Draft Ordinance is Out: Time for an Easter Egg Hunt!
Putting forth a draft ordinance for City Council review, amendment or acceptance is an important step in the policy process. It is a statement of where a law is going. Because it’s a product of Council direction — not authorship — a draft ordinance will often show the staff’s hand. Sometimes things find their way in there that get approved without much discussion. We call those ‘Easter eggs’: little treasures to be dug up by the community and then cracked open for discussion at the Council meeting.
The December 18th staff report and attached draft RSO ordinance was released to the public about the same time as sent to City Council (usually on a Friday afternoon). This time it was sent out after 8 pm Friday which suggests to us some last minute work. That’s always a clue that some important policy ‘refinements’ are being negotiated at the final hour.
Surprises can include significant policy provisions that depart from Council direction or perhaps some subtle language that has a far-reaching effect on what Council intended. Sometimes it’s a product of the City Attorney’s office: a change that the office feels is necessary to defend the city in case of a challenge. (That’s why the second draft ordinance sprung a bunch of surprises in February of 2017.)
The draft ordinance shapes the discussion as it gets to City Council. It’s the first draft of legislative history, let’s say. Here we see how this draft ordinance compares to what City Council discussed on November 20th.
Easter Egg Hunt!
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 the 7 Chapter-5 units that are protected from the provision) being exempted from rent stabilization protections. But the devil is in the details. What does ‘relative’ mean?
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 (p. 9) 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 (i.e., basic health & safety). Council had preliminarily agreed to adopt an even higher habitability standard, but the staff report leaves open the door on a local standards “Council may choose to establish additional enhanced Beverly Hills habitability standards,” the staff report says. We would have liked to see the inspection program and new habitability standard moved forward together.
More of the landlord’s relatives qualify for ‘owner-occupation.’ The draft ordinance defines ‘relative’ to include five generations of family when it comes to repossessing a unit from a tenant for landlord use (p. 11 and 23):
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…
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. If the provision is adopted by Council into the final ordinance, then any family member from one of five generations of family could bump a tenant for ‘owner-occupancy’ status. That in effect broadens the opportunity to, say, claim an exemption in a duplex (draft ordinance p. 21).
When City Council talked about the duplex exemption at the November 20th meeting, councilmembers supported expanding it to include grandchildren too, which was a fourth generation. (Fun fact: it was a suggestion from Councilmember Lester Friedman, who has five grandchildren as he told the Weekly in 2014.)
The seismic retrofit pass-through may costs tenants real money. Though City Council didn’t nail down a percentage, the draft ordinance came with a 25% tenant pass-through on that mandated expenditure. But the devil is in the 27-year amortization period. Now, that aligns with IRS depreciation schedules, so it’s understandable.
But the draft ordinance includes a provision not discussed by Council: the tenant will pay for interest on money whether or not money was actually borrowed and regardless of whether interest was 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.
This seems intended to compensate the owner for his cost of money, but there may be a large differential between what he would pay for money against his property and what he may impute as a prevailing interest rate (draft ordinance pages 3 and 37). Because if money is not actually borrowed, then there is no established actual rate of interest; the landlord could simply find the highest hypothetical rate.
Moreover, when it comes time to calculating the cost of interest, computing it over a 27 year term means a very high bill for interest paid by the tenant. That potential over-payment increases the wider is the difference between his actual cost of money and the interest rate he imputes.
The luxury unit exemption may be much larger than anticipated. A ‘luxury’ exemption could have affected nearly 5% of households under the Council’s last discussion, which was based on the consultant’s analysis. We calculated then that 341 households could have been denied tenant protections if the exemption threshold is set according to some multiple of median rent: 1.5 times the median, 1.75 times or 2 times the median rent.
But an accompanying, hastily-prepared luxury exemption memo was attached to the staff report that identifies households paying above some threshold percentile in rent in each unit-size category rather than using the median multiple as a threshold under the discussed policy.
The difference is BIG: instead of touching 341 households as the November 20th proposal would have, in our analysis at least, the revised approach could affect as many as 1,611 households – more than five times as many! The difference comes down to how the ‘luxury’ threshold is determined.
Thankfully the staff report cautioned that such a whopping exemption may not serve the city’s interests because a lot of not-exactly-luxury households may get ensnared in the exemption. “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,” the staff report said. (As we had earlier suggested, ‘rent burden’ might be a better measure if affordability is the metric for the so-called luxury exemption.)
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.
Gains for Tenants
The big win: relocation fees would be deposited into an escrow account. Council did not talk about it so this is a positive Easter egg surprise for tenants! The provision in the draft ordinance (p. 16 and 29):
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.
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 if he is to kick out a senior or disabled tenant. (That includes a comparable unit that was rented by the most recent tenant.)
Another 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.
Proposed update to the threshold for ‘major remodeling.’ As staff report (p. 12) acknowledges, the threshold for ‘major remodeling’ long kicked in at a dollar threshold that was too low because the threshold figure identified in the Municipal Code had not been updated in 15 years or indexed to inflation. “Staff recommends that Consider updating the major remodeling costs in the RSO to be consistent with current remodeling costs.”
Costs today run about 40% higher than when the ordinance was last amended in 2004, which means the threshold for triggering a major exemption termination of tenants is relatively much lower. (Note: the remodeling provision is relevant because City Council in October ended no-just-cause termination. Prior, 60-day notices were used which meant no landlord needed to even invoke the threshold for remodeling. He simply evicted.)
Other Things We Noticed
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.)