Draft Rent Stabilization Ordinance is Posted: Time for an Easter Egg Hunt!

There is an important step in the policy process where the needs of the public are served or thwarted by hidden hands: when a staff report and draft ordinance is presented to City Council. A draft ordinance should reflect the broad intent of City Council but also nail down the policy particulars necessary to codify Council direction into law. Sometimes there are surprises. I call these Easter eggs.

The December 18th staff report and attached draft RSO ordinance is released to the public about the same time as it is sent to City Council. That usually occurs on a Friday afternoon. This time it was sent out after 8 pm Friday which suggests some last minute work — and perhaps some some important policy ‘refinements’ negotiated at the final hour in the 4th floor City Hall executive suite. There Councilmembers can meet with department staff and some language can be inserted that subtly, but meaningfully, shapes the policy before it goes before City Council for consideration.

I call these surprise refinements Easter eggs because they are buried in the draft ordinance that is attached to the City Council staff report. It can feel like a hunt to uncover them. And when we do the hidden hand of city staff is made visible. [1]

Let’s take a look at what the staff report and the draft ordinance say and how that compares to what City Council discussed on November 20th.

Potential Losses for Tenants

The duplex exemption may affect many more tenants than anticipated. Here’s the bracing news for tenants in a duplex: “The proposed owner-occupied duplex exemption could result in 415 units (422 minus 7 Chapter 5 units) being exempted from the rent increase protections of Chapter 6 of the RSO.” That’s exactly how City Council constructed the provision. That kind of displacement presumably was anticipated. However the new definition of ‘relative’ to include five generations compounds the harm for tenants (more on that below). From the staff report:

If the owner, his or her spouse, children, grandchildren, parents and grandparents can be the owner occupant, any of those individuals could reside in one of the units and…could increase the likelihood of abuse of the duplex exemption by property owners. Accordingly, staff recommends that for the exemption to apply, either the owner or the owner’s spouse must reside in one of the units of the duplex. — December 18th Staff report (p. 4)

That staff recommendation to require the owner or the owner’s spouse to reside in the duplex was not included in the draft ordinance, however. So this is not exactly an Easter egg. Had it been included in the draft ordinance, though, it would have been an Easter egg that tenants would have been happy to discover. Alas.

Inspections maybe, habitability standard later. The staff report suggests that the city move forward on a two-pronged inspection program — random and driven by tenant complaints — to ensure that all units meet the state’s standard for a ‘tenantable’ unit (i.e., basic health & safety). Council discussed exactly that. The draft ordinance does not address that, but does make reference to “city habitability standards” (also agreed by Council). But the staff report seems to leave open the door on local standards. “Council may choose to establish additional enhanced Beverly Hills habitability standards,” the staff report says (emphasis added). Does this suggest some hesitation on the part of the city to tighten habitability standards? There is precedence for this: ten years ago the city considered elevated standards and a mandatory inspection program and shelved both. (See the staff report p. 9.)

More of the landlord’s relatives may use a unit. The draft ordinance defines ‘relative’ to include five generations of family when it comes to repossessing a unit from a tenant for landlord use. The draft ordinance: “A landlord may recover the possession of an apartment unit if the landlord seeks in good faith to recover such possession for use and occupancy by the landlord or the landlord’s spouse, children, grandchildren, grandparents or parents…” (see p. 11 and p. 23).

Now a family member from any of five generations (including the owner) would be able to bump a tenant. That widens the aperture to increase the opportunities where a landlord can claim a unit for family use and greatly increases the chance that he can install himself or a relative in a duplex unit to trigger the duplex exemption for the adjoining unit (see draft ordinance p. 21).

This is a real Easter egg for landlords because City Council never did discuss including a 5th generation of family for the purposes of landlord use or exemption. How did it happen? First, note that city’s current definition of relative includes just three generations: the owner and/or spouse, children, and parents. When City Council talked about the duplex exemption at the November 20th meeting, councilmembers supported their interest by citing the case of an aging parent. Now, our ordinance already defined parents as a ‘relative.’ But then Councilmember Lester Friedman surprised us by calling for a 4th generation by expanding the definition of ‘relative’ to include grandchildren. As it happens, Councilmember Friedman has five grandchildren, he told the Weekly in 2014. Now each would satisfy the owner requirement.

Again, this is an Easter egg because Council never talked about a 5th generation to include grandparents. The inclusion could add four additional potential candidates to the pool of relatives to trigger a displacement or an exemption! The bright side: the tenant would get 9 months notice as specified by City Council. Not so bright side: it falls short of the year mandated for seniors who get bumped for redevelopment or condo conversions.

The seismic retrofit pass-through is set. Though City Council didn’t nail down a percentage, the draft ordinance came with a 25% tenant pass-through on that mandated expenditure. But if the expenditure is required it also benefits only the landlord; he realizes the full gain. He gets it on the front end if he sells the property. Tenants, in contrast, are on the hook for one-quarter of his costs. The good news is that the amortization period for saddling tenants with that cost is 27 years (which aligns with IRS depreciation and which we support if any cost must be shared).

The bad news is that this draft ordinance includes a provision not before discussed in front of City Council: the tenant will pay for interest on the money whether or not interest was actually incurred. The provision reads: “…including interest incurred or the value of capital at the time the expenditure is made up to eighteen percent (18%) per annum.” Thought experiment: The landlord funds the retrofit himself by pulling out cash from savings because. That money earns much less in a savings account than he would pay to borrow it in our era of rising interest rates. When it comes time to calculate the expense to tenants today, some cost of interest is identified; then that cost is computed over a 27 year term and added to the cost of work; and the tenant gets the bill. Over a 27-year loan period the cost of interest will dwarf the outlay for the work. Should a tenant pay the bill for interest that was not actually incurred? (See draft ordinance p. 3 and p. 37.)

The luxury unit exemption may be much larger than anticipated. This would seem to be an Easter egg for tenants. The ‘luxury’ exemption could have affected nearly 5% of households renting at a rent in the upper range for any unit size category. We calculated that 341 households could have been denied tenant protections under the city consultant’s analysis. The threshold was set according to a multiple of median rent: should the exemption kick in at 1.5 times the median? Or 1.75 times? Or 2 times the median rent?

This ultimate Easter egg is presented in the staff report (p. 10) and in an accompanying hastily-prepared uxury exemption memo attachment. Instead of using a multiple of median rent, as did the earlier method, the new approach identifies households paying above some specified percentile in rent in each unit-size category. The difference is BIG: instead of touching 341 households as the November 20th proposal did, this revised analysis shows that as many as 1,611 households could be affected – more than five times as many!

The difference comes down to how those ‘luxury rents’ thresholds are determined. Imagine rents in any unit-size category are clustered around the median rent (the middle of the range for all units). When the threshold for exemption is 1.75 times the median rent for example (the middle of the three options presented on November 20th) there will be some households paying a rent that falls that high up the ladder. The consultant’s analysis predicted about 141 households of all sizes would fall into the ‘luxury’ category by that measure (about 2% of all units).

But the new luxury formula suggests maybe 20th percentile of rents should be the threshold (likewise this is the middle of the three options). If most rents in any size category are clustered around the median rent then the threshold would reach much farther down the ladder to effectively lop off about one fifth of the households. Indeed the consultant’s hasty analysis shows that 17% of households (1,337 units) would be affected under the revised formula. That is one big Easter egg for landlords!

The staff report cautioned that such a whopping exemption may not serve the city’s interests. After all, that’s a lot of not-exactly-luxury households that may get ensnared in Mayor Gold’s favorite exemption. Per the staff report: “Staff recommends that City Council consider other factors determining a luxury unit exemption and that this exemption be deferred pending further direction to staff about this topic.” As we suggested, rent burden might be a better measure if rent affordability is the metric for the so-called luxury exemption.

Neither Gain Nor Loss

The qualified tenant subsidy is on hold. This is the provision discussed in detail on November 20th that would have created a class of tenants who would qualify for direct cash assistance from a limited pot of money. As Councilmember Bob Wunderlich envisioned it, the program would allows the city to keep the maximum allowed annual rent increase higher — he suggested a range of 4% to 8% — while targeting money to those who most needed it. But it made Mayor Gold uncomfortable. “We’ll take a look at it,” the Mayor said. However from Council support in the November meeting to now, that program may be on the back-burner. As the staff report notes dryly, “Staff recommends that an assessment be conducted to establish the current need for the program.”

The shared RSO fee is higher than expected. We knew that City Council was interested to share the RSO program cost between tenants and landlords but we didn’t know the cost. Now we have a number: $197 per unit to cover the cost of the proposed $1.6 million Rent Stabilization Program office. The fee represents an increase of 250% over the current annual Rent Control Administration fee of $56 (paid by landlords) and is somewhat higher than other rent control programs. Tenants are proposed to share the cost as a 50% pass-through (on top of the base rent). My view is that while it is higher than expected it is a small price to pay if it means the city will effectively regulate rental housing. (See the fee study.)

Now you can call your landlord your ‘housing provider.’ The state’s codes regarding the leasing of housing says ‘landlord.’ Our municipal code for four decades used the term. As defined that included “any person, firm, corporation, partnership, or other entity entitled to receive rent.” Some landlords object to the term ‘landlord,’ evidently, so the draft ordinance includes a subtle change: ‘landlord or housing provider.’ For more than a year city staff have used ‘housing provider’ exclusively. Now we see that codified. (See draft ordinance p. 3 and p. 20.)

Gains for Tenants

On the positive side the draft ordinance included some provisions that are favorable to tenants even if they are only clarifications and not Easter eggs as such.

The big win: relocation fees would be deposited into an escrow account. Council did not talk about it so this is an Easter egg for tenants. The provision in the draft ordinance:

Within five business days of the date when the landlord gave written notice to the tenant that the tenant is required to vacate the rental unit, the landlord shall deposit the relocation fee into an escrow account in the name of the tenant. The landlord shall give written notice of such deposit to the tenant. — Draft ordinance p. 16 and p. 29.

After hearing several cases in which the fee was not paid — including a fee denied to a single mother who was leased an unlawful unit at 152 South Peck and then evicted — somebody in the RSO office saw the virtue in making escrow mandatory. (Tenants called for it back in summer of 2017.)

Seniors and disabled get some protection when a landlord wants their unit. Chapter 6 seniors now get a small measure of protection long provided to Chapter 5 tenants: the landlord must certify that no unit “comparable to the type” that is sought for the owner, or his relative, is available before kicking out a senior or disabled tenant. (That includes any comparable unit rented by “the most recent tenant.”) A senior or disabled tenant threatened with displacement may now have a bit of leverage. (See draft ordinance p. 24) A bonus: ’senior’ is defined as “sixty-two years of age or older” (down from 65). Not exactly an Easter egg — this is a clarification to the code — but welcome nevertheless.

The city updates the definition of ‘major remodeling.’ Chapter 5 tenants long had some protection when a landlord would renovate their unit. Chapter 6 tenants needed no such protection because landlords simply handed out 60-day notices (or used those notices as leverage to force a voluntary ‘buyout’ to allow the landlord to raise the rent later). As staff report (p. 12) acknowledges, the threshold for ‘major remodeling’ kicked in at a dollar threshold that was too low because it had not been updated in 15 years.

“Staff recommends that Consider updating the major remodeling costs in the RSO to be consistent with current remodeling costs.” The difference is that costs today run about 40% higher than when the ordinance section was last amended in 2004. If City Council agrees, then the bar for triggering the protection is more realistic.

After decades of our rent stabilization ordinance stagnating under outdated costs and outmoded assumptions we have a much longer wish list we want to see City Council act on. But as the staff report and draft ordinance show, it’s a constant battle even to ensure our interests are not shortchanged by unexpected provisions (like so many buried Easter eggs) inserted by unseen hands.

  1. These policy tweaks make a big difference because they define the scope of a final ordinance and may limit the reach of tenant protections. In February of 2017 an urgency ordinance was presented to City Council that unexpectedly slashed by one-third the relocation fees adopted just the prior month. It also added an entirely new ‘rent adjustment’ section that proposed to benchmark the landlord’s guaranteed ‘fair return’ to year 2016 profits — a high-water mark for owners. Council allowed those to pass into the final ordinance without discussion.  ↩

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