The question of pass-through surcharges comes back to the Rent Stabilization Commission on Wednesday, December 7th, and on the agenda is a review of current pass-throughs for refuse and water penalties which is applicable to all tenants; and a potential expansion of pass-throughs that could affect 95% of rent-stabilized tenants. Commissioners will discuss individual pass-throughs and may recommend to City Council that the city allow one or more monthly surcharges related to capital expenditures for property improvements; expenditures that are mandated by law (such as seismic retrofit); and a surcharge for additional tenant(s).
Refuse Surcharge: Set to Sharply Rise
Upon the commission’s request, the staff report provides additional information about the refuse pass-through in particular. Under the current ordinance the landlord can recover from a tenant 100% of the city’s bimonthly charge for collecting trash and maintaining the alleys. On a monthly basis that equates to $40.36 per dwelling unit for most tenants. The cost can be passed-through to tenants unless the lease explicitly disallows it.*
This pass-through is important because the city’s bill for refuse collection and alley maintenance is rising fast. Over the span of the 5-year rate plan approved by City Council in 2020, most multifamily customers will see the cost of collection double (a 100% increase) while alley maintenance will rise by 170%. These costs will rise much more sharply for multifamily customers than single-family customers — and that is a cost that can be passed-through to tenants in many instances.
We talk about the refuse rate hike — and how unfair it is to landlords and tenants who pay it — in our post, How Much Can My Landlord Bill Me for Trash Pickup?
The point we would make about the refuse pass-through is that the cost of refuse collection is a rental housing provider’s cost of doing business. Unlike gas, electricity, or any utility which is directly consumed by a tenant, refuse is a basic housing service. This commission should recommend that the refuse pass-through be stripped from both Chapter 5 and Chapter 6 of the rent stabilization ordinance.
Moreover, there were a number of city hearings about the refuse rate hike but only one landlord spoke up; our other nearly one thousand landlords simply didn’t take an interest. Why continue to allow the landlord to pass-through this cost to tenants?
Read our abridged version of the staff report for more information from the Rent Stabilization Office on this particular pass-through.
Expenditures Mandated by Law
The commission in prior meetings has supported the concept of passing-through to all tenants any expense for an improvement mandated by law. This pass-through is allowed only for a couple of hundred tenants today. (Read more in Chapter 5 section 4–5–305.)
Seismic retrofit is the most obvious example of an improvement mandated by law. The city wants to pass this expense through to tenants. The average monthly surcharge would be about $50 per month and is applicable only to tenants that live at a retrofit property. However what is proposed is a more expansive pass-through: any expenditures mandated by law which could include energy conservation measures, retrofit boilers or stoves, installation of a landscape water meter or solar or whatever.
Should these costs be passed-through to tenants? We don’t think so. Each of those improvements may be an improvement worthy of a mandate. However in our view the cost should be the responsibility of the housing provider. Moreover, some of those improvements will add value to the property (a new boiler or solar installation) while others may fetch higher rents (new fixtures or better insulation).
We feel that improvement expenditures mandated by law should not be passed-through to tenants because the landlord derives some or all of the value.
As for the cost of seismic retrofit in particular, we see no need to pass this through to tenants. For a few reasons:
- Retrofit adds value to the property. That value accrues to the owner in the form of reduced insurance and a higher asking price at sale. (Note that property listings highlight a completed retrofit.) That expense is also tax-deductible. Why allow a landlord to ALSO recapture that value from a tenant?
- Beverly Hills did not help owners with the cost of retrofit. Other cities provided grants or helped to arrange low-cost financing. West Hollywood and Santa Monica each pursued grants and state financing to defray the cost of retrofit (or at least make financing affordable). In fact, those cities cited such assistance when they choose to deny their landlords an opportunity to pass-through the cost of retrofit to tenants.
- Seismic retrofit pass-through will be challenging to administer. Assessing the cost is straightforward: the commission could allow landlords to divide the cost by the number of units and spread it over some period like ten years. But in that time tenancies start and end. Should a new tenant pay market rent AND pay a seismic surcharge? Of course not because the new rent should cover that cost. The city will have to keep track of surcharges for current tenants and wind it down after a vacancy.
- Longtime tenants will bear the burden of paying for seismic retrofit. Why? Because it is impossible to collect a surcharge from a former tenant. When units turn over departing tenants escape the surcharge. New tenants probably won’t be liable for the surcharge. The tenants who will actually pay what the commission called their “fair share” of the retrofit cost will be tenants who can least afford to relocate.
For all of these reasons we say NO to a seismic retrofit pass-through. And for one other reason too: landlords can afford it.
Capital Expenditure Surcharge
Landlords today can pass-through a surcharge for capital expenditures but that’s only applicable to a couple of hundred tenancies. The vast majority (95% or more) of tenancies are regulated under Chapter 6 which has no such pass-through. The commission will consider whether to extend this pass-through to all rent-stabilized tenants.
What is a capital expenditure? Section 4–5–304 explains that it is “a permanent improvement or renovation…the use of which will continue for at least five (5) years….” The pass-through language tries to differentiate between maintenance and improvement, but the distinction is not clear. Exterior paint and surfacing is called a permanent improvement although we would understand that as responsible maintenance.
The pass-through as written today also allows the landlord to make in-unit improvements and bill that to the tenant — whether or not the tenant consents to the improvements. Imagine the landlord replaces appliances and then bills the current tenant, only to recapture that value from the next tenant in the form of a higher asking rent. Tenants and landlords are free to agree on in-unit improvements (even at the tenant’s expense) but it should be an agreement — and not a pass-through without consent.
Moreover, this pass-through is an invitation to the landlord to characterize any expense as a ‘permanent improvement’ and then bill it to tenants. For example, some landlords have allowed their property to deteriorate and the signs are all around us: broken walkways, dilapidated structures and garages, creaky stairs, etc. Why wouldn’t that landlord want to put the expense of those repairs on his tenants?
Of all the pass-throughs this one should be of the most concern to tenants because it can be abused.
As written, this pass-through also allows the landlord to add up to 18% for the landlord’s “cost of capital” to the surcharge. That means the tenant pays for financing too, or indeed any percentage of the job (up to 18%) that the landlord calls his cost of financing if he self-finances. And as written this surcharge can amount to as much as 4% of the base rent — which is $96 extra monthly on top of a $2400 rent.
We oppose any recommendation to extend this pass-through to the other 95% of rent-stabilized Chapter 6 tenants precisely because it is so open to interpretation and potential abuse.
Have Your Say
You can comment on pass-throughs at the Rent Stabilization Commission’s meeting tonight, December 7, 2022 at 6pm. Instructions are on the agenda. Speak up in any of these ways:
- In-person comments (very important!) at the meeting in City Hall room 280A.
- 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).
- Comment remotely via Zoom (https://beverlyhills-org.zoom.us/my/bevpublic).
Live comments are taken shortly after item #4 is introduced and after the staff presentation from Helen Morales, deputy director of the rent stabilization division. The item will be heard probably at about 6:05 pm.
- Read the original 232-page monster Rent Stabilization December 7, 2022 staff report.
- Read the minutes of the Rent Stabilization Commission meetings for October and November.
- Watch the November 2, 2022 meeting video or review videos for past meetings on the commission’s archive page.
- Read our explainer about pass-throughs: Pass-Throughs and Surcharges: What You Need to Know.
The landlord can pass through the refuse surcharge if the rental agreement does not explicitly assign to the landlord the responsibility for providing refuse collection. This is true for month-to-month tenancies because those tenancies continue on the same terms after the lease expires. For example, some agreements assign the cost to the tenant (i.e., “tenant pays for refuse”). The tenant is probably already paying some or all of that cost. If an agreement says, “Tenants pay all utilities but landlord pays for water,” then the landlord may pass-through the cost with a change in the terms of tenancy at least 30 days in advance. If the lease says the landlord pays for refuse or utilities other than specified for tenant payment, then the landlord cannot pass it through even with a change in terms of tenancy.