Since Beverly Hills enacted rent stabilization in 1978 the RSO ordinance has applied to multifamily rental properties of two units or more. A few rental properties escaped its reach, namely condominiums and buildings built after 1995. Now City Council appears ready to categorically exempt many more, including owner-occupied duplexes. It is a major break from precedent with real implications for hundreds of families. Here’s what a duplex exemption means for tenants.
The Case for Exemption
Landlords have called for a categorical exemption for ‘mom-and-pop’ owners. Their argument is that smaller properties are not run by ‘professional’ operators, and that inefficiencies in operation mean higher costs for them. They should be allowed to charge higher rents than would otherwise be allowed by the rent stabilization ordinance.
Likewise some have said that older properties provide “historic charm.” Because they add to the community, and are more expensive to maintain, it is in the public interest to subsidize their operation. So the ‘mom-and-pop’ exemption is proposed for duplexes, triplexes and even fourplex properties. (Coincidentally, the executive director of the Apartment Association of Greater Los Angeles is a proponent of the exemption and he happens to own a fourplex in Beverly Hills.)
The call for a small-property exemption resonated with City Council. At the November 20th study session, councilmembers agreed to exempt some properties but limited it to duplexes and only those that are owner-occupied. Duplexes are most akin to single-family homes, Councilmember Lili Bosse said, and an owner-occupant renting out the other unit is “like a single-family homeowner renting out the backhouse.”
However the implications of a categorical exemption were not fully discussed by City Council; there was no assessment of how many households may be affected or simply displaced by an owner moving-in to take advantage of the owner-occupied duplex exemption.
Though a council majority favored the categorical exemption, Councilmember Bob Wunderlich pushed back. “I don’t understand the rationale,” he said, noting that owners provided no support for their claims of higher operating costs or inefficiencies. The December 18th staff report explains about the proposed exemption.
Why We Can’t Support an Exemption
The reasoning behind the “backhouse’ argument is understandable. And we see value in encouraging owner-occupation. Moreover, some duplex owner-operators have said they want greater control over the tenants in the adjoining apartment if they live there. The latter point is relevant now that the city has outlawed no-just-cause eviction).
Tenants have opposed any categorical exemption for duplex or any other sized property for a few reasons. Beverly Hills is unusual in that it has retained a significant proportion of smaller properties. That means any categorical exemption based on size will be disruptive to relatively more households here than other localities.
Second, owners have provided no data on operations costs, so they have not supported the claimed inefficiencies or higher costs for older properties. Indeed the city’s consultant, HR&A Advisors, found that on average the operating margin for rental property is 67% or more. That’s a fat margin to absorb some of the claimed inefficiencies.
Third, we can’t support reduced or eliminated tenant protections for some class of renting household simply because it’s a smaller property. That said, should any categorical exemption win City Council favor, we hope it is a narrowly-tailored exemption.
Some cities do extend categorical exemptions, though, as the city consultant’s exemption analysis memo makes clear:
Besides Beverly Hills, thirteen other California cities currently have residential rent regulation programs. Four cities do not exempt buildings by number of units (like Beverly Hills). The other nine cities exempt multifamily buildings with two, three and/or four units, although the specifics of these exemptions vary: four cities exempt duplexes only; three cities exempt duplexes and triplexes; and two cities exempt duplexes, triplexes and quadplexes.
What Does Exemption Really Mean?
An exemption from the rent stabilization ordinance means that an owner can increase the rent to the maximum allowed by state law. The state imposes no cap. “The sky’s the limit,” as the Mayor said. And the owner would not be obligated to provide a relocation fee if the household is terminated involuntarily (such as for owner use, remodeling or any other purpose).
While it is unlawful to terminate a tenant for no-just-cause in Beverly Hills today, the reality is that an unlimited increase is an eviction by another name. So an exemption would effectively nullify the most significant protection of tenant stability we have won from the city.
Another benefit to the owner is reduced city oversight. The rent stabilization office will have nothing to say about the unlimited rent increase or an unpaid relocation fee because it would not have any oversight role. It could not intervene to restore a housing service denied either. In effect our local tenant protections would cease at the doorstep of an exempted unit.
We did a bit of back-of-the-envelope analysis to gauge how many renting households may be affected by an owner-occupier duplex exemption. There exist about 7,700 households in 1,096 multifamily rental properties in Beverly Hills. Of those 211 are duplexes. All are rent stabilized today.
Ninety-nine renting households will lose tenant protections immediately. That’s because there are 99 duplex owner-occupiers and each household living adjacent to the current owner would be exempted from RSO provisions. That means no local cap on the maximum allowed annual rent increase and no relocation fees. Those families will be vulnerable to an unlimited rent increase. That would be the duplex exemption working as intended.
Because duplex units are larger (often 3 and 4 bedroom apartments), the affected households are more likely to have children in the schools. That is a class of tenant that City Council particularly wants to protect. Also these larger units fetch the highest rents, on average, the city’s consultant found. So any rent increase on a relatively high base rent will be significant in dollar terms.
Some unknown number of households currently renting in a duplex would lose local tenant protections if an owner moves-in next door. Currently 99 duplexes are owner-occupied which leaves 112 duplex properties not owner-occupied, according to recent registry data. How many of those 112 non-resident owners will move back? That will determine how many of their tenants lose protection.
Additionally, there would be addition incentive to take advantage of the duplex exemption because City Council has expressed an interest to define more broadly an owner’s ‘relative’ for the purposes of owner move-in. Today three generations of family can displace a tenant for owner-occupation under section 4-6-6(H) of the Municipal Code. City Council is poised to allow an owner’s grandchildren to count to, making a total of four generations that could possibly displace a renting household in a duplex to trigger the owner-occupier exemption.
For every new ‘owner’ who moves into a duplex to gain an exemption, a household would be displaced. Currently 112 duplexes are not owner-occupied, according to registry data, and the duplex exemption provides a powerful incentive for the owner to move in — or to move-in a family member. For every instance of landlord use a family will lose their apartment.
An added complication is how that relocated family is compensated. Today a relocation fee applies for any instance of termination for landlord use. But City Council found tentative agreement to prorate the relocation fee when an owner moves-in. The displaced family would get only 10% of the fee for each year of tenancy, under one proposal. Council later walked that back under pressure from Lili Bosse. At the time of the last discussion a full fee was obligated. But that could change again.
In total as many as 323 households could be affected. Assume the 99 owner-occupied units per the registry are indeed occupied by owners; that means the unit adjacent to each of them would be immediately exempted (99). Then there are the 112 duplex properties not owner-occupied today; each provides a units available to owner (112 more). The unit adjacent to each new owner would then become exempt (112 more). That’s a total of 323 renting households that could affected by even a relatively narrow exemption.
Each represents a family that will not benefit from a capped annual rent increase or a number of other protections provided by the rent stabilization ordinance. They would forfeit the longer notice period that precedes a demolition or condominium conversion (as required by the rent stabilization ordinance) and the relocation fee that would otherwise be obligated. Even required notice for major remodeling would be obviated because that family could simple be removed prior with 60 days notice.
City Council discussed none of these consequences even though each could be anticipated. Each is a product of the proposed duplex exemption working as intended.
It is impossible to predict the extent of harm to tenants from the duplex exemption due to some unknowns. Ninety-nine duplexes are indicated as owner-occupied in the registry today, but we don’t know if that is accurate. When registering the property owners were required to simply check off a box for ‘occupied by owner’ on the unit registration form. Those figures have not been verified.
Second, we don’t know how many duplexes may qualify for the ‘owner’ exemption even today. The exemption as proposed defines ‘owner’ as a person, family trust or partnership but not a corporation or limited liability company (LLC). How many of the 99 owner-occupied duplexes is actually owned by an entity that would not be eligible? More analysis is needed.
The December 18th staff report adds a caveat about family trusts too: it recommends that a trust must have had “at least a 50% interest in the property” by a person to qualify as an ‘owner’ under the proposed exemption. But the staff report includes no accounting of how many duplex properties today would meet the revised ‘owner’ qualification.)
And third, we simply don’t know how great an incentive the duplex exemption will prove to be. City Council could choose to tailor the exemption to make it more onerous (like a longer notice period prior to termination) or even more expensive for an owner to gain the exemption. The weaker the incentive the fewer families will be affected.
Opening the door to an exemption from tenant protections for duplex property owners is a break with the past. It should be carefully considered — and analyzed — for the harm it presents to hundreds of households.