Landlord Workshop: Mills Act & Rent Adjustment [recap]

City of Beverly Hills held its second landlord education workshop and on the agenda were the city’s Mills Act historic preservation incentive and the rent stabilization ordinance’s rent adjustment process. The Mills Act is a tool our city can use to encourage the maintenance and preservation of local register-eligible multifamily apartments. The rent adjustment allows a landlord to petition for a rent increase higher than would otherwise be allowed.

The October 10th Rent Adjustment Application & Mills Act workshop was targeted to landlords but we attended because any issue of interest to landlords should be of interest to tenants too. But only 17 landlords attended this workshop. Like the tenant workshop before the community interest was underwhelming!

Also these issues should be interesting to tenants because they touch on the preservation of rental housing and rental housing affordability (respectively). Video will air on 10/16 at 8pm, 10/17 at 3:30pm and again on 10/21 at 9pm (BHTV Spectrum channel 10). The workshop can also be streamed on demand.

The workshop kicked-off with the city’s urban designer, Mark Odell, introducing Mills Act historic preservation. Then the deputy director of the rent stabilization program, Helen Morales, explained the complicated rent adjustment process.

Mills Act: A Tax Break for Preservation

The Mills Act historic preservation program allows a property owner of an historic resource to benefit from a significant property tax in exchange for contractually agreeing to maintain and preserve it. The Mills Act is not a tax giveaway. Only legitimate preservation expenses are allowable. The owner must reinvest the tax savings and he is also contractually obligated to preserve the property. The tax break is a public expense of course. In our local Mills Act program both the city coffers and the school district share the burden of the lost tax revenue.

The benefits of the Mills Act are several. First, the property tax break provides funds to support “the long-term maintenance and preservation of the property’s historic features and character” (as the city’s website) phrases it). The tax break allows an owner to use public money for a private purpose — for example to maintain historic features like a roof that entail great expense. The tax break can also be applied toward the maintenance of interior historic features and furnishings. (A new kitchen would not qualify, said urban designer Mark Odell.)

Second, the community benefits from a Mills Act contract because an owner of a property eligible for listing on the city’s local register of historic places could find the tax break tips the balance from redevelopment to preservation. Older apartment houses are a tangible record of our city’s history and besides they lend character to multifamily neighborhoods. We want to keep them and keep them well-maintained.

Third, preserving these structures keeps rent-stabilized rental units on the housing market. Generally speaking that’s true; most property owners will continue to lease their units. That is a great advantage to the community because redevelopment would replace rent-stabilized units with apartments or condominiums that categorically are exempt from rent control. It is important we keep those units as rentals!

However the Mills Act tax incentive comes with a few limitations too. There is nothing in a Mills Act contract that obligates an owner to continue to rent his units. Under state law (Costa Hawkins Rental Housing Act) an owner can simply choose to exit the rental market. The Mills Act contract concerns only historic preservation. It says nothing about staying in the apartment leasing business.

Second, the Mills Act tax incentive may not be a sufficient incentive for an owner or buyer not to redevelop the property. A real estate speculator is not really interested in being in the apartment leasing business. Rents provide operating income but the point is to maximize the value of the land in a sale — and that usually means redevelopment.

(However a Mills Act contract would greatly cushion any increase in property taxes paid by a new buyer. In combination with other limitations that discourage redevelopment in Beverly Hills today — notably height limits and parking requirements — the Mills Act incentive can make the difference.)

Last, the reach of the Mills Act is not broad because it is limited only to local register-listed resources. (And the city has put a cap on the program’s benefit too.) There are not so many apartment buildings that would qualify for registering listing under today’s requirements although the requirements may be changed if we want to expand it. But the value of the Mills Act as a broad apartment preservation tool is quite limited.

We go into more detail about the potential for the program to hang on to our relatively affordable rental housing in our explainer, Mills Act: The Key to Multifamily Preservation?

Today our local register of historic places includes 42 properties but only three of them are apartment houses: Salkin Apartment Building No. 2 (328 South Rexford), Beverly Gardens Apartments (9379‐9383 West Olympic) and the most recent addition, the stately Weller-Schreiber Apartment Building (157 South Crescent). And only one of the listed multifamily properties today benefits from a Mills Act tax incentive: Salkin Apartment Building No. 2.

Perhaps property owners aren’t historically-minded. At this workshop the landlords showed scant interest in the Mills Act; perhaps just one or two asked for more detail.

Landlord Workshop rent adjustment 2019-10-10
Helen Morales, deputy director of the rent stabilization program, presents an overview of the rent adjustment process at the landlord workshop on October 10, 2019.

Rent Adjustment Provision

The rent adjustment provision of the Beverly Hills Municipal Code (section 4–6–11) prompted more discussion among landlords. But even still their questions were not particular incisive. Perhaps most don’t know enough about the process to ask specific questions (it is a complex process under the ordinance); some landlords just had general questions about tenancy.

The rent stabilization ordinance describes succinctly the purpose of the rent adjustment:

A landlord may file a rent adjustment application with the City for all rental units in the landlord’s rental complex to achieve a just and reasonable return…

A “just and reasonable return” is a way of expressing the legal principle that undergirds rent control in California: the concept of ‘fair return.’ A study commissioned by the City of San Jose describes the rent adjustment in the context of ‘fair return’ this way:

A central purpose of individual rent adjustment standards under rent stabilization ordinances is to insure that apartment owners may obtain a fair return in cases in which the annual allowable rent increases are not adequate to provide a fair return. Under the type of fair return standard that is mostly widely used under rent stabilization ordinances, apartment owners have a right to rent increases which are adequate to cover increases in operating costs and provide for growth in net operating income.

“Owners of rent regulated properties have a constitutional right to a ‘fair return,’” says the study. “Cities may select the fair return formulas that apply to fair return petitions. However, the courts are the ultimate arbiter’s of whether a fair return has been permitted.”

Section 4–6–11 of the rent stabilization ordinance sets out the Beverly Hills formula. Which is complicated in that it balances the landlord’s constitutional right to ‘fair return’ on his rental operations against the public interest to limit rent increases (at least in our city for the purpose of maximizing renter stability).

To clarify, the ‘rent adjustment’ is a rent increase allowance over and above the annual rent increase that is permitted by the ordinance in order to boost the owner’s net operating income sufficient to meet the ‘fair return’ standard. Section 4–6–11 codifies the city’s process for allowing (or disallowing) a rent adjustment.

The process is complex. Why weren’t there more landlord questions?

For one thing, there is a long list of enumerated expenses (new roof, new plumbing, landscaping, legal costs etc.) that can be depreciated and included in the rent adjustment determination. Many costs are not allowed (property upgrades, the cost of deferred maintenance, and importantly the cost of financing — the mortgage). A city-contracted hearing officer decides what’s allowed and what the rent adjustment should be (if any).

Some aspects of the process should have prompted greater interest among landlords and may interest tenants if their landlord ever applies. For example:

  • All support for a rent adjustment application is public and available for examination including the landlord’s expenses and current net operating income per B.H.M.C. 4–6–11 (A)(3)
  • Tenants are permitted to attend and participate in the hearing (presumably to deny the landlord the requested rent adjustment) per B.H.M.C. 4–6–11 (A)(4) and 4–6–11 (A)(7)(c)
  • Tenants “shall have the right to seek assistance in developing their positions, preparing their statements, and presenting evidence from a…tenant organization representative” per 4–6–11 (A)(8)

Perhaps there was scant interest form landlords because the rent adjustment process ain’t no cakewalk. Indeed the city has received not one application for a rent adjustment in the two-and-a-half years since the provision was incorporated into the ordinance. That is probably because landlords weren’t hurt by the rent stabilization ordinance changes. (They have been allowed about a 3–4% increase which is more than enough for a ‘fair return.’)

Also, landlords are always unwilling to open their books. To request a rent adjustment they would have to reveal their actual net operating income (which the city’s consultant estimated at 67 cents on every rent dollar). And the properties that most need maintenance wouldn’t even qualify because deferred maintenance is not an allowable expense.

Take-Away

We pressed the rent stabilization office this summer to separate the tenant and landlord workshops because we thought each side would benefit from a presentation tailored to our specific interests. And we continue to believe that. But the larger issue seems to be community engagement: both the tenant and landlord workshops are under-attended.

By the end of this workshop only about 12 landlords remained. Did they know all they needed to about the rent adjustment? Were they simply not interested in historic preservation? Hard to know. But we had hoped for more interest in the Mills Act. It provides a real tax incentive to preserve our most notable apartment buildings — and potentially many beyond those if we relax requirements for local register inclusion — and we need every tool we can get to keep those rental apartments housing Beverly Hills families.