Zachary Sokoloff
News 

Rent Stabilization Commission Poised to Allow More Pass-Throughs

Mark Elliot ,

The Beverly Hills Rent Stabilization Commission at the upcoming December meeting will again focus on pass-through surcharges and commissioners are likely to recommend more of them. To curb the impact, the commission has provisionally agreed to limit the rent increase plus pass-through surcharges to ten percent of the base rent. But that would be a significant increase in housing costs for any renting household. Should more pass-throughs be allowed at a time when asking rents are at record highs? You will have a chance to voice your opinion at the commission meeting on Wednesday, December 7th at 6pm. Here’s what you need to know and what may happen next.

Concerned About Pass-Throughs? Time to Get Involved!

The bottom-line concern for any rent-stabilized household is always going to be how much more we pay in rent after the next rent increase. Mostly that is determined by the maximum allowable annual rent increase which is indexed to inflation. However pass-throughs surcharges can add to the cost of housing. Though it is not considered as rent, the reality is that failure to pay a surcharge is a ground for eviction just like not paying the rent.

The rent stabilization ordinance for both Chapter 5 and Chapter 6 tenants limits landlords to passing-through only the cost of refuse collection and any water usage penalty that is assessed by the city. Relatively few tenants pay those surcharges today.

However Chapter 5 tenants can also see additional pass-through surcharges including for the cost of any improvement that is mandated by law (seismic retrofit for example); the cost of expenditures related to improvements at the property; and even costs for utilities if that cost rises faster than the rent. Should those pass-throughs be extended to all tenants? Or should there be fewer pass-throughs allowed for any or all tenants?

Those questions will come back to the commission for discussion at the Wednesday, December 7th meeting. After seven such discussions this one is likely be commission’s final word on a recommendation to City Council.

Why this meeting? For one thing, Helen Morales, deputy director of the rent stabilization division, and her boss, Ryan Gholich, director of the Community Development Department, are eager to provide landlords with a pass-through for seismic retrofit. City Council mandated that work and supports a pass-through.

Moreover the coming resignation of tenant-representative Zachary Sokoloff will force the commission into a temporary hiatus after the December meeting. Staff will want to wrap-up old business if possible and get a recommendation on pass-throughs to Council. The December 7, 2022 staff report indicates that all pass-throughs are on the table for discussion.

As it happens, City Council has already put on its agenda a discussion about commission’s recommendations and likely to be teed-up is the commission’s recommendation on pass-throughs. So now is the time to voice your concern.

Do you want to share your perspective on pass-through surcharges? Your first opportunity comes on Wednesday, December 7th at the Rent Stabilization Commission meeting. (Read the agenda.) Next up it’s City Council on Tuesday December 13th.

Please get in touch with Renters Alliance if you want more information about pass-throughs. Have a look at our explainer: Pass-Throughs and Surcharges: What You Need to Know.

Why the Pass-Through Matters

The bottom line for the landlord is that any expense that he can pass through to a tenant is an expense he doesn’t pay. That allows the landlord to take more of each rent dollar in net operating income (income after expenses). Instead of keeping as much as 70 cents of each collected rent dollar (on average) in net income, the landlord’s profit is greater because his cost of doing business is reduced.

Moreover, the landlord can deduct every dollar of a passed-through expense even though the tenant pays it. So why wouldn’t a landlord want to pass-through every expense that they could?

From the tenant’s perspective it is a different story: each expense dollar passed through is a dollar more in housing cost. And not a dollar of a tenant’s rent is deductible. In sum, the question for a tenant will be, How much can my rent rise due to pass-through surcharge(s)?

Commission Looks at a Cumulative Cap on Housing-Cost Rise

At the November meeting the commission addressed the cost issue by tentatively agreeing to an upper bound on the total percentage increase that a tenant could face year-to-year.  Tenant-representative Commissioner Zachary Sokoloff introduced the issue and asked commissioners to establish an upper bound, inclusive of both the rent increase and any surcharge, before discussing individual pass-throughs.

“I’m looking for consensus to cap the pass-through like rent, because it’s treated like rent,” Sokoloff said. “It is the ‘plus plus plus’ effect. I’m advocating for a [percentage] cap in totality for some certainty.” The certainty Sokoloff wanted concerned an upper limit on the total rise in monthly housing costs – especially if surcharges may be added.

After protracted discussion (watch the November meeting video) commissioners agreed that the total cumulative cost of the rent increase plus pass-through surcharges from one year to the next should not exceed 10% of the base rent.

What does that mean?

Say inflation runs 6% in our region and thus the rent is thus allowed to rise by 6%. Under the cumulative cap as agreed by commissioners, there would be four percentage points available to the landlord for allowed pass-through(s). The 4% effective increase in monthly housing cost due to pass-through surcharges would be perfectly allowed under the commission’s proposed cumulative cap because the percentage rent increase (6%) plus the pass-through percentage (4%) together don’t exceed the 10% cap.

To illustrate the concept: the average rent-stabilized apartment costs $2,400 in Beverly Hills and if the allowed rent increase is 6% then the landlord can raise the rent on that $2,400 apartment by $144. That leaves room for pass-through surcharge(s) of 4% or up to $96 per month in dollar terms.

Taken together that represents an increase in the effective housing cost of $240 (which does not exceed the 10% cap). Although the base rent changed by $144 what matters is the effective housing cost and the pass-throughs pushed it much higher.

Next Up for Discussion: What Costs Can Be Passed-Through?

With the cumulative cap tentatively agreed in November, the commissioners at the December meeting will return to the discussion about which pass-throughs should be allowed. The discussion  is framed by a few broad concerns:

  • Whether landlords should be allowed to expand the pass-throughs for Chapter 6 tenancies to mirror the allowed pass-throughs for Chapter 5 households;
  • Whether landlords should be disallowed from continuing to pass-through certain expenses to Chapter 5 households so as to mirror the allowed pass-throughs for Chapter 6 tenancies;
  • Whether pass-throughs for both chapters 5 and 6 tenants should be the same.

Whether to make pass-throughs the same for all renting households depends on perspective. One could argue that harmonizing pass-throughs for both Chapter 5 and 6 tenants is appropriate now that the annual rent increase is roughly the same for all rent-stabilized households today because it is indexed to inflation.

Or one can argue that Chapter 5 tenants enjoyed a much lower cap on the annual rent increase for decades and, to this day, their lower rents reflect it. Council decades ago imposed pass-throughs on those tenants in order to return to the landlord revenue diminished by the lower rent cap. Why should those pass-throughs be extended to tenants who don’t pay historically low rents?

The commission didn’t really look at any of that in a systematic fashion; the commission’s discussions tend to meander far from data-driven analysis.

Let’s look at the pass-throughs one by one including where the commission stands on each. We will start with the two pass-throughs that are allowed for ALL rent-stabilized tenants: cost of refuse and water penalties assessed by the city.

Refuse pass-through

Today landlords can pass-through to ALL rent-stabilized households a surcharge that is equal to 100% of the landlord’s cost for refuse collection (unless the tenant’s rental agreement says the landlord pays). The commission was undecided about whether to retain this pass-through and asked for more information about it. (They should read our explainer: How Much Can My Landlord Bill Me for Trash Pickup?)

Our view: refuse collection should be a rental housing provider’s responsibility; it is not a consumable service like a utility.

Moreover this is a cumbersome cost to pass-on: the city bills for refuse by unit, but it’s not the same for every property owing to how the trash is collected in multifamily areas. And the city bills every other month, which means the landlord has to divide the payment. And to collect it the landlord must give 30 days notice to the tenant and show the city’s refuse bill.

Can landlords afford refuse collection? Yes, Beverly Hills rents can cover it. And controlled rents are reset to market rate whenever a unit turns over, which is much more revenue and sufficient to cover the cost of refuse.

Where does the commission stand? It has requested more data and the discussion will continue in December.

Water penalty pass-through

Today the landlord can also pass-through to ALL renting households 90% of the cost of any city-levied water use penalty so long as the landlord has installed water-saving fixtures. The intent is to penalize those who consume the water rather than the landlord who can’t control a tenant’s water use. Today this pass-through exists for both Chapter 5 and Chapter 6 tenants.

Several commissioners thought 50% was more appropriate, but the commission majority (4–2) agreed to recommend that landlords continue be allowed to pass-through 90% of the penalty. (Again this is not the cost of water but rather the penalty when water use at the property exceeds the city’s established conservation threshold.)

Our view: we support some pass-through because the landlord can’t control tenants’ use of water. If the city levies an over-consumption penalty then tenants should pay some of it because they must also conserve. But the landlord is required to have installed water-saving features and that’s not always the case. We see landlords marketing their empty units with bathrooms featuring high-flow shower heads and high-flow kitchen sinks. If that’s the case then the pass-through should not be allowed.

Expenditures mandated by law

The commission has already discussed the Chapter 5 pass-through (section 4–5–305) for expenditures mandated by law. Most notably that includes seismic retrofit but other eligible expenditures could include costs for the installation of a landscape water meter, earthquake safety valves, solar or some other energy-efficiency measure.

The commission appears inclined to allow landlords to pass-through 100% of these costs — including seismic retrofit specifically. Commission chair Donna Tryfman said in September, “This is legally mandated…it’s got a deadline…it’s necessary and it will benefit both the landlord and tenant.”

Of all the pass-throughs, the one concerning seismic retrofit is of upmost interest to city hall. And city staff has pushed it to the foreground. A poll of commissioners in November found unanimous support for passing through the cost of retrofit although the percentage was likely to be 50% and not 100% of the cost.

Our view: there is no need for tenants to share the cost of retrofit because we see it as the landlord’s responsibility precisely because the law requires it. In the past, property owners were required to stabilize chimneys and replace combustible roofs. Those are owner responsibilities and not tenant responsibilities.

Moreover retrofit directly benefits the landlord: it reduces insurance costs and adds to resale value. (Online listings often highlight a completed retrofit because it is an expense the buyer won’t have to make and that’s priced-in.)

This commission signaled it’s OK to pass-through the retrofit cost to tenants without asking why city hall didn’t pursue grants for the work or hook-up landlords with low-cost financing (as other cities have done). The commission should consider these mitigating factors but hasn’t done so to date. West Hollywood and Santa Monica helped their landlords and didn’t allow one cent of retrofit cost to be passed-through to tenants. Those cities know that landlords can afford it while still earning their fair return.

Utility expense pass-through

Today the landlord is allowed to pass-through to Chapter 5 tenants a surcharge that reflects the percentage difference between the rising cost of a utility service and the percentage maximum annual rent increase that is allowed by the city for that year (see section 4–5–306). The intent of this pass-through when adopted decades ago was evidently to compensate landlords when rising utility costs outpaced the rent increase. Back then the increase for Chapter 5 tenants was capped at the rate of inflation. The pass-through was not extended to Chapter 6 tenants because the rent could rise by 10% or more.

The commission agreed (4–2) at the November meeting to retain this pass-through for Chapter 5 tenants. Commissioners also have appeared receptive to extending it to Chapter 6 tenants, too, which would affect as many as 8,500 additional households.

Our view: take this pass-through surcharge off the books. Landlords can afford a rise in utility costs due to the margins they enjoy which provides a big cushion against a rise in costs. West Hollywood and Santa Monica for example found that landlords get by just fine with an annual rent increase equivalent to only three-quarters of the rate of inflation. The landlord can earn their fair return without the utility pass-through. Anyway most tenants today today pay their own utilities. It might have been different decades ago.

More practically, is this pass-through even used? (The Rent Stabilization Office didn’t say.) But listening to the commission’s discussion a rule of thumb came to mind: if a pass-through is too difficult for commissioners to fully grasp after much detailed explanation, then it is too complicated for tenants and will prove to be a nightmare for the city to administer. Scrap it!

Capital Expenditure Surcharge

Landlords today can pass-through a surcharge for a capital expenditures to Chapter 5 tenants (only) for improvements at the property. This is the most serious threat to tenants.

What is a capital expenditure? Section 4–5–304 of the rent stabilization ordinance reads:

“Capital expenditure’ shall mean a permanent improvement or renovation, being an allowable capital expenditure for internal revenue service purposes, and other than ordinary repairs or maintenance, the use of which will continue for at least five (5) years after the date of the completion of such capital expenditure.”

In practice that means anything that the landlord can characterize as an ‘improvement’ is a cost he will want to pass-through. Big costs like for a roof, for example. The monthly surcharge would remain in effect for his tenants until the tab is paid. To make matters worse that provision allows the landlord to charge up to 18% additional for the cost of financing or the landlord’s ‘cost of capital.’ (The latter is not defined but presumably means when the landlord self-finances.)

The pass-through calls out exterior painting and exterior surfacing as eligible capital expenditures but we can think of a few others like the installation of coin-operated laundry facilities, new plumbing for laundry hookups inside the units, and upgraded walkways and railings, etc. The opportunities seem endless.

This pass-through limits the capital expenditures surcharge to 4% of the base rent monthly. Today it applies to Chapter 5 rents. But imagine it’s extended to Chapter 6 tenants too. At the average $2,400 rent that would  mean $96 extra monthly from the tenant’s pocket to pay for the landlord’s improvements. That’s like an additional rent increase!

To add insult to injury, just imagine you are a tenant paying this surcharge every month for laundry facilities that require you to also pay per-load with coins. Imagine paying this surcharge because the landlord has installed in-unit laundry plumbing but the landlord won’t install a washer and dryer in your unit because he’s waiting for a market-rent tenant to move in. Imagine paying this surcharge to a landlord who has refused to make repairs or under-maintains his dilapidated apartment building.

Our view: there is no reason to put tenants on the hook for an additional housing cost to pay for improvements that return an additional material benefit to the landlord. It’s a hard NO.

Have Your Say

You can comment on pass-throughs at the Rent Stabilization Commission’s meeting on December 7, 2022 at 6pm. Read the agenda. Speak up in any of these ways:

  1. In-person comments (very important!) at the meeting in City Hall room 280A;
  2. Email your comment to commentRSC@beverlyhills.org (be sure to put ‘Public comment for item #4 possible amendments to the Rent Stabilization Ordinance’ in the subject line);
  3. Comment remotely via Zoom (https://beverlyhills-org.zoom.us/my/bevpublic) as item #4 is introduced by or call in to 310–288–2288.

If you will you please get in touch with Renters Alliance and we can talk you through this complicated issue.

Additional Resources