Confusion Persists About the Maximum Allowable Annual Rent Increase

The Beverly Hills Rent Stabilization Commission at the July meeting discussed what should be the maximum allowable annual rent increase and agreed to recommend that it be capped at 8% for all rent-stabilized households — which is the percentage cap in place today for longtime Chapter 5 tenants. Reporting on the commission’s recommendation has generated some confusion over what it might mean in terms of rent hikes for coming years. Let’s talk about the cap and more generally about indexing the rent increase to inflation and put it all into the context of the recent City Council decision to allow a 3.1% increase this year.

Confusion about the annual rent increase is inevitable because there has been two parallel but unrelated discussions underway in City Hall as to what the maximum allowable percentage should be.

Post-Moratorium Allowed Increase (Council)

On one track City Council has been discussing since February how to allow landlords to recoup lost income from ‘missed’ rent increases (due to the moratorium) while also trying to cushion the impact on tenants of big rent increases. Inflation is running higher than 8% in our region today. Imagine the city allows the landlord to stack a missed rent increase on top of the 8% rent increase that would have been allowed by our rent stabilization ordinance. That amounts to a double-digit increase.

To avoid that double-digit rent increase, when City Council agreed to sunset the city’s moratorium it allowed landlords a 3.1% rent increase starting July 1, 2022 but only for households that missed a rent increase during the early months of the moratorium. For more information see Rent Can Rise Up to 3.1% for the 2019–20 Missed Rent Increase. Not all households were eligible for that 3.1% rent increase, though, so do have a look at the city’s Notice Regarding Changes to the Urgency Ordinance (May 2022) for how it may apply to you.

So City Council has established a one-off allowed increase of 3.1% for rent-stabilized households that didn’t see a rent increase two years ago; and in a future meeting will discuss what should be the allowed percentage increase in future years. Again this is all about allowing landlords to recoup income lost during the moratorium.

Maximum Allowable Annual Rent Increase (Commission)

On a parallel track the Rent Stabilization Commission since April has discussed whether or not the city should change the way it calculates the maximum allowable annual rent increase in any year. This is unrelated to the post-moratorium allowed rent increase; instead it could affect the percentage allowed in any year going forward relative to inflation. The commission is tasked with sending its recommendation to City Council which, at its discretion, may or may not reflect that recommendation in an amendment to the rent stabilization ordinance.

By way of background, Beverly Hills normally calculates the maximum allowable annual rent increase differently for the few remaining longtime Chapter 5 tenants than it does for most rent-stabilized households. The commission’s April 6, 2022 staff report explained the difference:

For Chapter 5 tenants the maximum allowable rent increase is calculated monthly, using the lesser of 8% or the change in the CPI, calculated by the difference of the sum of the Los Angeles Area CPI for the 12 months preceding the most recent 12 months, and dividing that difference by the lesser of the two 12 months period sum (BHMC 4–5–303). BR For Chapter 6, the maximum allowable rent increase is the greater of 3% or the percentage increase in the LA Area CPI between May 1 of the then current year and May 1 of the preceding year (BHMC 4–6–3). The Chapter 6 maximum allowable rent increase is calculated using the May to May change in CPI annually. BR Both Chapter 5 and Chapter 6 limit annual rent increases to once every 12 months…..

Our emphasis in that excerpt flags the current 8% cap on Chapter 5 rent increases: no matter how high is inflation the percentage increase cannot exceed 8%. Chapter 6 rent increases currently are not capped so that the percentage can increase with inflation. At the July meeting the Rent Stabilization Commission agreed to recommend that City Council amend the rent stabilization ordinance to also put an 8% cap on the Chapter 6 rent increase.

To recap, these are two different tracks: Council is tinkering with the percentage over the next two or three years to allow the landlords to recoup missed income while protecting rent-stabilized tenants from whopping increases, while the commission was asked by Council to consider long-term changes in how the rent increase is ordinarily calculated.

Don’t Confuse the Cap with the Allowed Rent Increase

Local media’s recent coverage of the Rent Stabilization Commission discussion was generally accurate but could give the impression that the commission has recommended an 8% rent increase when actually the commission recommended an 8% cap on the rent increase for Chapter 6 tenants — which would align them with the Chapter 5 cap.

Confusion is understandable because there are two different 8% figures we are talking about. One is the 8% commission-recommended cap; the other is a hypothetical 8% rent increase that would have been allowed in July by the rent stabilization ordinance if City Council hadn’t stepped-in to decide that the allowable percentage is 3.1% this year.

Where the hypothetical 8% provided important context for both the Council’s discussion and the commission’s discussion, it is only a hypothetical. Neither Council nor the Commission proposed to establish the maximum allowable annual rent increase at 8% this year.

What is important to discuss is whether the rents should be allowed to rise for Beverly Hills rent-stabilized tenants at the rate of inflation — in other words 100% of the percentage change in consumer prices (CPI) — or at a rate that is lower than inflation. West Hollywood and Santa Monica allow rent increases at three-quarters the rate of inflation (or 75% of CPI) while Berkeley allows only two-thirds (or 65% of CPI). Those cities have concluded that allowing rents to rise at the same rate as inflation overcompensates landlords relative to their cost of providing the housing.

Unfortunately the commission sidestepped the CPI discussion entirely and in effect decided to stick with the rent-increase formulas for Chapter 5 and 6 that are on the books today. That decision has no bearing on the percentage increase City Council may allow in the next year or two because, again, it is a separate issue.

What’s Next?

At some unknown time City Council will again discuss how to balance the city’s intent to allow landlords to carry-forward missed rent increases with the councilmembers’ concern to protect tenants from large rent increases just when household costs are rising faster than wages. There is no easy way to square those concerns so we anxiously await Council’s next action — especially as a new councilmember comes to the dais and may be the swing vote on important issues like rent stabilization.

The Rent Stabilization Commission at the upcoming August 3rd meeting will be addressing another issue that is related to the maximum allowable annual rent increase: whether to recommend that pass-through surcharges be allowed for, say, water service penalties, refuse fees, capital expenditures (like seismic retrofit) or any other cost paid by landlords. Pass-through charges of course stack on top of the maximum allowable annual increase in the base rent, so they directly add to the landlord’s bottom line while increasing the cost of rental housing to tenants.

In our view, Council should scrap the concept of recouping missed rent increases and instead focus on long-overdue amendments to the rent stabilization ordinance. Of course we have to appropriately balance the landlord’s right to operate with a profit while not overcompensating them with high-percentage rent increases. Other cities have found that balance and we can too.

Both the Council and Rent Stabilization Commission discussions are a reminder that, while we talk about caps and one-off percentage increases, we are delaying amendments to our rent stabilization ordinance that could enhance tenant stability and rein-in certain landlord misbehavior. It looks like we will be waiting on those amendments for some interminable time!

Additional Reading

[Pictured: Rent Stabilization commissioner Zach Sokoloff tries to make sense of CPI, the maximum allowable annual rent increase and the proposed cap on the rent increase.]