Next Up for Rent Stabilization Commission: Moratoriums on Rent Increase and No-Fault Eviction

The moratorium on rent increases and the moratorium on no-fault eviction will return to the Rent Stabilization Commission in September for additional discussion and a likely recommendation to the city council to end or amend those COVID-era tenant protections. Indeed commissioners at the last meeting seemed ready to end the moratorium on rent increases as soon as October. Here’s what transpired. Will commissioners also give the nod in September to allowing no-fault evictions to proceed?

Summary

The Rent Stabilization Commission was tasked by city council with recommending whether or when to end or amend tenant protections enacted under the city’s COVID–19 emergency order. First up was the moratorium on eviction for nonpayment. Commissioners agreed to recommend that our local moratorium end when the state’s moratorium expires as soon as September 30th. Beverly Hills tenants could begin again paying full rent as soon as October 1st if city council agrees.

The commission then briefly touched on the moratorium on no-fault eviction. Under this COVID-era protection, tenancy terminations for landlord occupancy, major remodeling, condo conversions and redevelopment were paused. Ordinarily there are not many such terminations in Beverly Hills. And in each case a relocation fee will apply.

After 18 months of the COVID moratorium there will be landlords ready to move ahead with terminations. For example there are planned developments at 149–159 South Maple, 132–144 South Spalding that could displace 38 households in nine buildings. Indeed landlord commissioners were in favor of ending the moratorium. “Get rid of it, it’s enough already,” said landlord commissioner Neal Baseman of the no-fault provision and moratorium tenant protections in general. Landlord commissioner Frances Miller agreed. “Everything comes out of the landlord’s pocket,” she said earlier in the discussion.

A straw poll of commissioners found the majority in favor of leaving the tenant protection in place at least for now. So the commission took no action to recommending an end to the moratorium on no-fault evictions but will likely take up the issue in September.

A far more consequential provision of the COVID emergency order is the moratorium on rent increases. That provision has blocked rent increases for rent-stabilized households (and only rent-stabilized households). Now commissioners appear ready to let this provision sunset too but no action was yet taken to recommend a sunset. Let’s look in detail at the commission’s discussion about post-pandemic rent increases (plural).

Will Tenants Face a Double Rent Increase?

The moratorium on rent increases for rent-stabilized tenants has spared about 7,700 renting households in the city from a rent increase during the pandemic. Many been spared two rent increases since February of 2020 (the moratorium was enacted in March). Many tenants will not know that those increases are not denied but merely delayed as we explained in our post, Expect a Post-Moratorium Double Rent Increase This Year.

Tenants will not know they face a double rent increase in the coming year because the city had not stated that publicly until the August 4th commission meeting. Helen Morales, deputy director of the rent stabilization division, attributed that to this provision of the COVID urgency ordinance 20-O–2806 adopted on March 31, 2020: “Nothing in this Ordinance shall alter the date of annual rent increases in future years.”

The question is when a landlord can demand the delayed rent increase(s). And discussion about how to allow those delayed increases to proceed without undue disruptions to tenants who still owe back rent is what had the commission hamstrung.

Vice-Chair Neal Basement broke the ice. “Is there a way to approve the conclusion of the moratorium on rent increases but do something about alleviating the difficulties tenants may have with two rent increases on top of one another?” That prospect came as a surprise to the rest of the commission.

City attorney Robin Harris explained:

The moratorium is about a delay in the implementation of the rent increases and not a forgoing of the rent increase….The way the ordinance is drafted those rent increase that’s were not implemented during the moratorium could be implemented immediately upon the end of the moratorium.

The issue is timing. The rent stabilization ordinance governs rent increases for rent-stabilized tenants and it allows only one rent increase in any 12-month period. Commissioners were concerned that tenants could see two stacked rent increases — or perhaps one rent increase followed shortly by a second increase on the regular annual date of increase.

Multiple rent increases inside the same 12 months could mean tenants see as much as a 7.8% increase this year if the landlord increases the rent immediately upon expiration of the moratorium and then again to carry forward the delayed rent increase at the current allowed percentage of 3.9%. (Read more: [Expect a 3.9% Rent Increase When the Moratorium is Lifted](Expect a 3.9% Rent Increase When the Moratorium is Lifted ).) (Alternately a lower 3% or 3.1% percentage could be carried forward but we’re waiting for clarification from the city on this point.)

The prospect of a double rent increase raised two questions. Is that even allowed under the rent stabilization ordinance? And how to cushion the blow for tenants if it is allowed? There was uncertainty on the first question although Morales from the rent stabilization division advised the commission they could nevertheless recommend that the double rent increase be allowed. “I would want to consult with the city attorney’s office to make sure we’re comfortable, or the council is comfortable, with making that change,” Helen said.

How to cushion the blow proved more vexing as the two hour discussion on the meeting video shows.

Commissioners Lean Toward Yes on Recommending Rent Increases

Chair Lou Milkowsky at one point in the meeting polled his fellow Rent Stabilization commissioners. Only tenant commissioners Kathy Bronte and Kandace Lindsey-Cerqueira (an alternate member) wanted to maintain the moratorium on rent increases. In favor of sunsetting the moratorium were at-large commissioners Donna Tryfman and Ryan D. Gurman (another alternate); landlord commissioners Neal Baseman and Frances Miller; and tenant commissioner Zachary Sokoloff.

“With our poll it looks like people are in favor of modifying or revoking it,” said Chair Lou Milkowsky. “With that in mind I would like to call for a motion” and landlord commissioner Neal Baseman was quick to oblige: “I would recommend to the city council that the moratorium on rent increases be concluded on the same day as the moratorium is concluded for evictions.” Landlord commissioner Frances Miller quickly seconded the motion.

Baseman asked, “Is there a way to approve the conclusion of the moratorium on rent increases but do something about alleviating the difficulties tenants may have with two rent increases on top of one another?”

Tenant commissioner Kathy Bronte said some owners may be “getting back on their feet” after the pandemic and a 7.8% rent increase could amount to $200-$300 for some families in larger units. “Is there a different way to do it?” Landlord commissioner Frances Miller was not sympathetic. “Just until quite recently, landlords were entitled in Beverly Hills for as long as the city existed a 10% annual increase. I think it was until 2017. So 7.8% is a lot less.”

Miller added that landlords had agreed to limit rent increases to the annual change in consumer prices (CPI) but now talk of a landlord forgoing the delayed rent increase meant “the goal post keeps moving around in favor of the tenants and the disfavor of the landlords.” (In fact, landlords fought a CPI-capped rent increase kicking and screaming. City council then capped the annual rent increase at CPI anyway and that’s where it’s been since February of 2017.)

Miller suggested that landlords could “give leniency” if tenants show cause. “A lot of people can afford it,” she said. There was discussion about qualifying tenants for relief from a doubled rent increase by using the city’s COVID–19 hardship definition. If they qualified they could delay the second increase for example.

Another suggestion was to space the rent increases six months apart. Said Baseman:

I would be willing to modify my motion to provide that no tenant should incur a rent increase in excess of 3.9% within any six month period during the first year after the end of the moratorium on rent increases. So that after the rent increase moratorium ends, tenants can’t get a 3.9% increase and then another increase on top of that within, say, six months….[not] until at least six months after the initial increase.

Under this amendment a tenant would first pay a rent increase of 3.9% upon the expiration of the local emergency and then pay another rent increase either on the regular anniversary of the annual rent increase or, if that anniversary date comes fewer than six months after the first increase, six months after the first increase. In this proposal the subsequent annual increase would then reset the annual date of rent increase for subsequent increases. In effect the regular date of annual rent increase would be brought forward.

Three examples will illustrate alternate outcomes if the moratorium on rent increases is allowed to sunset on September 30th:

1) Keep to the regular annual date of increase regardless. A tenant with a rent increase usually paid in May saw the 2020 rent increase delayed due to the moratorium. The landlord could demand an immediate rent increase of 3.9% upon sunset of the moratorium on October 1st. The landlord would wait until May 2022, which is the usual date of annual rent increase, to raise the rent again. The date of annual rent increase does not change and only eight months elapses between the two rent increases.

While keeping to the date of annual increase is simple to administer some tenants would see two increases in rapid succession. For example a tenant with a January date of annual increase could see the first post-emergency first rent increase on October 1st and then the second on January 1st with only three months elapsed between first and second rent increases.

2) Introduce a six-month buffer and let the annual schedule slip. A tenant with a rent increase usually paid in May saw the 2020 rent increase delayed due to the moratorium. The landlord could demand an immediate rent increase of 3.9% upon sunset of the moratorium, on October 1st, and then carry-forward the May 2021 rent increase as soon as six months later on April 1, 2022. The next rent increase available to the landlord comes in April of 2023 and, thereafter, in April of succeeding years.

That is a compromise that allows the landlord to carry forward the second of two delayed rent increases yet imposes a 6-month buffer between the first and second rent increases. But it requires the annual rent increase schedule to slip to some degree in order to put twelve months between the second post-emergency rent increase and the subsequent year’s (2022) increase.

3) Introduce a six-month buffer and keep to the usual annual rent increase schedule. A tenant with a scheduled rent increase in March saw a total of two rent increases delayed. After the local emergency ends the rent is increased in October and then again six months later in April of 2022. The next increase comes on the regular annual schedule in March of 2023. In this example six months elapses between the October and April rent increases and then only eleven months elapses between that second April increase and the subsequent rent increase.

This hybrid approach allows the landlord to recover as two delayed rent increases fully while keeping the tenant on the regular schedule. However the tenant will see two periods between rent increases that are fewer than 12 months apart.( Again the rent stabilization ordinance allows only one rent increase in any 12-month period.)

All options mostly make the landlord whole: they can raise the rent as they would have but for the pandemic; and they recapture some but not all months’ of rent increment that was delayed.

No Clear Means to Cushion the Rent Increases

The greater problem is on the tenant side. Some households may have benefited marginally by saving some months of rent increment but more households were likely to suffer some degree of hardship. An unknown number of households are behind on the rent and now face the prospect paying a higher rent too. That was the task before the commission: how to find the right solution.

Unfortunately, commissioners were really ‘flying blind’ in this discussion. No possible option (such as those above) were presented in the rent stabilization division staff report. Commissioners tried to understand the implications of allowing delayed rent increases to go forward and were at something of a loss to mitigate the hardship for tenants at a disadvantage.

Tenant commissioner Zachary Sokoloff was concerned about it. “The idea of recouping the missed [rent-increase] bump, it feels like it overly burdens the tenant to pay multiple rental increases in one year coming out of a financial hardship… where those tenants are digging themselves out a hole from missed rental payments during the pandemic.”

Landlord commissioner Miller disagreed. “The landlord has been subsidizing these people during COVID and now they’re just trying to get back what they’re entitled to,” she said. “Many tenants don’t need this and are living off subsidies of the landlord. I have tenants who are wealthier. They don’t want to pay the expenses. We pay for them.” She added, “I want to make sure we don’t paint broad strokes that everyone is suffering.”

Tenant commissioner Bronte also was uncertain:

For families who have two or three children who are here, that becomes three to four hundred dollars. That’s a big difference for a family who is trying to just be here, you know with the rent closer to four thousand or more because you have more bedrooms because you want your kids to go to school here. It just seems like it’s a lost money at this time….I’m not comfortable although we have to make a vote.

Like Sokoloff, Bronte was concerned about tenants catching up on the delayed rent increases while catching up on the owed rent. “If you’re COVID impacted you don’t pay the second amount and you defer it another year. But I don’t understand what that means because at the back end you still owe the money.”

Another commissioner suggested spreading out the second post-pandemic increase over a couple of years — “A 1.25% rent increase each year above and beyond what the normal ordinance would allow.” “It’s complicated enough,” Baseman replied. “To carry this [rent increase] forward for three years — I don’t know. That’s not something I want to do as a landlord to keep track of that. You know, enough is enough.”

But there was a motion already on the table and Baseman didn’t want to amend it. Deputy director Morales said the commission could vote on Baseman’s motion. “We can provide additional information and advice [next month] on the legality whether this is in compliance with the ordinance and doesn’t fall short of providing a fair rate of return.”

The vote was taken on the original motion which read: Recommend to the city council to end the moratorium on rent increases on the same date as the moratorium on the evictions for nonpayment of rent is ended; and the rent increase be implemented immediately except that there would be no subsequent rent increase within the next six months irrespective of the natural anniversary date for rent increase.

The motion failed to carry and so commissioners continued to toss out ideas. Landlord commissioner Miller again suggested the city could distinguish between tenants who suffer continuing COVID hardship and those who are not affected.

RSO director Morales agreed with that principle in part because it might help any recommended policy pass legal muster. “We have to have a rationale, legally, to say there is a reason why we’re not requiring [a delayed rent increase],” Morales said. “If we just make a blanket statement and say we’re not allowing the rent increase and it’s not tie to something we have a bigger challenge on allowing a fair rate of return for a landlord.”

In other words, if the landlord forgoes some of his otherwise allowed annual rent increase, can he still profitably operate his apartments?

Detour: What is ‘Fair Return’?

The concept of ‘fair return’ originates with an apartment owner’s constitutional right to cover his own increases in operating costs and at the same time provide some increment to grow his net operating income year-over-year. When a locality establishes rent control it must craft its rent control ordinance to generally allow for fair return.

Beverly Hills is no different. Our CPI-indexed allowed rent increase is understood to provide landlords with a fair return (as described) while a provision in the rent stabilization ordinance that has been on the Beverly Hills books allows a money-losing landlord to petitioned the city to raise the rent higher. (Very few landlords have used the provision in the four decades it has been on the books.)

What constitutes a fair return has been adjudicated over the past two decades by California courts. That gives localities like Beverly Hills a clear idea of where to draw the line when it regulates rent. A zero percent increase will not pass muster because generally operating costs do increase.

Beverly Hills simply indexed our allowed annual rent increase to 100% of CPI (3.9% today because the annual change in CPI is 3.9%) but never had a conversation about ‘fair return.’ The 3.9% gives enough cushion to landlords that the city is on relatively safe ground when defending our CPI-indexed percentage.

However Santa Monica and West Hollywood did have the ‘fair return’ conversation and those cities have been able to defend a much lower allowed increase — 75% of CPI — because even with that low an annual increase the landlord still makes money. Why? Because apartments turn over and new tenants pay market rent; and asset appreciation is off-the-charts and appreciation is included in calculating fair return.

When we talk about whether a forgone rent increase during a pandemic impairs the landlord’s ‘fair return,’ we should keep these points in mind:

  • Landlords in Beverly Hills receive an annual rent increase that is as much as one-third larger than landlords do in neighboring cities;
  • Almost half of all Beverly Hills rent-stabilized tenants (45%) moved-in in 2016 or later, according to recent rental unit registry data, and the data show they are paying rents at or very near current market rate;
  • Landlords certainly have not taken it on the chin where it comes to asset appreciation because we see 10% average annual appreciation on multifamily rental properties in the city (read more: Beverly Hills Multifamily Market Heats Up!).

Though Morales from the rent stabilization division and Harris from the city attorney invoked the ‘fair return’ principle, they did not explain to commissioners what that means. Had they explained that landlords are very likely to receive a fair return on their investment despite forgone rent increases it might have given commissioners more options to consider.

Tenant commissioner Bronte seemed half on board with having landlords forgo the rent increase altogether. “It just seems like it’s a lost money at this time,” she said. Landlords may not agree, but eliminating the pandemic-era rent increases would be a great help to households that face the prospect of paying a sharply higher current rent (up 7.8%) as they repay back rent.

Next month at the Rent Stabilization Commission meeting we can expect the city attorney to provide clarification on these key questions:

  • Whether allowing two rent increases within a 12-month period is lawful under the rent stabilization ordinance;
  • What may need to change to make stacked or frequent rent increases lawful;
  • What are the implications to ‘fair return’ from forgoing rent increases; and,
  • The policy particulars concerning forbearance on delayed rent increases for tenants who demonstrate COVID hardship.

Our Take

The newly reconstituted Rent Stabilization Commission deliberated in good faith on the key question before commissioners: whether or not to recommend to city council a modification to any, or all three, of the moratorium tenant provisions in the COVID emergency order. Commissioners agreed to end the moratorium on eviction for nonpayment coincident with the state moratorium but could not come to agreement on the rent increase moratorium. Discussion on no-fault eviction was deferred entirely.

However the city (again) has ill-prepared the commission to grapple with complex concepts like ‘fair return’ or even some aspects of our rent stabilization ordinance and COVID urgency ordinance. Commissioners should not be surprised to learn that post-pandemic rent increases can stack up. The city simply didn’t prepare them for a challenging discussion.

The city also did not outline any policy alternatives for amending or ending the all-important moratorium on rent increases. This is the most significant provision that has affected all tenants and landlords. Yet commissioners came to the discussion armed with a staff report that ran to barely four pages and hardly a sentence at all about the rent-increase moratorium. As a result commissioners had to find their way through a discussion that lasted 2+ hours without any resolution.

Commissioners for example had no table that shows how the date of annual rent increase affects the hypothetical landlord and tenant or how carrying forward more than one delayed rent increase runs afoul of our rent stabilization ordinance. It is impossible to visualize the various options without putting pen to paper and commissioners struggled to find the right solution.

Our Recommendation: Flip the Script on Demonstrating Hardship

Had city staff properly prepared the commission to discuss these complex issues, our commissioners might have arrived at a proposal that Renters Alliance will put forward:

Deny landlords the delayed rent increases and, if any particular landlord can demonstrate that he can’t get a ‘fair return’ without the increase, then let that landlord apply to the city for a rent increase due to hardship. (See Beverly Hills Municipal Code section 4–6–11 (RENT ADJUSTMENTS UPON APPLICATION.)

Sure landlords on the whole would lose the additional rent they could have earned but for the pandemic. But the greater importance is that the many tenants who suffered hardship but did not apply for rent forbearance through the city would not have to now affirmatively qualify. We are talking about merely delaying the imposition of a rent increase for a few months. Would it be worth it?

Keep in mind that relatively few applied to the city to delay the payment of rent (perhaps 5% of households). Presumably many didn’t want to provide the landlord with the required income documentation which is understandable because landlords don’t ever want to provide the city with income documentation either.

So why not flip the script and let landlords demonstrate hardship to recapture the lost rent increase(s)? We are talking about a pandemic recovery measure after all, so  let the landlord come to the city to demonstrate his need. If that’s what it takes for his operation to run profitably then let him meet the burden of proof under B.H.M.C. 4–6–11.

We are confident that few if any landlords will meet that burden of proof because the apartment investing and leasing business is just too profitable. Landlords will be reaping record rents in the years ahead while some tenants relocate or struggle to cover the higher rent and back rent too.