City Council RSO Study Session #1 [recap]

City Council held the first scheduled rent stabilization study session last Thursday. This latest step in the 18-month process to reform the ordinance is a sign that the endgame is near. In this first study session, our councilmembers suggested what a final rent stabilization ordinance might look like. However they continue to discuss both the key issues and the process itself. Here’s our recap as we look ahead to the second study session on October 18th.

The second-round ‘dialogues’ held this summer effectively established the scope of the changes to the city’s rent stabilization ordinance. It includes eight key policy topics as analyzed and discussed by the city’s consultant: the allowed annual rent increase; relocation fees eligibility and amounts; possible exemption from rent stabilization for smaller properties; the end of no-just-cause tenancy terminations and more. (Read about these options and our recommended positions.)

The staff report for the Council study sessions, though, adds a new set of options: four ’cross-cutting’ policy options groups much like a restaurant’s prix fixe menu. The policymaker can then choose just one from a range that provides greater protections for tenants on one end of the scale to a menu of options more beneficial to landlords. (Indeed that’s how they are presented.)

But crafting public policy via prix fixe menu does a disservice to the complexity of the rent stabilization issue. It has many moving parts that beg close analysis as all of the meetings to date illustrate. At this study session our councilmembers largely sidestepped the prix fixe offering and instead staked out some general views on many of the key topics and effectively signposted their positions going into the coming second study session.

The Consensus Issues

The staff report had teed up six issues on which Council direction was requested. Should the city require landlords to continue to register their tenancies and rents? Should a rent board or commission be created to mediate or adjudicate tenant disputes? Should some subset of tenants qualify for special consideration in some way? Should seismic costs be passed-on to tenants? What about the program fee estimated to be about $178 per unit annually?

For City Council these were the easy questions the found consensus:

Strong YES on the continued registration of rents that are key to maintaining a rental unit registry;

Strong YES on the creation of a rent board or commission comprised of both tenants and landlords;

YES on qualified status for some tenants though councilmembers differed on purpose and benefit;

Strong YES on a seismic pass-through (that was pre-cooked in an earlier meeting); and,

YES on a program fee cost-sharing or pass-through to tenants (as is done in other cities).

An additional question found consensus: the city should look at expanding our Mills Act historic preservation program in order to incentivize some owners to preserve and maintain their ‘character-contributing’ buildings. In our view, the greatest threat to tenants is displacement through redevelopment. Indeed the city encourages it. But this could at least be a band-aid to suggest the importance of preserving our smaller multifamily housing stock.

On seismic Council had already agreed to pass some costs to tenants. The question is how much to pass-through and for how long. The good news is there was no unanimous consent to force tenants to bear the whole cost because (as was pointed out) tenants will see no material return; instead that benefit flows only to the owner.

The remainder of the policy questions are more challenging. Issues like the maximum rent increase, relocation fees, exemptions and no-just-cause require analysis. They resist easy consensus in some instances. Moreover, grappling with them is akin to Council changing a tire while driving the car: there is no real agreement on what the next steps in this process should be. Council is feeling its way though.

Before we touch on individual councilmember remarks, understand that tenants may well gain greater protections but some may also lose ground. Chapter 5 has always limited annual rent increases to the change in consumer prices and average rents reflect it (though allowed increases for Chapter 5 and 6 are closing the gap under the current ordinance). Will City Council also tie Chapter 6 allowed increases to Consumer prices? Will Council allow landlords to pass-through expenses on Chapter 6 tenants that were only allowed for Chapter 5 tenants? [1]

Staking Out Positions

Bob Wunderlich, Councilmember

Councilmember Wunderlich noted his objectives for rent stabilization (RSO) include maintaining resident stability and maintaining the quality of the housing stock. He asked how current rents paid compare with the market rent for any category of unit; how quickly 50% of units, say, turned over as a way of understanding how close aggregate rents in a property were to market rent at any time; and if rents were tied to consumer prices (which he favored) why 100% of the increase in consumer prices is not the right formula. (That Chapter 6 formula of 100% of CPI produces the current 4.1% allowable increase. He thought both a floor and a cap on the allowed increase would be appropriate.)

CM Wunderlich was also interested in a qualified class of tenants to which the city may directly provide a subsidy. He used the example of a subsidy that would take a 1% or 2% off the allowed increase only for that qualified class. Interestingly he ballparked the cost of such a program based roughly on about a quarter of the tenant base (225M in gross rent citywide x .25 x 2% subsidy = $900,000 for an annual program to shave the impact on those qualified tenants of an allowed increase. Mayor Gold seemed cool to the idea. Wunderlich suggested tying the cost of the program to, say, the change in business tax receipts so as to effectively cap the outlay. [2]

On the key issue of ending no-just-cause termination, he is prepared to end it but (like other councilmembers) seemed inclined to refer cases to a rent board for adjudication. For example in cases of retaliation: presumably a board would not allow that termination to go forward. (The alternative is a statutory end to no-just-cause like in our neighboring cities.) He also was open to allowing the board to decide when a relocation fee may not be appropriate.

On the other key issue of exemptions, Wunderlich wondered whether the argument for exempting small-properties because operations costs are higher is actually true. “Are they different for a smaller property?” And even if so, he wanted a narrow exemption — “not a blanket exemption” — perhaps for owner-occupied duplexes and maybe triplexes. And finally to relflect his priority to maintain the rental stock, he was also interested in exploring a pass-through for substantial unit upgrades. That could go to a decision-making body like a rent board, he said.[3]

Lester Friedman, Councilmember

CM Friedman identified his priorities as residential stability and providing RSO protection “to those who need it.” He suggested the ‘mom-and-pop’ case for special consideration might not resonate. “These are defacto business owners – and it is a business and they have to keep up with [habitability] standards.” (By the same token, “those who need it” could mean a limit on the reach of rent stabilization to fewer than the households that get it today.)

On the issue of ending no-just-cause termination he was direct: two-thirds of the 83 evictions between January 2017 and September 2018 were for no-just-cause. (And that may not account for all such terminations.) “That’s troubling. I’ve heard ‘few or no no-cause evictions.’” That needs to be discussed (though he did not commit to ending no-just-cause termination).

On the maximum increase he said “should be a number with variations contemplated” but it is not clear if that meant a percentage with floor and ceiling or something tied to CPI (as tenants have asked). He supported considering a ‘qualified’ tenant class but was not specific.

Lili Bosse, Councilmember

Where Bob Wunderlich threw out a bunch of ideas only to get the conversation going, Lili was more reticent. “For me I feel more comfortable listening.” She wanted to take public input first and then (presumably) suggest her positions in the second study sessions. “I want to allow for the public process.”

On exemptions, during public comment she did question several landlords who had asked for an exemption. Where would they draw the line? At 2 units, 3 units or 4 units? She followed the theme in the discussion. Mom-and-pop is a business, she said, but also she understands the value of owner-occupation. Duplexes fetch the highest rents, so did they need to be exempted on the basis they are more expensive to maintain? Were duplexes something like a single-family renting out their back unit? Again they are a business.

As for no-just-cause, “I do have concerns but some [problem] tenants need to go. She envisioned a board making a determination to terminate and deny fees “if it would fit under just-cause [law].”[4]

John Mirisch, Vice-Mayor

Councilmember Mirisch was not so reticent about sharing his perspective. On no-just-cause termination he was in favor of prohibiting no-just-cause with a rent board to mediate. “Obnoxious tenant? The board can say, OK, go with no fees.” He alternately suggested a trial period for a tenant. “The lease year would be a trial period.” After that the tenant could be terminated without fees. (Currently the city requires fees.)[5]

CM Mirisch likes an empowered rent board — “one tenant, one landlord, maybe a neutral person but no hearing officer” — suggests as a model the city’s water penalty appeals board. As for maintaining the housing stock, he advocates for an extension of the Mills Act preservation incentive to keep smaller ‘character-contributing’ properties from the redevelopment bulldozer.

As for a ‘qualified’ tenant, he seemed open to a means test to exempt some households from RSO provisions. But he cautioned against a “two-tier” system and said any provision must not incentivize landlords to rent to wealthier households so that they are exempted from city RSO. “It’s unintended consequences…”

On the maximum rent increase he likes where it is now (which is 100% of CPI or 4.1% for Chapter 6). He would accept some pass-throughs. CM Mirisch also appeared open to rent-banking but with tight limits. Councilmember Friedman argued for predictability for the tenant who may be surprised by an additional ‘banked’ increase. Mirisch replied, “I’d like some flexibility but not a shock” to the tenant.

His bottom line is maintaining the stock but protecting tenants who live here. That includes restricting RSO to full-time tenants (part-timers aren’t really using the housing stock) and prohibiting AirBnB in rental units.

Julian Gold, Mayor

The Mayor has consistently questioned the economic rationale for rent control. As he has before, he’s wondered aloud why some cities have “backed away” from an established rent control policy or program. City Consultant Paul Silvern from HR&A Advisors observed that he is aware of no city in the country that has “deliberately undid their system.” Gold also has asked whether tenants paying the highest rents really need rent control — “a threshold [rent] beyond which RSO would not apply.” He did not get more specific.

He’s not interested in a subsidy to tenants. He might consider a ‘qualified’ tenant class, but not for subsidy purposes. “Some clearly have to be protected but I have a concern about a long-term subsidy.” IT suggested his ongoing concern about the reach of rent stabilization. For example he expressed support for exemptions for owner-occupied properties (“it deserves different consideration than a rental unit to the public”). However he did not appear to favor a blanket exemption by property size and questioned whether costs are indeed higher for smaller properties. (If so he would consider it he said.)

He supports a rent board “especially related to no-cause” terminations which, he said, could be handled by the board “to fit the circumstance” though this too falls short of the strict for-cause standard under state law. (Reference footnote #4.)

He supports rent banking (property owners have asked for “flexibility” and he called it a “good idea”) but on the allowed rent increase he betrayed no allegiance to CPI or any specific percentage. This is important: he suggested that his approach to deciding the allowable increase may be more concerned with the end return to the landlord than any conceptual approach (as is taken in other rent control cities). The increase would depend on how the other policies are decided. “It gets answered last [and] that number goes up or down,” he said.

Our Take

We will post the video of the entire discussion. It gives a nuanced sense of whether any councilmember is more sympathetic to tenants or to landlords (or neither). But overall it is a credit to our city that this discussion was deliberated, thoughtful, and measured. Above all it reflected the good faith of the current councilmembers whatever their policy inclinations. (That cannot be said of past Councils. There’s a reason why every time rent stabilization reform came up it was shunted to a siding!)

Interestingly there was no question asked of city RSO staff. Not a single question. When CM Mirisch suggested that the next study session staff report reflect what was discussed, Susan Healy Keene, Director of the Community Development Department, was non-committal. Indeed the staff report for the meeting upcoming on October 18th is word-for-word unchanged… except the date!

The key issues remain the allowed rent increase and exemptions; no-just-cause termination; the role of the rent board; and a path to an elevated habitability standard. City Council will certainly decide on the allowed increase and an exemption policy, but on the rent board, which received support, the path is unclear. Tenants and landlords differ about the role of such a body. And how it may adjudicate terminations is a question that may get addressed only well after this ordinance is finalized.

The key issue with regard to the habitability standard is whether city inspectors should enforce or else allow landlords to swear scouts honor that they met the standard. Again, that may get kicked down the road a bit.

It is worth noting that some of this business will undoubtedly span the transition to our next Mayor, John Mirisch, when he takes office in late March. How could it be otherwise? The Mayor may want to wrap it up ASAP but cities with rent stabilization have incrementally crafted their policies over decades. That our city would wrap-up this once-in-a-generation policy reform in just two sessions is a long shot. Renters Alliance will be there every step of the way!

  1. The Beverly Hills RSO ordinance provides two tiers of tenant protections depending solely on the amount of the rent when the apartment was first leased. Chapter 5 disallows no-just-cause terminations, has historically allowed lower annual rent increases but allows some pass-through of landlord costs to tenants; and Chapter 6 (rent stabilization lite) that allows no-just-cause terminations and excludes provisions related to extended remodeling and other protections afforded Chapter 5. The staff report’s ‘cross-cutting policy options’ notably suggests some interest to harmonize the two tiers of rent stabilization in Beverly Hills: Chapter 5 and Chapter 6. Today these tiers offer different levels of protection and some Chapter 5 tenants may lose protections if Council wants to fold these tiers into a uniform ordinance.  ↩
  2. Presumably these ‘qualified’ tenants would qualify by income. An alternate threshold may be the proportion of income paid in rent. ‘Rent burdened’ is a federal category that includes those paying more than half their income in rent.  ↩
  3. The pass-through for luxury upgrades (we will call them) is problematic if it is not voluntary on the part of the tenant. At the same time, this pass-through might encourage an owner to make an investment that benefits the current tenant (as opposed to remodeling when it comes vacant). The NYC market offers a caution: such investments return to owners long-lived pass-through revenue, far longer than the initial outlay which can also be depreciated to the advantage of the owner… but of course not to the tenant because rent is not deductible!  ↩
  4. How to handle terminations outside of state law and the courts is the crux here. If the city crafts its own approach, should a ‘problem’ tenant be terminated simply because he’s a bother to neighbors but who would not be otherwise terminated under for-cause provisions in state law? Should any termination have to rise to the state’s [nuisance] standard but a rent board would make it easier? Councilmembers offered no concrete suggestions but did express concerns about due process for both tenants and landlords and also how a board decision would be appealed.  ↩
  5. There is an important distinction between suggesting a one-year trial period covered by a lease, after which termination can happen and without paying a fee, and the city’s current policy. Today if a tenant comes to the end of her lease; and the landlord will neither extend the lease nor continue to accept rent; then that is considered an involuntary termination and he must pay the relocation fee. Why that’s an important distinction: the landlord cannot say that because the lease is expiring the tenant must go or perhaps pay much more to stay. Either the tenant stays on a month-to-month agreement and pays the lawful maximum increase; or she gets her relocation fee.  ↩

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