RSO Commission Recommends a ‘Seismic’ Pass-Through to Tenants
The Beverly Hills Rent Stabilization Commission has tentatively agreed that tenants should pay for seismic retrofit as a surcharge on top of the rent — an additional $62.50 to $125 monthly per household, according to city staff projections, and that surcharge would be in place for a period of ten years. If City Council agrees, then that pass-through would represent a significant increase in the cost of rent for many households. West Hollywood and Santa Monica think landlords can afford to reinforce their apartment buildings without a pass-through. Why not in Beverly Hills?
At the Rent Stabilization Commission’s August 3, 2022 commissioners reasoned that it’s only fair that tenants and landlords share the bill. Tenants benefit from a safer building and the improvement reduces the risk to the landlord’s property; and the tenant’s contribution would help needy landlords too. “I think we need to do that because we are taking on water, the landlords,” said landlord commissioner Frances Miller. “We’re trying to stay afloat and to keep it a profitable business without gauging the tenants.”
It was a familiar claim of hardship from this commissioner. But does it hold up to scrutiny? Steeply rising asking rents suggest — and rental industry studies show — that it’s a pretty good time to be a landlord.
Seismic retrofit was not the only pass-through up for discussion at this meeting. However it was highlighted by city staff and so commissioners chose to address it first. Helen Morales, deputy director of the rent stabilization division, presented a brief 10-minute overview of pass-throughs. Then commission got to work. And a couple of hours later they agreed: tenants should shoulder some or all of the expense to structurally reinforce vulnerable apartment buildings.
Let’s look at the key issues and then briefly review the commission’s discussion. The commission will continue discussing the seismic retrofit pass-through along with other pass-throughs at the next meeting in September.
What is a Pass-Through?
Helen Morales explained that a Beverly Hills landlord may ‘pass through’ certain operating or capital improvement expenses to tenants. Some need only simple documentation. The landlord may pass-through the cost of refuse collection unless the rental agreement says otherwise. The landlord can also pass-through 90% of any water-use penalty imposed by the city. These are passed-through on a per-unit basis and appear as a surcharge in addition to the rent.
Some rent control cities pass-through a surcharge to pay for administration of the rent stabilization program. In Los Angeles tenants also pay for half of the cost of the city’s systematic housing inspection program. These pass-throughs will likely be discussed here too in the near future.
Some pass-throughs require greater review. Beverly Hills landlords may pass-through the cost of capital improvements, such as exterior painting or a new roof, as well as interior improvements, but only to Chapter 5 households (which are only a few percent of rent-stabilized tenancies). Likewise the landlord can pass-through to Chapter 5 tenants an expense which is related to capital improvements mandated by law. Seismic retrofit falls into this category.
Aside from refuse collection and water penalties, these expenses cannot be passed-through to the 97% of rent-stabilized households in Beverly Hills which are regulated under Chapter 6 of the rent stabilization ordinance. Chapter 5 households, on the other hand, are more exposed to pass-throughs because rent increases historically were more restricted for these tenants, and pass-throughs were enacted over time to provide the landlord with a greater return.
Read more about pass-throughs in our explainer: Pass-Throughs and Surcharges: What You Need to Know.
What is Seismic Retrofit?
A few years ago the city created a mandatory program to structurally reinforce about 300 rental properties in Beverly Hills which are ‘soft story’ structures that feature dwellings situated above pull-under parking. That arrangement is vulnerable to ‘pancaking,’ as we saw happen in the Northridge quake, if they are not properly reinforced.
Many of those 300 properties already have been reinforced and over the next year all will be. The estimated cost when prorated across units at the retrofit property is estimated to be $10k to $15k per unit. As a monthly surcharge over a ten-year period that could add $62.50 to $125 monthly to the rent.
The retrofit bill is coming due. Who should pay it? As it stands today, only the 3% of rent-stabilized tenancies that are Chapter 5 are subject to a pass-through for seismic retrofit. There is no pass-through on the books that would obligate the other 97% of households to share in the cost.
Hence the city wants a fuller discussion about how the seismic retrofit cost can be shared. That can be accomplished by enacting a pass-through that affects all rent-stabilized tenants. The commission is the first step in that discussion. If the commission agrees to recommend such a pass-through then it would go to City Council for more discussion. By the way, City Council in 2019 indicated an interest to pass-through the cost to tenants.
Should Seismic Retrofit Be Passed-Through?
Beverly Hills currently allows 100% of the seismic retrofit cost to be passed-through but only for Chapter 5 tenancies — just 3% of all rent-stabilized households. The August 3, 2023 staff report includes a table summarizing how neighboring cities do or don’t allow the cost of retrofit to be shared by tenants.
Los Angeles and Culver City put only 50% of the cost on tenants. West Hollywood and Santa Monica don’t make tenants pay any part of seismic retrofit. Why such divergent approaches? Commissioners asked but there was no ready answer for them.
The answer is out there because those cities undertook informed discussions their RSO board and City Council. Those videos are available. Yet there was no recap of those cities’ findings for the commission. Clearly those cities believe that landlords can afford to absorb the cost of seismic retrofit!
Our Rent Stabilization Commission might have come to the same conclusion had commissioners looked at seismic retrofit surcharge estimates in the context of landlord operating margins and average rents.
Instead there was a bit of seat-of-the-pants discussion…and some questionable assertions. Landlord alternate representative Frances Miller thought landlords were “underwater” and she favored the seismic pass-through to (figuratively) bail-out the landlords.
Landlord representative Neal Basement chimed-in with support for pass-throughs “as a result of the state that we’re in.” Landlord representative Remmie Mader supported pass-throughs because the city should be “incentivizing investment” in rental properties.
At-large (neutral) representatives agreed. Lou Milkowitz called a retrofit pass-through “fair.” At-large rep Ryan Gurman suggested the Culver City approach (pass through of 50% of the expense to tenants not to exceed 3% of the base rent).
Even our tenant representatives agreed that a seismic retrofit pass-through seemed reasonable. “Yes on the concept but the details are up for debate,” said tenant rep Zachary Sokoloff. He could support a “reasonable” 50–50 cost-share, he said, “but the goal is to provide certainty and predictability to tenants about what their rent will be on an annual basis.” He recommended a percentage cap on the aggregate surcharges that a tenant could pay. “If the rent increase is 5% then all surcharges can only be another 1% on top of that.”
Tenant alternate representative Kandace Lindsey-Cerqueira suggested dollar cap on the seismic retrofit pass-through in particular. “Some percentage is fair but not 100%…but also a [monthly] maximum dollar amount.”
There were additional questions to be answered. Should a 50–50 cost share apply to Chapter 5 tenants too? Today those households bear 100% of the seismic retrofit cost under the current ordinance. Should Chapter 6 tenants then get a better deal? “Don’t modify Chapter 5,” said landlord representative Neal Baseman — in other words keep 100% for Chapter 5 households.
What about the landlord’s cost of money? In addition to the seismic retrofit sticker price the landlord can pass-through to 18% APR (or the reasonable value of money if the landlord self-finances) to Chapter 5 tenants. “Eighteen percent is very generous,” said Helen Morales. Should that be allowed for Chapter 6 households if Council agrees to a retrofit pass-through?
Should a Chapter 6 pass-through cover only improvements that are mandated by law (like retrofit), or should it apply to any capital expenditures for improvements like Chapter 5 currently allows?
These and other questions weren’t addressed squarely. Tenant representative and vice-chair Kathy Bronte was subbing at this meeting for the absent at-large representative (and chair) Donna Tryfman. Bronte didn’t tip her hand on her views; she preferred to defer these details, and perhaps a vote, to the September meeting. Watch the commission’s discussion for the full flavor.
Our Take on the Commission’s Discussion
We hoped that the Rent Stabilization Commission would have thought this issue through systematically and with some degree of analysis. Perhaps commissioners could have carefully considered the impact of a surcharge of the magnitude estimated by city staff. After all, City Council tasked this commission with doing the policy ‘spadework’ to later inform the Council’s discussion.
But this commission is known neither for detailed analyses nor for grappling with fundamental concepts. Instead commissioners tend to go by the seat of their collective pants. They arrive at informal conclusions like “sounds fair.” In our view that is not the best way to approach a policy recommendation.
We believe that a pass-through of 100% of the retrofit expense would be ‘seismic’ indeed for an average tenant because it could mean a surcharge of $62.50 to $125 monthly.
Nearly one-third of Beverly Hills households are ‘rent burdened,’ according to the census, and half of renting households are ‘severely rent-burdened.’ (These figures were not mentioned by a commissioner or staff.) A surcharge of that magnitude, coupled perhaps with other surcharges, would unduly burden low-income households that today can scarcely deal with the rising cost of everything.
Additionally, a retrofit surcharge would saddle households that pay a lower rent with an effective rent increase which is greater than the annual rent increase in percentage terms. And because it would sit on top of the annual increase, together they could add up to a double-digit rise in the cost of housing at a 100% seismic retofit pass-through.
Shouldn’t this commission first ask whether tenants need to pay this bill? That question could be asked of any pass-through because they are all intended to defray the landlord’s cost of doing business or the expense to improve the property. After all, do tenants need to buy the landlord a new roof, coat of paint or new appliances? Isn’t that why we pay rent?
Next Steps
The Rent Stabilization Commission will discuss more details of the agreed seismic retrofit pass-through at the September 7, 2022 6pm monthly meeting. The discussion will likely touch on the percentage pass-through and a possible cap on the monthly surcharge. The commission may also broaden the discussion to address a menu of pass-throughs (as enumerated in the August 3, 2023 staff report). The commission could vote then and soon thereafter forward a recommendation to City Council.
As for the seismic retrofit pass-through specifically, well that goose may already be cooked. This year’s city budget includes a reference to a rent subsidy program “if a pass-through of seismic retrofit costs is authorized by the City Council.” We don’t need a Magic 8-Ball to know if tenants are likely to pay for retrofit. As the 8-Ball would say, “Signs point to yes.”
Watch the commission video for the staff presentation and the commission discussion. Then mark your calendars for the next meeting on September 8th at 6pm. The agenda will be posted on the Rent Stabilization Commission agenda website by September 1st. Participation instructions are atop each agenda.
Have a question about pass-through? Read through our explainer, Pass-Throughs and Surcharges: What You Need to Know. And of course get in touch with Renters Alliance!