Make the Chapter 6 Maximum Rent Increase Floor-Free!

There are many issues up for consideration at Tuesday’s City Council meeting but among the most important is the proposed 3.5% floor on the maximum allowed annual rent increase. That floor allows a landlord a 3.5% increase even when his actual costs don’t increase much when inflation is low. This is nothing more than a City Council subsidy to landlords.

Over the last couple of years our City Council has taken steps to harmonize chapters 5 and 6 of the rent stabilization ordinance. When the city outlawed no-just-cause eviction and added a new ‘disruptive tenant’ reason for termination, a little-noticed change (we noticed!) to the ordinance brought many Chapter 5 tenant protections to Chapter 6 tenants. Now all tenants see a relatively low capped rent increase, relocation fees, and a prohibition on no-just-cause termination.

In fact both Chapter 5 and 6 tenants can see their rate of rent increase rise with consumer prices (read more about it). But where these tenant classes differ is the range in which the rate is allowed to fluctuate.

Chapter 6 Provides a Ceiling But No Floor

When Council in January of 2017 reduced the allowed increase from 10% to 3% it also established that 3% as the floor below which the maximum allowed rent increase would not drop. For the landlord inclined to ask the maximum increase in a low-inflation year, for example, he could demand a 3% increase even if his costs don’t rise at all. That’s the floor established by City Council working as intended.

Here is the relevant clause:

Such increases shall not exceed the greater of: 1) three percent (3%) of the rental rate then in effect, or 2) the percentage equal to the percentage increase, if any, of the consumer price index. -- BHMC 4-6-3(B)

When a landlord’s cost of providing rental housing barely increases and the city still allows him to wring a 3% increase out of tenants, we can look at that 3% as 100% profit. It is a true unearned increment. That’s why the floor has to go: it is an unwarranted subsidy for the landlord.

Chapter 5 Provides a Ceiling But Not a Floor

Chapter 5 rent stabilization is different: when inflation is low (even zero) and consumer prices don’t increase, those tenants will see their maximum allowed annual rent increase drop to near zero too. There is no floor on the Chapter 5 increase. The allowed rent increase, because it is linked to CPI like Chapter 6, can ride inflation down even to zero percent!

Chapter 5 may not include a floor but it does put a ceiling on the increase. If inflation should rise to levels we haven’t seen in decades, Chapter 5 tenants have some protection: the rent increase can’t be more than 8%. Here is the relevant clause:

For annual increases effective on or after December 15, 1981, no such increase shall exceed eight percent (8%) or the CPI as of the date of the notice of increase, computed pursuant to subsection A of this section, whichever is less. -- BHMC 4-5-303(C)

Chapter 5 rent stabilization affects only about 3% of households in rental apartments in Beverly Hills. City Council has indicated interest to leave the more extensive protections for those tenants in place. And we like those protections. That’s why we say, Chapter 5 for everyone! And we could get a lot of the way there by simply removing the floor on the Chapter 6 allowed rent increase.

Why the 3.5% Floor Has to Go

The current 3% floor for Chapter 6 tenants was added to the rent stabilization ordinance in February of 2017. Recent Council discussion showed some consensus on raising that floor to 3.5% — a product of a so-called compromise that we said then produced no real gain for tenants. There is no sugar-coating it: the proposed 3.5% floor is an even bigger giveaway to landlords than the current 3%!

Read the Greatest Threat to Tenants is the Proposed 3.5% Floor on Increases for a more in-depth analysis of the role the floor plays in providing a subsidy to the landlord.

We can show how frequently subsidy would have kicked-in over the past 25 years. It was a period of low inflation and many years a 3.5% floor would have provided a subsidy. This chart shows how infrequently the change in consumer prices (CPI) was quite a bit below the floor. Over that time CPI averaged about 2% so the subsidy on average would have boosted the allowed annual increase up a full point-and-a-half above the actual rate of change in landlord costs.

Change in CPI between 1993-2018 relative to the proposed range on the maximum allowed annual rent increase.
CPI for our Los Angeles region seldom breaks though the 3.5% floor proposed by City Council. Overall the average change in consumer costs runs only 2.3% — far below the proposed floor.

In many years CPI never even approached the 3.5% floor. Each of those would have been a potential subsidy year if a 3.5% to 7.5% range was allowed for the maximum allowed annual rent increase! In years like 2009, just after the crash, when a landlord’s costs probably decreased, the floor would still have allowed a 3.5% rent increase — which probably would have fallen on below-market tenants disproportionately. (Market-rate tenants would both be more price-sensitive and, as shorter-tenure tenants, would be more likely to move.) In a year like that a 3.5% rent increase would return a 100% margin because the landlord’s costs did not increase at all.

How great is the magnitude of that potential subsidy? Let’s look at it by unit size and rent dollars (the most relevant way to think about it). Allowing the landlord to increase the rent at 3.5% given the floor on the range would add a lot of dollars to the average tenant’s rent. Take a hypothetical 10-year period: a tenant paying today’s average rent for a given sized unit would see her 10th year rent much higher if the 3.5% floor were in place.

(The caveat to this hypothetical is that we are using the ten prior years of CPI to project forward how the monthly rent would increase if the next ten years looked the same. Here orange represents the magnitude of the subsidy in dollars which of course increases with unit size as rents are higher.

Maximum potential monthly subsidy per unit
The proposed 3.5% floor would add significantly to the hypothetical tenant’s rent payment after, say, 10 years of tenancy. And because it is applied to the rent it would scale up with higher rents.

Were we to have a period of low inflation as we had; and were a landlord to levy the maximum increase each year on the average tenant, those in a 3-bedroom apartment would pay an extra $858 each month in that 10th year above what they would pay were there no floor in place.

Our Take

We can’t support a floor on the CPI-increase range simply because it would transfer a lot of wealth from tenants to landlords if landlords persist in demanding the maximum increase as we see they do today. That transfer is unnecessary because liking the maximum allowed annual rent increase to CPI is supposed to cover the landlords costs. In reality, linking the increase to 100% of CPI provides more to the landlord than his change in costs.

City Council discussed the 3% floor concept for a total of ten minutes over two meetings without acknowledging the long-term effect on tenants. There were no charts or numbers to guide them. Just a seat-of-the-pants ‘compromise that would bump-up the floor from today’s 3% to 3.5% without any analysis.

As a public service Renters Alliance ran the numbers. Read our analysis for all of the details. The findings support our position that a half-percentage point in unearned bonus or subsidy makes a big difference to tenants and an even bigger difference to landlords.

Let’s get rid of the unnecessary floor on the Chapter 6 maximum allowed annual rent increase!