Tenants cannot support this option. We should indeed continue to establish the annual rent increase according to a measurable standard: the change in consumer prices and not an arbitrary percentage. But the percentage of CPI is what matters here: if the city continues with 100% of CPI for Chapter 5 and 6 tenants (which is in effect today), landlords would benefit from both the CPI-indexed rent increase and the increase in value from their equity stake in the property. (Let’s not forget that owning residential rental real estate is a commercial property investment foremost.) That is why seven other rent control cities in California have established their allowed increase at a fraction of CPI (ranging from 65% to 80% of CPI): property owners are making it on the back end on the appreciation of the asset.
  2. Set a maximum dollar amount by which rents may be increased annually, coupled with the existing allowable increases based on CPI. Tenants do not prefer this option. The dollar cap sounds worthwhile, but in practice it is likely to limit the impact to the tenant of compounded rent increases only for higher-rent tenants. As the rent increases year-to-year, and the annual rent increase proportionally increases too, eventually that increase it will bump into the dollar cap. The magnitude of the cap will determine which tenants will benefit, while tenants with increases that do not bump into the cap would not benefit at all. Additionally, as the policy memo notes, the cap may, over time, reduce the disparity between higher-rent tenants and the rest of us. The big caveat: perhaps relatively few higher-rent tenants will benefit, whereas there will be no relief for the rest as rents rise to meet the market (especially if the landlord increases the rent to the maximum allowed each year).
  3. Set a fixed annual maximum allowable rent percentage increase for Chapter 6 tenants and remove the minimum 3% floor when CPI falls below 3%.Tenants do not prefer this option. The memo implies that the current 100% of CPI would remain while removing the 3% effective floor. Removing the floor would benefit tenants in a low-inflation environment because the allowed annual increase would follow the change in consumer prices (CPI) to 3% and below – and improvement on the today’s Chapter 6 policy. (This option does not affect Chapter 5 tenants.) However we may not see a low-inflation environment for years, while rents may continue to increase at a maximum 4.1% (or greater should inflation continue upward). For the foreseeable future there would be no apparent gain to Chapter 6 tenants.
  4. Eliminate allowable maximum and minimum rent increases and set increases entirely on 100 percent or some fraction of percentage change in CPI. Tenants can support this option. This is a reasonable approach that achieves the tenants’ goal: indexing the rent increase to a measurable standard (consumer prices) while contemplating an operating profit fair to the landlord. What is a percentage of CPI? Some rent control cities establish an allowed increase below 100% of CPI (for example 65% or 80%). The rationale is that even at a fraction of the increase in consumer prices the landlord profits (see the footnote). The closer that percentage is to 100% of CPI, however, the more the increase formula would compensate a landlord over and above what he needs to profit despite rising consumer prices. Also, this option eliminates the 3% floor on increases that exists today. That means when consumer prices drops (like in less-inflationary times) the allowed increase follows inflation downward below 3%. Losing the 8% cap (ceiling) on the allowed increase, we believe, is not a sacrifice because we have not seen inflation rise to that level in decades. (Low inflation or deflation is the the more likely long-term outlook even if inflation continues to bump up until the crash.)
  5. Allow more operating expense pass-throughs for Chapter 6 housing providers without an application process. Tenants cannot support this option. Certain pass-through costs are permissible – such as water penalties or trash surcharges perhaps – and tenants do not disagree with cost-sharing of the fee imposed by the city to operate the Rent Stabilization Program or a mandatory habitability inspection program. But tenants cannot support larding on other pass-through expenses that are the expected cost of doing business. After all, that’s why we’re paying rent. So a pass-through for capital costs that are part of property maintenance, for example, will not benefit the tenant, and should not be applicable to Chapter 5 tenants as it is today. As the memo notes of this policy option, “Disadvantages to housing providers: Little to no disadvantage.”
  6. Limit operating expense pass-throughs, either by precluding them or by requiring formal rent increase application processes. Chapter 5 tenants can support this option, but Chapter 6 tenants should exercise caution. Chapter 5 tenants are already subject to numerous pass-throughs costs like an increase in utilities cost, property tax hikes, and government-mandated expenses. They will benefit from precluding pass-throughs or subjecting allowed pass-through costs to a hearing officer process. But fewer than 5% of households are Chapter 5. The rest, Chapter 6 tenants, already have only two pass-through costs allowed, so in the preclude or limit language we may see a door open to new pass-through costs, however they may be limited. (Like when a term limits ballot initiative says “limit office-holders to X terms,” but X really represents an increase of allowed terms. Tricky!) Any pass-through should perhaps be available only when the landlord can demonstrate hardship.
  7. Require apartment buildings to meet habitability standards in order for housing providers to increase rents. Tenants support this option. And landlords who participated in last summer’s dialogues appeared to support this in concept too because they keep up their properties. However this policy option seems misplaced here; instead it should be addressed in the habitability discussion.

Note: Indexing the annual rent increase to something less than 100% of CPI (as have of California’s rent control cities do) is a recognition that property owners already have ample opportunities to profit. These include market rents when any unit is vacated and appreciation over time on the underlying property asset. It is important to note that the formula for evaluating profitability examines net operating income exclusive of debt service on the property. The ‘fair return’ standard under state law is understood not to include costs related to property speculation (financing) but instead operating costs (expenses). Regardless of how a property is acquired the asset historically has appreciated which is another means for the apartment house owner to profit.

Do you have a question about an issue before you make your comment? Get in touch with Renters Alliance!