Beverly Hills City Council is ready to sunset the city’s residential tenant moratorium. Effective May 31st the two-year freeze on rent increases will come to an end. Rents will rise again but what will that percentage increase be? If the rent was increased today it would rise 3.1%. In July that percentage will change and it is likely to be much higher. The challenge facing City Council is how to deal with the effect of high inflation on the coming rent increases while recouping for landlords the missed rent increases. It is complicated!
Indeed complicated is an understatement. Landlords are champing at the bit to raise rents after at least two years of missed rent increases. Renting households brace at the notion of paying a whopping rent increase when other household costs are rising due to record-high inflation. And it is a dilemma for Council because councilmembers have already expressed interest for making landlords whole for the rent increases they missed during the moratorium. How to protect renting households from an egregious rent increase (or two) after missed rent increases are added in?
Compounding the dilemma is that this is an election year. Three of five councilmembers are up for reelection on June 7th and no one wants to be associated with a whopping rent increase while on the stump. Nevertheless landlords and tenants need some certainty after the moratorium sunsets and a Council decision is likely at the next meeting on April 12th. What’s proposed?
“Let’s Phase It In”
At the April 12th City Council meeting councilmembers discussed how to allow the landlord to carry-forward missed rent increases due to the pandemic without hitting tenants with a whopping rent increase.
Mayor Robert Wunderlich proposed to spread the cost of missed rent increases during the moratorium over a period of several years. But it would not stack the missed percentages on top of the allowed maximum allowable annual rent increase in each of the next few years; instead Wunderlich proposed that the city establish a schedule of set maximum rent increase percentages for those years.
(This applies only to rent-stabilized households in Beverly Hills. That includes both Chapter 5 and Chapter 6 households. Our discussion here will focus on the 95% of rent-stabilized households that are Chapter 6 tenancies — tenancies that began with a rent of more than $600 per month. City Council may treat Chapter 5 tenants differently. In any case, we are not talking about mandatory rent increases but rather the maximum percentage the rent could rise.)
At the March 15th meeting the entire City Council appeared to support the Wunderlich proposal…even if not all councilmembers appeared to grasp exactly how it would work. We weren’t sure either so we asked for clarification from Helen Morales at the RSO office and also Mayor Wunderlich (who proposed it). We’ve distilled it to several points.
Fiscal year time periods
Recall that there is no specific month or window of time when all rent-stabilized tenants receive a rent increase. Unlike some rent control cities which have defined a month or window, Beverly Hills instead allows rents to be increased on a rolling basis as long as no more than one increase is served in any 12-month period. Some tenants pay an increase each year in the same month and some are increased irregularly. That’s why some households had paid a rent increase shortly before the moratorium on rent increases took effect on March 15, 2020 while other households escaped the rent increase.
The Wunderlich proposal does not ask when the rent was last raised foreach tenancy. That is an administrative burden. Instead the city is looking for a remedy for missed rent increases that could be applied to all rent-stabilized tenancies regardless of when the rent was last raised. After all, renting households escaped two or maybe three rent increases by now. Why split hairs about which households paid a rent increase shortly before the moratorium and which didn’t?
In order to simplify the remedy, staff has presented the problem of missed rent increases in terms of fiscal years. That makes some sense because that is how the city sets the Chapter 6 rent increase percentage each year: the city looks at the annual change in consumer prices for our region and allows the rents to rise by that percentage. The new percentage takes effect on July 1st each year, which is the beginning of the city’s fiscal year. The percentage remains in effect to June 30th of the next year (the end of the fiscal year).
When staff presented the issue to Council it categorized the missed moratorium rent increases according to fiscal years and the percentage that would have been allowed that fiscal year:
- July 2019 through June 2020 (3%)
- July 2020 through June 2021 (3%)
- July 2021 though June 2022 (3.9%)
That’s how the Wunderlich proposal identifies missed rent increases and assigns a percentage to each missed rent increase in order to phase-in lost increases by carrying each of those percentages forward to the present and future years.
Carrying-forward missed rent increases
With that in mind we can look at what Wunderlich proposed: carry forward the missed rent increases to present years while potentially delaying the current-day rent increases (which would be higher due to inflation) to some future time.
The first post-pandemic rent increase would be 3.1%. This would be the allowed rent increase for this coming fiscal year from July 2022 through June 2023. It is not yet clear if that percentage increase would be available to landlords when the moratorium sunsets in June; or whether the rent increase would be delayed until July 1st. In any case the percentage increase proposed is 3.1% because that was the percentage that was allowed during the fiscal year from July 2019 through June 2020.
Again Wunderlich proposes to carry forward that 3.1% from the first pandemic fiscal year and establish it as the first allowed post-pandemic rent increase that may be available to landlords as early as June 1st when the moratorium sunsets if they provide the required 30 day notice. Subsequently there could not be another rent increase available for the next 12 months.
It is important to recognize that some tenants did pay a rent increase during the 2019–2020 fiscal year if their rent was raised prior to the moratorium taking effect on March 15, 2020. These tenants did not escape the rent increase but may have to pay for that rent increase if the 3.1% is carried forward and payable by all rent-stabilized tenants in the coming months.
The second post-pandemic rent increase would be 4.2% available to the landlord in July 2023. This is more complicated to explain. One component of that 4.2% is 1.2% that is carried forward from the July 2020 through June 2021 fiscal year. For that period the rent stabilization ordinance would have allowed 3%. But Wunderlich has proposed to carry forward only 1.2% of that allowed 3% for the 2020–21 fiscal year.
Why carry forward only 1.2% when the ordinance would have allowed 3%? Wunderlich pointed out that the change in consumer prices that year was much lower than 3%. The Bureau of Labor Statistics shows that the monthly-calculated year-over-year change in prices over the 12-month fiscal year averaged only 1.2%, he said. So a percentage increase of 1.2% for FY2020–21 would more accurately reflect the actual change in consumer prices paid by the landlord.
So that is one component of the proposed 4.2% increase payable in mid–2023. The other component is a 3% increase that also would be carried forward and payable in mid–2023.
The 3% carry-forward percentage comes from the FY2021–22 missed rent increase of 3.9%. Wunderlich proposes to allocate a portion of it (3%) to add to the 1.2% payable in mid–2023 to make a total increase of 4.2% available to the landlord in mid–2023.
If we are carrying forward only 3% of the missed 3.9% for FY2021–22, then what happens to the other 0.9%? Presumably it is delayed to the next year’s increase in mid–2024. Why split the 3.9% into two parts like that? That reflects an effort to cushion the impact of carrying forward missed rent increases.
The effort to carry forward missed rent increases whole or in part is reflected in this chart based on the discussion had by Council at the March 15th meeting. The green arrows show how certain percentages are carried forward.
What Happens in June of 2024 Then?
To sum up, the Wunderlich proposal would essentially allow landlords most of the three rent increases missed during the moratorium. The recouped increases are effectively packed into two post-pandemic rent increases available this year and the next (mid–2022 and mid–2023 respectively). The first rent increase of 3.1% would be available to landlords in June or July this year. The next rent increase of 4.2% would be available twelve months later in mid–2023.
We don’t know what will happen with the rent-increase percentages we would have paid starting mid–2022 and following in mid–2023. For example a 7% or so increase followed by a high but more moderate percentage the next year. Save that discussion for later, Council said. And that’s the conundrum: this proposal more or less makes landlords whole rent increases missed — even if they weren’t entitled to all of it — while delaying the tough percentages to mid–2024 or later.
Our Argument Against Recovering Missed Rent Increases
To landlords this proposal must suggest a temporal mirage: the closer the landlord gets to being made whole for past missed increases, the father into the horizon does the prospect recede for rent increases to cover today’s higher costs. The landlord would recoup 3.1% from fiscal year 2019–20 once the moratorium sunsets, but he will wait for years to recover what should be a 7% or so rent increase this July. To tenants the proposed schedule of post-pandemic rent increases will seem unduly complex.
It begs the question: Is it even necessary to allow landlords to recover the missed rent increases? The Renters Alliance view is that it is not necessary to allow landlords to recoup lost rent increases.
First, we believe landlords as a whole did not suffer material harm during the moratorium. Most tenants’ rent arrears were paid by Housing is Key (so don’t fall for landlord stories about the poorhouse) and nearly all will find that they are earning the state-mandate ‘fair return’ despite the missed rent increases. That’s because vacancy decontrol (vacant units return to market rent) and asset appreciation both provide landlords with plenty at the bottom line to make up for what they missed.
Second, the landlord can apply to the city for an additional rent increase if he was harmed by the moratorium. The process is prescribed in the rent stabilization ordinance titled Rent Adjustments Upon Application. In the application for an additional rent increase the landlord can show his profit-and-loss statement to the city. The purpose of the process is to ensure a fair return so the landlord cannot be denied it.
Third, this proposed program is too complex to administer. Imagine staff communicating to tenants a schedule of maximum allowable annual rent increases that doesn’t comport with inflation. Tenants may like a relatively low rent increase of 3.1% in a high inflation year. But on the back end tenants will grow angry about a high, carried-over percentage in a low-inflation year. It is likely to sow confusion. Indeed it took several viewings of the Council meeting tape and then additional clarification with the RSO director and the Mayor (who proposed it) to fully understand what is on offer here. That’s why we’re presenting a table to illustrate it!
Third, we are not talking about a lot of money to recover. We did some arithmetic using the citywide average rent for a rent-stabilized apartment ($2,400). Using the carry-forward percentages defined by the Wunderlich proposal, and totaling the missed increases at each percentage over the 25 months since the moratorium went into effect, we find the landlord lost only $2.924.39 on the average tenancy.
(Analysis and table by Renters Alliance.)
Let’s put that in perspective: that is just a bit more than one month’s rent. We see units sit empty for 6 months or a year before getting rented. Yet City Council is considering whether or not to create an elaborate program to carry forward these missed rent increase increments. Is it necessary? Are we legally required to compensate landlords for missed rent? We don’t think so.
Fourth, there are circumstantial factors that suggest it is a bad idea. We already mentioned that some landlords didn’t actually miss a FY2019–20 rent increase because that increase was available to landlords for about three-quarters of all tenancies in the months between July 2019 and March 2020 when the moratorium went into effect.
What about units that sat empty for some long period during the pandemic? There was of course no missed rent increases on empty units. Should tenants who rented one of those apartments later in the moratorium period now have to make the landlord whole for rent increases on a unit that wasn’t tenanted?
Tenants, landlords and the city all materially suffered to some degree during the pandemic. Yet the Wunderlich proposal wants to thread the needle: to allow landlords to make up missed rent increases while protecting tenants from potentially large rent increases in this era of high inflation. However the compromise proposal suggests a political dilemma more than a practical problem. It seems like a complicated calculus to balance what appear to be tenants’ and landlords’ competing interests.
We want to emphasize that this is not about competing interests (zero-sum) but instead about whether landlords were able to earn a ‘fair return’ during the moratorium. If landlords were able to earn a fair return — which is comprised of rents collected, asset appreciation and other revenues like fees and coin laundry — then there is no need to make up for missed rent increases.
In other words there is no need to balance the interests of tenants and landlords because that is not the question that City Council should be asking. It is whether landlords got their fair return as mandated by law.
In our view Council would be better to focus on the question that Mayor Wunderlich posed at the March 15th meeting: whether or not the rent stabilization ordinance’s 100% of CPI rent increase is even necessary to achieve their fair return. That question will take on added salience going forward into a period of very high inflation.
What does 100% of CPI mean to tenants? Let’s take an example. Our city shares a sub-regional housing market with West Hollywood and Santa Monica. Property values and rents are comparable. Those cities allow an annual increase of only 75% of CPI for rent-controlled units. If CPI in our region reaches 7% this year, say, the Beverly Hills ordinance would ordinarily allow a 7% rent increase. Those cities would allow only a 5.25% rent increase. It is a marginal difference but important in the context of the landlord’s fair return.
Funny, we never hear landlords talk about ‘fair return.’ That’s because they always earn it. Their great fear is that City of Beverly Hills has a discussion to ask whether landlords are earning too much of a fair return. Maybe Mayor Wunderlich has offered us an opportunity to ask. In our view that is more worth the Council’s time than spending another minute discussing how much of the missed rent increases to allow landlords to recover.
On a closing topical note, the Rent Stabilization Commission will consider changes to the maximum allowable annual rent increase starting at the April 6, 2022 meeting. Here is the agenda and the staff report. We hope for a structured and informed discussion on this complex topic. However past experience suggest it will receive superficial consideration. Indeed the supreme irony of this commission is that the belabored process we’ve seen play out time-and-again never gets to the foundational concepts. So much time spent churning through what are often uninformed discussions.
Maximum Allowable Rent Increase memo from HRA Advisors (2018)