One Pass-Through Gets Commission OK, Others TBD

The Rent Stabilization Commission at the December meeting returned to its ongoing discussion about pass-throughs for Beverly Hills rent-stabilized tenants. There was no formal action but commissioners did find consensus on sharing with tenants the cost of the annual $63 per-unit RSO administration fee, and nearly found consensus on a 50–50 cost-share for seismic retrofit. Landlord commissioners scuttled that proposal so that pass-through plus several others will come back for more discussion in December.

The Rent Stabilization Commission’s four-hour December meeting was the eighth — eighth! — meeting to discuss pass-through surcharges that may be added in addition to the rent. Tenant representative Kathy Bronte signaled a bit of a harder line at this meeting by noting that she was “struggling” with passing-through to tenants any of the landlord’s cost of doing business. The two other tenant commissioners, Zachary Sokoloff and Kandace Lindsey-Cerqueira (a voting alternate) also indicated some discomfort with pass-throughs.

Despite the agreed maximum 10% cap the cumulative total of monthly surcharges plus allowed rent increase, as agreed in November, tenant commissioners were concerned about how surcharges can add up. For example a household paying the city’s average rent of $2,400 could see a maximum $240 increase between the rent increase and pass-throughs.

Having established that cumulative cap the commissioners in December turned their attention to the individual pass-throughs. Chair Donna Tryfman, who was appointed by City Council as an ‘at-large’ commissioner because she is neither a tenant nor a landlord, signaled clear support for additional pass-throughs. “We have to look at the landlords’ skyrocketing expenses and what portion tenants should share,” she said. “The bills have to get paid. We should start from a place of yes.”

Watch the video for the full discussion.

Donna Tryfman, at-large representative to the Rent Stabilization, says of pass-throughs, “The bills have to get paid. Let’s start from a place of ‘yes.’[/caption]

OK to Share the RSO Administration Fee

Commissioners dispatched with the easy work in only 15 minutes: tenants and landlords should share the cost of administering the rent stabilization program. The $63 annual fee covers staffing for the office and related code enforcement activities and today it is paid by the landlord.

The commission agreement was unanimous: tenants and landlords should share the cost. The tenant’s share would be paid through a monthly surcharge of $2.60.

Our take

It seems fair to recover the cost of rent stabilization administration because the city already recovers the cost for many services. We think $63 annually is a fair price to pay for the rental unit registry and a dedicated Rent Stabilization Office to curb past landlord abuses. Other rent-control jurisdictions assess tenants for 50% of the cost. In fact we would volunteer to pay more if it meant that tenants in Beverly Hills would receive even half the attention that tenants in Santa Monica get from their rent stabilization office.

Tentative Agreement on the Refuse Pass-Through

Next up was the cost of solid waste collection and alley maintenance (hereafter referred to as ‘refuse’). This pass-through is allowed for all tenants today even though the cost of refuse is not always passed-through to tenants. Historically the cost was included in the rent but landlords have become aware of this pass-through and may have noticed that the cost of refuse is on the rise too. They will pass it through on top of the rent where they can.

The commission hasn’t discussed the context for this pass through: the city’s steep hike in refuse rates. According to the 5-year rate schedule approved by City Council, multifamily customers will pay 100% more in 2025 than 2020 and 170% more for alley maintenance. Single-family customers are hit with a much more moderate increase. Read more: How Much Can My Landlord Bill Me for Trash Pickup?

Commissioner Frances Miller noted the rate hike because she read about it in Renters Alliance. “This is unfair for the landlord — we didn’t know these astronomical increases would be levied.” She thought tenants should remain on the hook for 100% of the cost. It is worth noting that the city conducted many presentations to city commissions and this item was heard at City Council several times before the rate schedule was approved. Every landlord received a notice in the mail — if not multiple notices.

At-large commissioner Lou Milkowski also thought that tenants should be on the hook for all of refuse cost. “We’re talking pennies,” he said, though the refuse charge for most multifamily units is $40.36 monthly. Landlord commissioner Neal Basemen took a more moderate position. He suggested that tenants and landlords could share this cost with a cap on the tenant’s share for this surcharge at 1% of the base rent. (Commissioner Miller added that she could go along with a 50–50 share.)

Tenant commissioner Bronte opposed this pass-through saying it should be taken off the books. Tenant commissioners Sokoloff and Lindsey-Cerqueira agreed. At-large commissioner Tryfman said “tenants and landlords can negotiate it” to which at-large commissioner Ryan Gurman agreed. In commercial real estate, he said, these charges are in addition to rent and are negotiated.

The commission found tentative agreement to recommend removing it from the rent stabilization ordinance.

Our take

We should remove the refuse pass-through from both Chapter 5 and Chapter 6 of the rent stabilization ordinance. Current tenants should not pay for refuse unless their lease obligates them to pay it, while future tenants will likely see that obligation in a lease. However it is foolish to think that tenants will be able to negotiate on refuse. There is no incentive for a landlord to negotiate this cost. Indeed the standard residential lease provided to landlords from the Apartment Association of Greater Los Angeles says, “Renter shall pay for all utilities supplied to the Premises.” Arguably that would include refuse.

Not Quite There on Seismic Retrofit Pass-Through…

The commission was poised to recommend that landlords be able to pass-through 50% of the cost of seismic retrofit as mandated by law. The landlord could allocate that cost to present tenants according to the proportion of their unit area (in square feet) to the total leasable area. The passed-through surcharge would not include the cost of financing or money and, as proposed, could not exceed 2% of the tenant’s base rent. The surcharge would be payable over the period defined by the IRS depreciation schedule.

As proposed in the motion, the commission’s recommendation would add a retrofit pass-through to Chapter 6 of the rent stabilization ordinance and modify the terms of the existing Chapter 5 pass-through for expenses mandated by law. Section 4–5–305 would be amended to limit the tenants share of retrofit to 50% (down from 100%) and eliminate the landlord’s ability to pass-through the cost of financing (which can be up to 18% today).

The commission was close to a final agreement before landlord commissioners snatched defeat from the jaws of victory. They didn’t want to exclude any expenses that are mandated by law from a pass-through and voted no on the motion. They were joined by the two tenant commissioners in voting no. The two at-large commissioners favored the retrofit pass-through.

With a split commission the discussion will resume in January.

Our take

We see no need to pass-through the expense of seismic retrofit. As we stated prior to this meeting, retrofit adds value to the property and that is reflected in a higher purchase price. And while the expense is tax-deductible for the landlord, the tenant’s share is not deductible. But really the bottom line is that landlords can afford it. That’s what neighboring cities of West Hollywood and Santa Monica found and those cities denied landlords the retrofit pass-through.

In Beverly Hills no analysis was undertaken. Moreover Beverly Hills took no step to help owners reduce their retrofit cost whereas West Hollywood and Santa Monica provided grants and helped to arrange low-cost financing. In light of these factors — factors that were not discussed by the commission — we think landlords can afford it while earning their legally-mandated ‘fair return’ on rental operations.

Disagreement Over the Additional Tenant 10% Surcharge

Much of the December Rent Stabilization Commission meeting was devoted to the 10% surcharge for an additional tenant. This only applies to Chapter 5 tenants but the commission has proposed to extend it to the other 97% of renting households that are regulated under Chapter 6 of the rent stabilization ordinance. The surcharge allows the landlord to bump-up the rent by 10% per additional occupant (until that occupant is no longer in residence) but the landlord still has the right of approval over any additional tenant. Unlike a pass-through this one is actually a rent increase.

Per section 4–5–307 of the rent stabilization ordinance:

If an apartment rental agreement specifies the maximum number of occupants in an apartment unit but does not contain any provision stating a specific dollar amount for an additional tenant occupying such apartment unit after the inception of the agreement, the landlord may exercise his or her rights under state laws or may raise the rent on such apartment unit a maximum of ten percent (10%) of the base rent for each additional tenant. If such additional tenant subsequently vacates the apartment unit, the rent shall be reduced by the amount that was imposed pursuant to the provisions of this section.

At first glance this provision would be intended to apply to a roommate, partner or spouse who would join a primary tenant. However commissioners discussed whether to allow this surcharge to apply to family members too. Could the landlord charge the 10% for a new baby? What about a newly-adopted child? If an elderly parent moves-in for elder care, should the primary tenant be on the hook for 10% more rent?

At-large commissioner Tryfman suggested a compromise: allow the tenant a “1st child exclusion” so the 10% surcharge would not apply to a first-born. Tenant commissioners supported the exclusion. What about elderly parents? No exclusion, said Tryfman. “This is a child exclusion — not a parent exclusion.”

However landlord commissioners weren’t agreeable to the proposed 1st child exclusion. “A baby uses water,” said landlord commissioner Baseman and landlord commissioner Miller agreed. “Charge the fee for the 1st child.” Two at-large commissioners also supported the surcharge without an exclusion.

After further discussion at-large commissioner Tryfman backed away from the exclusion in favor of tenants negotiating with the landlord over the additional rent for an additional tenant.

Tenant commissioner Sokoloff questioned whether any tenant would be in a position to negotiate. “There is a form lease and you sign it or you don’t,” he said, referring to lease templates like the Apartment Association of Greater Los Angeles provides to member landlords. “If I were a tenant would I have the wherewithal [to negotiate]?” He didn’t think so. “In the spirt of promoting stable tenancy I stand behind the exclusion for 1st child.”

Tenant commissioner Lindsey-Cerqueira agreed. She distinguished between minor and adult and said minors should get a pass. “At 18 they can get their own place or be charged as an additional tenant.”

Ultimately there was no consensus on the child exclusion and the discussion moved on.

Our take

Indeed it is simply ridiculous to allow a landlord to impose a 10% rent increase for a newborn baby or for any minor child brought into the home. After all, we want to support growing families (our school district says we need the additional enrollment) and we don’t want to erect barriers to adoption or guardianship arrangements. Would a 10% rent hike put a damper on family planning? It could certainly encourage a family to move and perhaps out of the city given the limited availability of affordable rentals.

Just listening to commissioners talk about a 10% surcharge for a baby reminded us of pet rent: you can bring your baby home but be prepared to pay a premium each and every month for the extra wear and tear.

However we do think a surcharge for an additional adult tenant is reasonable for a couple of reasons. Most important, a surcharge establishes a process whereby an additional tenant can be added to the existing rental agreement. The primary tenant would not be under pressure to accept a new rental agreement which might have less-favorable terms simply to move-in a partner or sibling. Once the occupant is screened the rent increases by a predictable amount.

Second, we can’t see any financial benefit that comes from a tenant negotiating without leverage with a landlord who might exact an unreasonable rent increase even if the additional tenant easily passes the screening. Tenant and landlord are always free to agree on a percentage increase that is less than the statutory surcharge.

Certainly we would not recommend that a tenant negotiate the terms of a future addition to the household before signing a lease. Federal and state statutes explicitly prohibit discrimination against families with children and those statutes have been put on the books for a reason: discrimination is a problem.

No Agreement on the Utility Expense Surcharge

Today Chapter 5 tenants can pay a surcharge to cover the cost of utilities that are billed to the landlord. This little-used pass-through is less relevant now than ever now that the pool of eligible (Chapter 5) rent-stabilized tenants is just a couple of hundred households; and because new tenancies tend to put the cost of metered utilities on the tenant anyway. Where it is likely to apply is to the ‘house lights.’

Moreover the section 4–5–306 pass-through is simply too complicated. To illustrate:

[The] surcharge shall be computed by comparing the utility costs for the year beginning March 1, and ending on the last day of February just ended, with those costs for the year preceding that year. If the utility costs have increased by a percentage which is greater than the annual rent increase percentage [then] any amount of such utility costs which is in excess of that amount which would have been arrived at had the utility costs increased only by the same percentage as the annual rental increase may be passed through to the tenants….

If the annual cost of a utility rises by a percentage greater than the percentage of the allowed rent increase, then the landlord can pass-through to tenants the dollar cost of the percentage that represents the difference.

Confused? Don’t worry; commissioners were confused too. They needed some guidance to conceptually distinguish between the actual cost of a utility and the year-over year percentage change in that utility cost that determines the surcharge. Commissioners were also uncertain about the implications of this pass-through for Chapter 6 tenants who already pay metered utilities.

Amid the confusion commissioners chose to wrap-up the discussion without conclusive direction on this pass-through.

Our take

Scrap the utility expense pass-through entirely. If it can’t be easily understood by a commissioner when city staff explain it, then it certainly won’t be understandable to a tenant who calls the landlord about an unexpected monthly utility surcharge added to the rent.

Additional Pass-Throughs Not Discussed

The commission didn’t talk about whether to add two additional Chapter 5 pass-throughs to Chapter 6 of the rent stabilization ordinance: expenditures mandated by law and capital expenditures surcharge. Commissions neared agreement on one kind of mandated-by-law expenditure — retrofit — but there was no substantive discussion about whether to expand the mandated expenses pass-through. Today there is no other expense mandated by law.

As for the capital expenditures surcharge, commissioners did not discuss whether to allow the landlord to pass-through 100% of the cost of an improvement to Chapter 6 tenants. Today it applies only to Chapter 5 tenants. Expect it to come back for more discussion in January.

Has your landlord passed-through seismic retrofit or any expenditure mandated by law? Please get in touch with Renters Alliance!