Make the Chapter 6 Maximum Rent Increase Floor-Free!

There are many issues up for discussion at the Tuesday City Council meeting, but among the most important for Chapter 6 tenants is the proposed 3.5% floor on the maximum allowed annual rent increase. Chapter 5 and Chapter 6 tenants may be increased annually by the percentage change in consumer prices (CPI) but with a crucial difference: only Chapter 6 tenants could see their rent increased as much as 3.5% in any year even when the landlord’s costs don’t increase at all. This is nothing more than a City Council subsidy to landlords and it should be removed from our rent stabilization ordinance.

Through the last couple of years, City Council has taken baby steps to harmonize chapters 5 and 6 of the rent stabilization ordinance. That is to the good: Chapter 5 tenants had many protections not afforded to most renting households. But by adding to Chapter 6 relocation fees, the prohibition on no-just-cause termination, extended remodeling requirements and more, Council took an important step toward parity for renting households.

Except where the maximum allowed annual rent increase is concerned. When Council in January reduced the allowed increase from 10% to 3%, little-noticed was that the 3% was not a fixed percentage; it could fluctuate with consumer prices (CPI) just like Chapter 5. Also little-noticed was a clause that established an effective floor at that 3% level. When inflation goes down, the allowed Chapter 5 increase follows it down even to zero percent annual increase. Not so for Chapter 6 households: when CPI is zero percent the landlord can still demand 3%. 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)

In other words, when a landlord cost of providing rental housing barely increase in a low-inflation year, the city still allows him to wring a 3% increase out of his tenants. And if his costs don’t increase at all then that year’s rent increase is 100% profit. That’s why the floor has to go: it is an unearned bonus that City Council acknowledges is a subsidy for the landlord. (Read all about it.)

City Council could eliminate the subsidy simply by indexing the maximum allowed annual rent increase to CPI without any floor specified. That’s how Chapter 5 of the rent stabilization ordinance reads. Why not Chapter 6 too? My arguments for jettisoning the subsidy follow.

First, the city is already harmonizing Chapters 5 and 6 with consistent provisions related to the relocation fees, involuntary termination, and most recently extended remodeling. That is all to the good as all renting households should have these protections and City Council should be acknowledged for providing them.

In this regard, any floor, much less the proposed RAISE of the floor to 3.5%, represents a subsidy in any low-inflation year when CPI doesn’t even reach the proposed floor:

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 so many years CPI never even approaches the floor. Each of those is a potential subsidy year for any landlord that would demand the maximum allowed annual rent increase.

Second, keeping a floor on the maximum allowed annual rent increase would accelerate the transfer of wealth to landlords from tenants. Landlords have said they will increase the maximum allowed every year, and that means a floor of 3.5% (or any floor) would overcompensate for the change in his actual costs. Worse, that extra increase will compound annually like any increase. Here is the difference over a 10-year tenancy between a CPI increase (part of the ordinance today) and the 3.5% floor. It adds up!

Chart comparing CPI vs CPI plus the proposed floor of 3.5% for the period 2008-2018.
The proposed floor of 3.5% allows landlords to demand a 3.5% rent increase even in low-inflation years. Because many years are low-inflation, and because those increases compound annually, allowing for a floor ramps up the cost of rent dramatically relative to a rent that is ‘straight CPI.’

Third, there is the magnitude of the subsidy that would be provided through a 3.5% floor. The floor has no effect in years where CPI is greater than 3.5%, but in low-inflation years the floor provides a big subsidy. So big that it could would double or triple the actual increase in the landlord’s cost that year. This chart shows the difference in magnitude between the landlord’s costs (approximated by CPI) and the subsidy in low-inflation years were the floor in place over the past 25 years.

if a floor of 3.5% on the allowed rent increase were in place for the 1993-2018 period.
The extend of the subsidy is evident in this hypothetical illustration of a 3.5% floor in place over the past 25 years. Many years of low inflation makes that 3.5% increase in any or every year quite valuable to the landlord.

In a year like 2009 the allowed 3.5% increase would be 100% profit because the landlord’s costs did not increase at all. Many other years the 3.5% allowed increase would not only cover his costs but double those costs though the subsidy (illustrated in orange).

The bottom line is that the floor will hit hardest our below-market and longer-term tenants. Landlords could use low-inflation years to accelerate the rise of below-market rents to market; and the longer the tenancy the more compounded is the effect of the subsidy. And over the course of a 10-year tenancy the subsidy could really drive up the monthly rent if the landlord demands the maximum increase.

And fourth, the subsidy would simply transfer too much wealth from tenants to any landlord who would demand the maximum allowed annual rent increase year after year. Were we to cycle into low inflation again (not if but when), and on a similar cycle as the years 2008-2018, the subsidy would make up a hugh proportion of an average household’s rent! This chart takes that 10-year economic cycle and projects it forward to estimate the proportion of the subsidy payment each month.

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.

City Council discussed the concept of the maximum allowed annual rent increase range (and specifically the 3% floor) for a total of ten minutes over two meetings. Yet it is among the most consequential decisions that our councilmembers will make. Moreover, staff prepared an analysis and consequently there was no discussion about how the floor would affect tenants.

As a public service Renters Alliance ran the numbers. And they suggest there should be no unearned bonus or subsidy to the landlord at all. Let’s get rid of the unnecessary floor on the Chapter 6 maximum allowed annual rent increase.

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