Another Break With the Past: A Luxury Exemption from Rent Stabilization

Beverly Hills City Council appears ready to exempt ‘luxury’ units from the reach of the city’s rent stabilization ordinance. Along with the exemption for duplexes this represents another major break from the past. Since 1978 the ordinance has applied to every unit in multifamily rental properties of 2-units or more. That will further change if City Council embraces a ’luxury’ unit exemption because tenants paying higher rents would be denied tenant protections. Will you be affected?

Update:  As presented to City Council on November 20th, the proposed ‘luxury’ exemption was estimated to affect at most 341 renting households (about 5% of the total). Each would have been denied tenant protections under the rent stabilization ordinance if their rent fell into an upper-range in each unit-size category. That range was determined according to a multiple of the median rent (read more below).
However when it returned to City Council for more discussion on December 18th, the approach to calculating the exemption changed. No longer wasit a multiplier of median rent; now the exemption could ensnare households with a rent that falls into the upper quarter of all rents in any unit-size category. That could include 1-bedroom rents above $2,250 or 2-bedroom rents above $3,200 — a much bigger slice of renting households.
In fact under this proposal as many as 1,611 households could be affected (more than five times as many). Read the hastily-prepared revised luxury exemption memo and the December 18th staff report (p. 10) for more details. Look for another update after this evening’s City Council discussion.

Landlords and their industry association, Apartment Association of Greater Los Angeles, want to restrict rent control in Beverly Hills. Not only have they filed two lawsuits to invalidate the rental unit registry (one of them a federal case!); they want to carve-out as many units as possible from the reach of tenant protections under the rent stabilization ordinance.

One of their primary targets is tenants who pay more rent. The philosophy is that tenant protections like a cap on the allowed rent increase should only go to households that need it. To identify those whom they say don’t need rent control they look for tenants in ‘luxury’ situations: households that pay rent in excess of some dollar limit or perhaps those that earn an income above some threshold. Mayor Julian Gold appreciates the landlords’ argument: “If people pay $10,000 a month rent, do they need protection? I don’t think so.”

The broader strategy is to nibble away at the reach of rent stabilization. That reduces to the greatest extent possible the number of rent-regulated units. And that means fatter margins for landlords. (Even fatter than the 66% margin that the city’s consultant ballparks as the average return to a rental property owner today. The ‘return’ is what’s left over from rents collected after operating expenses are paid.)

Julian GoldAt the November 20th study session, The Mayor took the lead on introducing the ‘luxury’ exemption (“It’s my baby”) but after some discussion then we still don’t yet have specifics. Those will be discussed at the upcoming December 18th meeting. But  we do have some idea where Council may establish the rent limit beyond which a unit is ‘luxury.’  And ‘luxury’ is not as luxurious as you may think. Scroll down to the section Tenant Impact: Luxury Exemptions for some indication of whether you may be affected.

What Does a Luxury Exemption Mean?

A ‘luxury exemption’ implies that a household that is able to rent a nicer-than-average apartment does not need the benefits of rent stabilization. It is a staple argument of the Apartment Association of Greater Los Angeles and industry associations like it: focus rent control on to the part of the renter population that needs it.

The ‘luxury’ exemption removes tenant protections (including the cap on the allowed annual rent increase) from households that meet some threshold. It could be that a household’s income exceeds some threshold — the means test — or that a unit rents for a high rent. We do know that the likely threshold is certainly not the Mayor’s $10,000 figure. A ‘luxury’ exemption at that level would touch few to no renting households in Beverly Hills. We simply don’t have those newer luxury buildings. If it is to be effective an exemption must net many renting households. That means ratcheting thresholds down to reach farther down the economic ladder.

Where to draw the line? Perhaps the most practical aspect of ability-to-pay is the ‘rent burden.’ That is a federal measure of the financial sacrifice a household makes to afford their rental housing.[1] It is different for every household because it is a function of rent amount and household income. The ‘luxury’ exemption then could be calibrated to fall only on households that are not rent burdened.

On the other hand, one could simply look at the rent paid. On November 20th councilmembers appeared to embrace the rent amount as the proxy for ‘luxury.’ (Councilmembers were noncommittal regarding a means test using tenant income.) If rent amount alone is the criterion, then these are the options:

  1. Establishing a dollar cutoff above which rents would be considered luxury (hence the $10,000 thrown around);
  2. Establishing a dollar cutoff above which rents in any unit-size category are deemed ‘luxury’; and,
  3. Establishing a cutoff that is a multiple of the median rent paid by tenants in a unit-size category.

Council agreed to the third option: some multiple of the median rent paid by households in each unit-size tier. These three options were discussed in the city’s consultant’s issue memo.

Tenant Impact: Luxury Exemptions

The city’s consultant presented three multiples of the median rent for consideration. Depending on the multiple of the median rent chosen by Council — 1.5 x median, 1.75x or 2x of the median — the ‘luxury’ exemption would kick in at the rent indicated in this table for each unit-size category. This is the rent that would potentially trigger a ‘luxury’ exemption for a renting household.

Unit-size category (median rent) 1.5 x median 1.75 x median 2 x median
Studio ($1,444) $2,165 $2,526 $2,887
1-Bedroom ($1,900) $2,850 $3,325 $3,800
2-Bedroom ($2,700) $4,050 $4,725 $5,400
3-Bedroom ($3,750) $5,625 $6,563 $7,500
4-Bedroom ($4,975) $7,463 $8,706 $9,950

The higher the multiple-of-the-median-rent that is chosen, the higher is the threshold where the ‘luxury’ exemption would kick in. Of course the higher the threshold, the fewer households that would be touched by an exemption.

Tenants who fear they may be vulnerable to the ‘luxury’ exemption should hope for a narrow exemption using a higher multiple-of-median-rent.

To put it in perspective, a multiple of two times the median rent in any unit-size tier would affect a total of about 1% of all renting households (inclusive of all unit-size categories). In contrast, a lower threshold would touch more households. A threshold at one-and-a-half times the median rent would affect as many as 5% of households in total — five times as many households as under the highest exemption threshold.

Here is a table that illustrates the impact on households across unit-size categories.

< more — Households exempted at various multiples of median rent — fewer >
Above 1.5x Median Above 1.75x Median Above 2x Median
Studio 4 1 1
1-Bedroom 125 40 16
2-Bedroom 176 89 38
3-Bedroom 36 11 6
4-Bedroom 0 0 0

Should the provision exempt 61 households (at the 2x median-rent threshold) or 141 households (1.75x threshold)? Is an exemption that touches 341 households (5% of the total renting population) too many to exempt from tenant protections?

The multiple matters! Raising the threshold from the 1.5 multiple to the 1.75 multiple will affect 85 fewer households in the 1-bedroom category. Going from 1.75 to 2 times median rent reduces the affected number of households by 24 more.

I have generated a chart based on the data to show visually how the thresholds would affect households in each unit-size category.

Units exempted at various median rent multiples (chart)What About Income?

Finally, the consultant’s memo goes on to estimate how the proposed exemption parameters would affect households at certain income levels. It is not precise, however; the city’s rental unit registry does not collect information on tenants so the consultant called on census data for household incomes associated with unit size categories. Then the consultant took a multiple of the median income in that category to identify what an approximate income might be at the various exemption thresholds. Summarized here:

< Lower — Households reached by the exemption at approximated incomes — Higher >
Above 1.5x Median Above 1.75x Median Above 2x Median
Studio $84,365 $98,741 $112,847
1-Bedroom $111,401 $129,967 $148,534
2-Bedroom $158,306 $184,691 $211,075
3-Bedroom $219,870 $256,515 $293,160
4-Bedroom $291,694 $340,309 $388,925

We see that raising the threshold for exemption (from 1.5 to 1.75 to 2 times median rent) not only touches fewer households but touches households progressively higher on the income ladder. That does begin to achieve the objective of the ‘luxury’ exemption. Again, it is impossible to quantify precisely the effect of exemption on households by income because the ‘implied’ household income from the census used here is not precise.

The question for City Council is how tightly the ‘luxury’ exemption should be focused (if adopted) if it is to serve the city’s ends.

My Takeaway

The multiple-of-median-rent threshold used as a proxy for ‘luxury’ effectively lops off the upper segments of rent-paying tenants across unit-size categories. But is that really meeting the city’s objective? Rent burden is the more appropriate way of ensuring that only tenants who need price control on rent would benefit from it. Again rent burden is a federal measure of a household’s ability-to-pay rent.

However our city does not have income information and would have to collect it. That should be no obstacle: the city appears prepared to collect income information at the bottom of the income ladder to administer the ‘qualified tenant’ status program. So why not collect it from high-earners too? The household that wants to means-test out of the luxury exemption will be inclined to provide it.

The bottom-line question is whether Beverly Hills should exclude any tenants at all from the protection of the rent stabilization ordinance. We tried it before in 1978 with Chapter 5 rent stabilization.[2] City Council fixed that exemption a decade later with Chapter 6. This is the first time City Council has revisited the exemption question in decades — a clear break with the past. And more than three hundred households could lose their status as rent stabilized as a result. That means unlimited rent increases and no recourse to other tenant protections too.

The ‘luxury’ exemption appears headed for final agreement at the December 18th meeting. If you fall above one of the possible thresholds for the exemption I’d wait-and-see what Council says; if they give it the OK then I would look to sign a lease immediately to lock in the rent before the landlord gets the news about an exemption.

  1. The Department of Housing and Urban Development calls a household rent burdened when it pays more than 30% of household income for housing. Households that pay more than 50% of income for housing are called ‘severely rent burdened.’ By the way, over half of Bevery Hills renting households are ‘rent burdened’ and about 4-in–10 pay more than 35% of household income in rent. On the other hand, American Community Survey (part of the census) data shows that 13-in–100 renting households here pay less than 15% of their income in rent. That is exactly 1000 households and would make for a very significant exemption from rent stabilization. It could inadvertently capture a few Chapter 5 households who enjoy a very low rent relative to income. But those units are more likely to be in older and sometimes poorly maintained properties — hardly the kind of luxury units targeted by a ‘luxury’ exemption!  ↩
  2. Some rent control cities do allow exemptions but only two out of 14 cities (besides Beverly Hills) have adopted an exemption based on unit rent. (Neither uses the multiple-of-median threshold or employs a means test.) Both cities exempt using the same approach as Bevery Hills did four decades ago in our first rent stabilization ordinance in Chapter 5: households that rented their apartment at a rent below $600 were covered but those that rented above $600 were not. (The other cities set their threshold differently.) There was no unit-size category considered. That made the policy efficient and easy to administer but it did not effective capture the households that should have been exempted but were not. City Council in the 1980s then adopted Chapter 6 of the rent stabilization ordinance to cover all households.  ↩

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