Proposed Luxury Exemption: Would You Lose Protections?

Beverly Hills City Council first discussed exempting ‘luxury’ rental units from the reach of rent stabilization back in November. About 5% of units by our analysis might fall into that exemption. Subsequently it came back for discussion again in December when a much wider net was cast: as many as one-quarter of units with higher rents in any size category could be affected? How will the luxury exemption affect you?

What is a Luxury Exemption?

City consultant HR&A Advisors explains in a memo to the city describing some policy options. “The basic purpose for including this type of provision is to remove limits on rent for those households that arguably do not require such protections, because of the high incomes implied by high rent levels,” the memo says. That could be a one-time exemption based on rent amount or a program that periodically assesses rent burden (the rent relative to income) of tenants in high-rent units.

Julian GoldThe philosophy behind the luxury exemption is that tenant protections (like a cap on the allowed rent increase and relocation fees) should only go to households that need it. It came into the rent stabilization discussion because landlords and their industry association, Apartment Association of Greater Los Angeles, want to restrict the reach of rent control in Beverly Hills however way they can.

They have filed a federal lawsuit to keep the city from collecting information from landlords and now they look to carve-out as many units as possible from those eligible for tenant protections. The strategy is death by a thousand cuts: luxury exemption, exemption by property size, means-testing, etc.

Mayor Julian Gold appreciates the landlords’ argument for a luxury exemption. “If people pay $10,000 a month rent,” he said, do they need protection?” He doesn’t think so. At the November 20th study session the mayor took the lead in introducing the luxury exemption. “It’s my baby” he said.

But how to do it? We don’t have many examples. Most localities do not have a luxury exemption. (Los Angeles and Palm Springs do exempt some units by rent amount.) For Beverly Hills it would represent a clear break with the past as the rent stabilization ordinance applies to every unit in rental properties of 2-units or more.

Exemption by Median Rent Multiplier

As first presented to City Council, the so-called ‘luxury’ exemption would have identified unis that rent for an amount that falls into some upper-range in each unit-size category. For example the threshold for exemption could be established by identifying the median rent per unit category and then applying a multiplier to get to a threshold rent. As half of households fall above a median rent, of course, the multiplier is necessary to set the threshold higher.

The city’s consultant used three multiples of the median rent for consideration: 1.5 x median, 1.75x or 2x of the median. Depending on the multiple chosen by Council, a luxury exemption would kick in at various rents (as indicated in this table).

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 that is chosen, the higher would be the threshold where the exemption kicks in – and the fewer the households that would be affected. Tenants vulnerable to the luxury exemption should hope for a narrow exemption that uses a higher multiple of the median rent.

To put it these numbers in perspective, a multiple of 2x the median rent in any unit-size tier would affect in total almost 1% of all renting households. That’s the top 1% by rent at least. A lower threshold would touch more households; at 1.5x the median rent a total of about 5% of renting households would be exempted. That’s a factor of five between the narrowest and broadest exemption.

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

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

So the multiple does matter! 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 in that category reduces it further to affect only 16 households.

Renters alliance generated this chart to show how the thresholds would affect households in each unit-size category.

Units exempted at various median rent multiples (chart)

Would exempting fully 5% of households (about 341) using the lowest 1.5x multiple be too many?

Affect on Households by 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 as the city’s rental unit registry does not collect information on tenant income. The consultant called on census data for household incomes associated with unit size categories and then applied the multiples of the median income to identify where on the income ladder might an exemption kick-in.

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 1.5x to 1.75x to 2x median rent) not only touches fewer households but touches households progressively higher up the income ladder. That does begin to meet the objective of a luxury exemption. Again, it is impossible to actually gauge the effect because the census implied household income is just an estimate.

Another Approach: The Top Quarter of Rent-Payers

The consultant’s November memo identified the number of households that could be exempted under various median rent multipliers. But when the exemption proposal returned to City Council for discussion in December, that approach changed: now the exemption might touch 1-in-10 households that pay the highest rent in any unit-size category; or the top 1-in-5 in any category; or even 1-in-4 in any category. That is much larger net!

Let’s compare how many more potentially affected households are exempted under this approach.

1) Compare the widest net: 1.5x median income versus the 1-in-4 top rent-paying households formula. (Look at the bottom line in each table.)1.5x median rent luxury exemption table1-in-4 top rent-payers luxury exemption tableWhoa — that’s five times as many households snared in the luxury exemption net if the city used the 1-in-4 top rent-payer formula!

2) Now compare the middle-sized net: 1.75x median rent versus the 1-in-5 of top rent payers.

1.75x median rent luxury exemption table

1-in-5 top rent-payers luxury exemption table

Wow! The luxury exemption under the 1-in-5 top rent-payer formula would net TEN times as many households as the 1.75x median income formula.

3) Now compare the smallest net: 2x median rent versus the 1-in-10 top rent-paying households.

2x median rent luxury exemption table

1-in-10 top rent-payers luxury exemption table

Again we see that this approach is a much blunter instrument that nets so many more households in the so-called luxury exemption. At its most targeted, the 1-in-10 top rent-payer formula also nets TEN times as many households as does the median-rent formula.

As described in the consultant’s rather hastily-revised (December) luxury exemption memo this alternate approach could touch 1-bedroom households paying rents above $2,250 and 2-bedroom households paying rents above $3,200. Hardly luxury in the Beverly Hills market! Read the the December 18th staff report (p. 10) for more details about the luxury exemption.

Yet Another Approach: Rent Burden

The problem with a threshold based on rent amount (whether calculated by the median multiplier or simply the top slice of rent-paying households) is that it does not take into account the household’s ability to pay. For example the household that stretches to afford a spacious apartment because children are in the house is likely paying more and may fall above some exemption threshold even if the rent is barely affordable to the family. It’s a sacrifice.

The luxury exemption that does not take into account ability to pay presents a double whammy for the family that puts more of their households budget into housing: not only is the rent barely affordable to begin with, but after the exemption the very tenant protections that would keep the rent sustainable (like the capped maximum allowed annual rent increase) would disappear. Before long they are looking for replacement housing.

Ability-to-pay should be an essential part of the luxury exemption threshold. Say the rent falls above the dollar threshold for an exemption AND the household pays less than 30% of household income in rent (the federal measure of burden), then arguably they could better afford it than the family at that rent that pays 50% of household income (‘severely rent burdened in the government’s view).

Whether any household should be exempted is another question entirely! And City Council came to no conclusion on the broader question or the ability-to-pay criterion.

One roadblock to implementing the ability-to-pay criterion in Beverly Hills is that our city knows nothing about the households that rent housing. In most instances the city does not even know the name of the tenant (let alone the household income). And does the city really want to be in the household income verification business?

Note:Beverly Hills did categorically exempt units by rent amount when it adopted Chapter 5 rent stabilization. Units that rented at $600 or less were covered by Chapter 5, all others were effectively exempted. Later, Chapter 6 extended weaker protections to the rest — creating a two-tier system that persisted until October of 2018 when the city extended many Chapter 5 protections to all tenants.

My Takeaway

Ultimately the key policy question is whether to exempt for higher rents and, if so, how wide to cast the exemption net. At the December 18th meeting Council could come to no consensus. It is likely the luxury exemption is one issue that will be discussed by the rent commission.

The tenants position is that no unit should be exempted from rent stabilization. The protections go beyond just the cap on the rent increase; rent-stabilized tenants are also protected from no-just-cause eviction. Also involuntary (but lawful) terminations under Ellis Act, landlord use, or, locally, major remodeling, all obligate notice periods and some benefits that would not be available to exempted households.