Commission Recommended Relocation Fees: A Bad Deal for Tenants

On December 5th the Rent Stabilization Commission is poised to pass a resolution that will recommend Beverly Hills to change the way the relocation fees are calculated. The new formula would reduce the fee for nine out of ten rent-stabilized households, should they be evicted, and effectively reduces the compensation for moving expenses to a flat $1,000 regardless of apartment size. The commission majority supported a change to relocation fees by a 4–2 vote. Tenant commissioners didn’t support it, though, because it would be a bad deal for tenants.

The relocation fee formula agreed by the 4-2 commission majority at the November the Rent Stabilization Commission appears straightforward: the relocation fee should be three times the median monthly rent for a unit with the same number of bedrooms plus $1,000 for moving expenses and an additional $2,000 supplement if the household includes a senior, disabled person or a minor.

But the proposed relocation fee formula will produce a fee that is several thousand dollars lower for many Beverly Hills rent-stabilized households. Overall 90% of households would see a lower fee. The grace note: the moving compensation component in the formula would provide too little to cover actual moving expenses for many households.

How the New Formula Would Work

The formula recommended by the Rent Stabilization Commission is a bad deal for tenants for a number of reasons, but principally because the low median monthly rents determined by the rent stabilization division for the purposes of calculating the fee underestimate the actual cost of rental housing in today’s market.

Those median monthly rents are intended to approximate the cost of renting a new comparable apartment with the same number of bedrooms. Any difference between the median monthly rents determined by the rent stabilization division and the actual cost of rental housing would be magnified in the relocation fee because the formula multiplies the median monthly rent by three to comprise the bulk of the fee. An underestimate of the market cost of housing will produce an outsized error in the fee amounts compared to what is intended by the formula.

So let’s focus on the way the rent stabilization division determines those median monthly rents. Each July the rent stabilization division will have determined the median monthly rent for apartments sized from studio to 4-bedrooms. The January 5, 2022 staff report cryptically explains the method (emphasized in italics):

The base relocation fee shall be three (3) times the median monthly rent for the same sized unit… calculated on the basis of newly occupied units registered with the City during the preceding January 1st through May 31st; provided that if there is insufficient data in the rent registry for a particular size of unit, the median monthly rent established on the prior July 1st shall be used. — staff report January 5, 2022

We expect that evictions for multifamily redevelopment will increase in the years ahead. More households will receive a relocation fee than in the past. So it may be useful to explain how this works with an example so we can understand how the recommended fee would be calculated. Of course the staff report doesn’t explain it!

Say a Beverly Hills household is evicted from a studio due to no fault of their own to make way for redevelopment. The rent stabilization division will have already determined the median monthly rent for studio apartments in Beverly Hills by tapping data from the rental unit registry. Rent amounts that are paid by tenants who leased a studio between January 1st through May of that year are ordered from smallest to largest and the value that lies at the middle of that range — the median value by definition — becomes the median monthly rent for the purpose of calculating the relocation fee.

The studio household that evicted would receive a relocation fee of $6,017.50 if the Rent Stabilization Commission recommendation is adopted by City Council. That fee is largely based on the median monthly rent for newly-registered studio tenancies. In 2021 that value is $1,672.50, according to the rent stabilization division. Plugging that value into the formula: (3 x 1672.50)+1000 = 6017.50.

Compare that to the current relocation fee which is $6,988.87 for a studio. That’s a $971.37 difference which represents a 14% reduction from the current relocation fee under the commission’s recommended formula. And the recommended relocation formula would produce even greater reductions for 1-bedroom and 2-bedroom households. Our chart shows the difference.

Bedrooms Current relocation fee Recommended fee Difference
0 $6,988.87 $6,017.50 -$971.37
1 $10,323.61 $7,845.01 -$2,478.60
2 $13,986.75 $10,658.26 -$3,328.49
3 $13,986.75 $14,200.00 $213.25
4 $13,986.75 $15,692.50 $1,705.75

The recommended relocation fee formula is the product of seven commission meetings and a 4–2 vote in November. However our two tenant commissioners couldn’t support it. Not because the recommended fees would be much lower (as we reported in an earlier post) but because the $1,000 for moving expenses was not sufficient in their view.

Ironically it isn’t the paltry moving compensation that reduces the fee as much as the way the fee is calculated using those median monthly rents determined by the rent stabilization division. But the division never provided that information; there was no table like the one above for commissioners to discuss. The commission majority simply recommended the new relocation fee formula without assessing the impact on tenants. We did the math in twenty minutes to find how bad a deal it would be for tenants.

Why is the New Formula a Bad Deal for Tenants?

There are two components of the recommended relocation fee that conspire to produce a much lower fee: 1) the median monthly rent used to calculate the relocation fees appears to underestimate the actual cost of rental housing in today’s market; and 2) the paltry $1,000 relocation allowance that underestimates the actual cost of moving house for most households. Let’s look at the moving expenses first.

Moving Compensation is Paltry!

The Rent Stabilization Commission recommends that the revised relocation fee formula should provide a flat $1,000 to households to compensate for the cost of moving house locally. But common sense says that $1,000 won’t move a larger apartment. And we don’t have to rely on our common sense because the city itself has indicated that the estimated cost of the average local move is more than $1,000.

For example, four years ago the city established relocation fees for all rent-stabilized households. At the time the average cost of a local move was estimated to be $1,116 with another $277 added for utilities setup. So four years ago the total estimated moving cost was $1,398 — and that is in 2017 dollars. This chart from a 2017 staff report shows those figures.

Relocation fee description table February 21, 2017 staff report

This compensation is built into the current relocation fees which are adjusted for inflation each year. When adjusted for inflation the moving compensation component would be $1,500 today.

In December 2020 the rent stabilization division again estimated moving expenses and found that a representative average cost for a local move was $1,300. Subsequently staff did another estimate in 2021 and found a wide range of costs that ranged up to $5,000 for a larger household.

The commission saw all of those estimates yet largely brushed them aside in favor of a flat $1,000.  The landlord commissioner that proposed the motion to recommend the new formula, Vice Chair Neal Baseman, refused to accept an amendment to bump it up.

Adding insult to injury, that meager compensation won’t be adjusted annually for inflation. Why? Vice-Chair Baseman also refused a suggestion to adjust for inflation. So that compensation will cede ground to inflation each year. And not a little ground too! The Bureau of Labor Statistics this month posted consumer price data that show the cost of a local residential move is up 13% over last year. That is among the sharpest cost increases for goods and services tracked by the bureau.

Ultimately the landlords’ motion carried 4-2 without tenant commissioner support due to the paltry moving compensation. The better reason to reject it is because the relocation fees as recommended will underestimate the cost of replacement rental housing.

The Formula Underestimates the Cost of Replacement Housing

The culprit behind relocation fees that could be substantially reduced for 90% of rent-stabilized households is the median monthly rent value that is plugged into the recommended relocation fee formula to calculate the fee. Recall the formula: Relocation fee = (3 x median monthly rent) + 1000.

The rent stabilization division proposes to determine this median monthly rent for each apartment size every July by identifying the median value in the range of rents for tenancies that were created during the preceding period of January 1st through May 31st.

These median monthly rents as calculated by the rent stabilization division were provided to commissioners in the November 2021 staff report:

Median market rents in Beverly Hills per RSO division
The rent stabilization division determined that the rents in column three reflect today’s Beverly Hills rental market. We don’t agree!

Do these median monthly rents reflect the cost of rental housing in today’s market? We don’t believe that they do. For one thing, asking rents around town seem quite a bit higher than these figures. How many 1-bedroom apartments rent for $2,281? Our online search of available apartments in Beverly Hills suggest all of these median monthly rents underestimate the actual cost of rental housing in today’s market.

We can see a few reasons why the median monthly rents as determined by the rent stabilization division are too low.

    • These median monthly rents are not the product of a local housing cost study. Instead the figures reflect tenancies created in Beverly Hills since January. Are those figures representative of the rental market? The rent stabilization division made no effort to validate those median rent figures by, say, consulting market titan Costar Realty or public-facing outfits like Zillow. Rent stabilization division staff didn’t volunteer such comparisons and the commissioners didn’t ask.
    • These median monthly rents reflect only tenancies created which may not be representative of today’s market. We suspect the high vacancy rate in Beverly Hills today is a result of landlords either holding out for rents that are too high for the market, or else choosing to sit on empty units in wait for a stronger or more certain market. Either way we see relatively high asking rents as dissuading potential tenants from leasing. Those that did start tenancies this may have been apartment shopping in the bargain bin. We don’t know, exactly, but if true then the tenancies that determine the median market rents are not representative of the market.
    • The median monthly rents are determined by tenancies created in the middle of the pandemic. Is there any worse time to benchmark relocation fees in effect through June of 2022 than during a pandemic when  there is considerable uncertainty in the market? The rent stabilization division comment on it and again the commissioners didn’t ask.
    • Median monthly rents can be determined by a relatively few data points. Only 19 studio apartments were leased in the city between January and August, according to a rent stabilization division report in August, and only 16 three-bedroom apartments were leased. Just one four-bedroom was leased. At what point is the data insufficient to determine a representative median monthly rent? The rent stabilization division didn’t explain this aspect of the methodology and commissioners didn’t ask.

The rent stabilization division itself concedes the last point: this aspect of the methodology may be problematic! From the January 5, 2022 staff report:

If there is insufficient data in the rent registry for a particular size of unit, the median monthly rent established on the prior July 1st shall be used. — staff report

The rent stabilization division’s solution to having too few data points is to tap tenancy data that is even more out-of-date. For example, a relocation fee that is in effect through June 2024 could be established using median monthly rents derived from tenancies created as many as 30 months earlier (in January 2022), under this method. That seems like a recipe for a relocation fee that is not representative of the current rental market.

For all of these reasons Renters Alliance recommended to the commission that it refrain at this time from making a change to the relocation fee. We were joined by the Apartment Association of Greater Los Angeles which also recommended that the commission delay any action. Yet the commission chose to plow ahead.

Instead of determining median monthly rents using registry data the city could instead tap industry data. For example industry behemoth Costar Realty, Inc. provides a range of relevant up-to-date market data culled from Costar partners Apartments.com and Loopnet. The city already pays Costar $1,895 each and every month for that data!

Who Fares Worst? Nearly Everybody!

Reduced relocation fees will make it more difficult for most evicted households to secure replacement rental housing. And the recommended relocation fee formula looks sure to make it more difficult for most households.

We already illustrated the difference between current and recommended fee amounts in the earlier table. We found that a studio occupant would see a 14% smaller fee than today (a difference of a thousand bucks) while 1-bedroom and 2-bedroom households would see a 24% smaller fee (a few thousand bucks less). Households in 3-bedroom apartments would fare marginally better than under the current fee structure and 4-bedroom households would fare much better.

What does that mean for tenants as a whole? On balance 90% of city households would be harmed by lower fees if the commission’s relocation fee recommendation is adopted by City Council. Here is a table that our commissioners didn’t get from the rent stabilization division.

Who benefits and who loses from the recommended relocation fees?
Bedrooms Unit count % Impact
0 686 8.9% Worse 90%
1 3349 43.6% Much worse
2 2907 37.9% Much worse
3 692 9.0% Little better 10%
4 42 0.5% Better

Only 1% of Beverly Hills households would fare substantially better under the recommended relocation fee formula. About 9% (3-bedroom tenants) fare about the same. The rest — fully 90% of households — fare worse. The harm is distributed that way because the majority of our housing stock is studio, 1-bedroom and 2-bedroom and those households would fare much worse. The real beneficiaries — 4-bedroom households — are only 1% of rent-stabilized households.

Rent Stabilization commissioners didn’t discuss this disparate impact because the rent stabilization division didn’t prepare this kind of comparison. Even the staff report that accompanies the draft resolution for the January 5th meeting doesn’t show it. We call that rent stabilization malpractice.

About That Mom-and-Pop Reduction…

The Rent Stabilization Commission has also agreed to allow certain landlords to pay a reduced relocation fee if they own no more than four multifamily units in the city (aside from a single-family dwelling that they may own). The reduction is substantial: a 25% lower relocation fee for most households and a 15% lower fee if the household has been resident for more than ten years.

A 25% reduction would be a loss of $1,500 for a studio household and about $4,000 for 4-bedroom household (under the recommended relocation fee formula). That’s not chump change!

How many tenants would see a smaller relocation fee to benefit their ‘mom-and-pop’ landlord? The rent stabilization division didn’t volunteer that information and the commission didn’t ask before recommending it!

We did the math and estimate that about 384 properties of 2–4 units could qualify for a reduced relocation fee. We estimate about 1,000 renting households could be affected if City Council agrees to this provision. (We arrived at that figure by excluding properties controlled by landlords with a corporate interest and further excluding properties controlled by landlords that appear to own 5 or more units.)

Would knowing that have affected the commissioners 5-1 vote in favor?

What Does This All Mean for Renting Households?

A reduced relocation fee means less money that an evicted households can use for replacement housing. And with a smaller housing budget there won’t be as many available options as may be intended when the commission recommended the relocation fee formula. This is an important point that was not discussed by the commission so we want to explain it.

In theory, a relocation fee which is calculated using an accurate median monthly rent should provide a fee that is sufficient to assist the relocating household with the transition to a market-rate median-priced apartment of the same number of bedrooms in the same rental market.

The premise is that a sufficient relocation fee which reflects the actual cost of housing will provide the relocating household with the widest range of housing options: half of available apartments would be priced higher than the middle of the market, which is what the relocation fee is intended to target, while half would be priced lower.

Conversely, a relocation fee which is calculated using a below-market median monthly rent would provide the household with relocation assistance that is lower relative to the market; there would be fewer options available with that housing budget. So more apartments would be available at a less-affordable higher rent but fewer apartments available at a more affordable rent.

That brings us back to the key question: Does the relocation fee formula as recommended by the commission serve its purpose to help relocating households access the widest possible range of housing options?

We believe it does not. To test that proposition we logged on to apartments.com in early December to search available Beverly Hills apartments in each size category of zero to four bedrooms. We had two values to work with in each category: the median monthly rent as determined by the rent stabilization division using its method (these values were shown in the staff report table at the top of the post); and the median asking rent in the Beverly Hills rental market.

We determined the latter by aggregating all available apartment listings on Apartments.com within each apartment size category and then finding the median value for each category. By definition these median rents mean that half of apartments listed on Apartments.com rent for more and half for less.

Next we plugged our respective values into Apartments.com to see what was available at or below the city’s determined median monthly rent and the actual median asking rent on Apartments.com. If the rent stabilization division’s median monthly rent was an accurate reflection of the market, then we would expect to see  similar availability using either value. (The caveat is that we are assuming that Apartments.com is reasonably representative of the market!)

Our finding: there are significantly fewer apartments renting at, or below, the rent stabilization division’s median monthly rent than are shown as available when we use the median asking rent. In other words, when we plugged-in the city’s median rent value used to calculate the relocation fees we came up with fewer apartments available at our price range.

Our conclusion: the median monthly rents determined by the rent stabilization division underestimate today’s rental market; and the relocation fees generated from those values will be too low. Consequently there will be a narrowed range of housing options available to the evicted household as a result of the recommended relocation fee formula.

All of this is to say that today’s relocation fees are a much better deal for renting households than what is being recommended by the Rent Stabilization Commission. It seems that the rents used to calculate the relocation fees back in 2017 remain a better representation of today’s rental housing prices than the median monthly rents that are plucked from the rental unit registry during a pandemic by the rent stabilization division. This is not rocket science; it is simply common sense.

If adopted by City Council as recommended then the new relocation fees would take effect in July and stay in effect until June of 2023. You can have your say when the Rent Stabilization Commission votes on a resolution to formally adopt its recommendation at the upcoming January 5th meeting. Read the staff report and consult the meeting agenda for your participation opportunity.

Our Take

We were prompted to take a closer look at the impact of the recommended relocation fees when we read in the Courier that the commission’s recommendation will result in higher compensation for most tenants. We called that out as fake news. After a few minutes with our spreadsheet we could see that the commission’s recommended fees would be much lower for 90% of Beverly Hills tenants.

Our Rent Stabilization commissioners never asked exactly how fees under the formula it was recommending would change. But we put the blame squarely on the shoulders of the rent stabilization division. We have seen staff reports from the division on this issue run from barely two pages to well over 100 pages with a riot of poorly-organized attachments and exhibits. The relevant tables, charts and bullet points we referenced here were in the staff reports generally, but those tables were not referenced by commissioners because the material as presented by the division was difficult to use. Nevertheless we went though every staff report dating to November of 2020 to make sense of it all.

Across all of the discussions we saw commissioners try to grapple with the fundamental concepts and details but receive hardly a helping hand from the rent stabilization division. If anything, city staff encouraged the commission to narrow its focus to the most simple option: the Culver City relocation fee formula that is at the heart of this commission’s recommended formula.

Had the rent stabilization division guided the commission through a more systematic and informed discussion we might have seen a different outcome. Instead of the formula praised for “easy math” by a landlord commissioner we might have seen the commission assess the impact of the proposed changes on tenants.

We present this analysis simply to show that changing the relocation fee as recommended by the commission majority will have an impact. And though the commission really didn’t acknowledge it, let’s remember that when a landlord evicts a tenant for no fault of the tenant it can only be because it makes financial sense to the landlord.

Whether it’s for redevelopment, condo conversion, remodeling, or some other use, the financial upside invariably dwarfs the relatively small relocation fees that a landlord would pay today — to say nothing of the reduced fees bestowed by this commission as soon as July if City Council agrees.