Pass-Throughs Back at the RSO Commission for 9th Time

January 4, 2023July 5, 2024 Mark Elliot pass-through, Rent Stabilization Commission

At the January meeting the Rent Stabilization Commission will take a record NINTH swing at crafting a recommendation to City Council concerning pass-through surcharges. In prior meetings commissioners found agreement to limit the cumulatively cost of any pass-throughs plus the maximum allowable annual rent increase to 10% of the base rent. Beyond that outer bound the commissioners have split on nearly every pass-through under consideration. At this meeting commissioners will try to come to some agreement on whether landlords should be able to pass through the cost of seismic retrofit, capital improvements and other major costs; and if so whether both Chapter 5 and Chapter 6 rent-stabilized tenants should pay for it.

At the prior meeting in December, commissioners were divided on many of the pass-throughs that were teed-up for discussion. There was consensus that tenants should share the cost of the annual $63 per-unit RSO administration fee (just a few bucks a month) and consensus appeared near on sharing the cost-share of seismic retrofit 50–50 between tenants and landlords. The latter is an example of a landlord expense that is mandated by law: Beverly Hills like many localities has mandated structural reinforcement of certain multifamily buildings. If the commission ultimately agrees, the average rent-stabilized household could see $50 or $60 added to the monthly rent.

However commissioners disagreed on whether all expenses that are mandated by law should be passed-through to rent-stabilized tenants. If the city mandates that a landscape water meter and solar panels be installed, should tenants pay the cost? Commissioners were also in disagreement over whether bringing a baby into a household should implicate a 10% ‘additional tenant’ surcharge. Read about the December meeting in our post: One Pass-Through Gets Commission OK, Others TBD.

Same Pass-Throughs for Everybody?

In the background is whether all rent-stabilized tenants should be treated similarly with respect to pass-throughs. Today Chapter 5 rent-stabilized households may pay a variety of pass-throughs related to additional tenant, capital improvements, and utility rate increases among other charges. That’s because Chapter 5 rent control imposed a relatively low cap on the annual rent increase — it was indexed to the rate of inflation — and the additional pass-throughs for Chapter 5 tenants were added in the years after rent control was enacted in the city so as to allow landlords to capture additional revenue.

In contrast, Chapter 6 rent control was enacted years later with a much higher cap (10%) which allowed landlords to recover any additional costs they incurred (and then some). There was no need for pass-throughs. One question for commissioners: should pass-throughs should be extended to Chapter 6 tenants?

Today the allowed rent increase for Chapter 5 and 6 tenants is about the same (all rent increases are capped at the rate of inflation) but the legacy effect of the much lower Chapter 5 cap means that Chapter 5 tenants pay a much lower rent than Chapter 6 tenants for whom the rent could be raised by 10% annually. Should these households be saddled with the Chapter 5 pass-throughs too? The commissioners discussed the difference between chapters 5 and 6 tenancies but unfortunately didn’t seem to grasp the legacy concept.

On the agenda for tonight’s meeting are a few unresolved questions:

Seismic retrofit: allow landlords to pass-through at least 50% of the cost to Chapter 6 tenants as well as Chapter 5? Today Chapter 5 tenants can pay for seismic retrofit at 100% of the cost because expenses mandated by law may be passed-through.
Improvements mandated by law: limit it to seismic retrofit for now for all rent-stabilized tenants — or expand it for all tenants to include for any expense that is mandated by law?
Capital improvements (not mandated by law): Allow it to stand for Chapter 5 tenants, extend it to Chapter 6, or remove it from both chapters 5 and 6?
Additional tenant surcharge of 10%: Extend it to Chapter 6 tenants (including one or more children who come into the household), leave it to Chapter 5 only, or extend it but exclude one or more children from the application of the surcharge?
Utility rate increase: Extend it to Chapter 6 tenants or strike it from Chapter 5 of the rent stabilization ordinance?
Refuse fee surcharge: allow it to stand for all rent-stabilized tenants (as it applies today) or strike it from both chapters 5 and 6 of the ordinance?
Water service penalty: leave it at 100% for all rent-stabilized tenants or reduce it to 50% or some other percentage to effectively share the penalty cost between tenants and landlords?

Read more about the options in the commission staff report for January 4, 2022. Pay attention only to the first 4 pages; the remaining 241 pages is a maddening mess of prior staff reports and more staff reports and attachments. For a fuller history of the commission’s discussion, read our recap posts on the pass-through issue. Or simply sit back for another well-intentioned but meandering commission discussion! You can watch commission meetings live online or cable channel 10.

Our Take

Chapter 5 pass-throughs

In brief, we oppose the extension to Chapter 6 rent-stabilized tenants of any pass-through which is today applicable only to Chapter 5 tenants. That includes expenses mandated by law (including seismic retrofit), capital expenditures not mandated by law (which are generally improvements that add value), additional tenants surcharge of 10%, and utility rate increases (if they outpace the percentage allowed annual rent increase).

Simply put, those pass-throughs were added to Chapter 5 of the rent stabilization ordinance to increase the revenue to landlords from those households that benefitted from a rent increase cap indexed to inflation. Chapter 6 tenants did not benefit from that cap — increases were allowed as high as 10% annually — and to extend those pass-throughs to Chapter 6 tenants seems punitive on top of the higher rents we pay.

Whether or not those Chapter 5 pass-throughs remain on the books for Chapter 5 tenants is up to the commission. It would be useful to have some data to show how frequently those households pay any of the surcharges. (We have never seen that data.) In the absence of that data we would argue to simply strike those pass-throughs from Chapter 5.

(By definition the latter amendment would have only a marginal effect as there are only 149 Chapter 5 households today. However those households that remain we do want to retain. So if eliminating the pass-through can effectively reduce the rent for an economically-vulnerable Chapter 5 household, then it is worth taking those pass-throughs off the books.)

Pass-throughs applicable to all tenants

As to the two surcharges that can be passed-through to all rent-stabilized households today we suggest the commission recommend that tenants share only half of the water penalty surcharge but not any of the refuse and alley surcharge.

Water penalty: today tenants can pay 100% of the cost of the excessive water use penalty if levied by the city. Fair enough that tenants pick up at least part of that penalty; our households are ultimately responsible for a significant part of water use and thus excessive water use. But 100% is too much because tenants can’t control water use for the building and common areas.

Moreover we have not seen an apartment ever rented with the actual required water-saving shower heads which is a prerequisite for passing-through this penalty to tenants. We can support a cost-share to discourage tenant over-consumption of water. The rent stabilization ordinance can be amended so that the landlord can only pass-through 50% of the penalty.

Refuse and alley maintenance: We don’t support this surcharge simply because refuse is a cost of the rental business. The city levies an alley maintenance charge and that is a cost of doing business. Unlike gas, electricity, or any metered utility which is consumed by tenants, refuse is a basic housing service and so the commission should recommend that this pass-through be stripped from both Chapter 5 and Chapter 6 of the rent stabilization ordinance.

We are most vehemently opposed to any pass-through that will allow the landlord to improve his property at the tenants’ expense. Do tenants need to pay for a new roof, or exterior paint, or landscaping or anything else that adds to the value of the landlord’s investment? No. Rent should cover proper maintenance and we’re not even seeing that today at many older properties.

Let’s dispel with one canard: that the city should incentivize landlords to improve these properties. Asset appreciation is incentive enough…especially when landlords hold a property over a longer period. Take for example the recent sale of 232 Spalding (at right). In July the 3-unit property was sold for $3,350,000 — more than a million bucks per unit according to the tax assessor. The last time the property was sold (rather than transferred within the family) was 1974 when consideration in the sale was reported to be $49,000. Adjusted for inflation that 1974 purchase price would be $313,043. The current owner paid ten times as much. Appreciation outpaced inflation by a factor of ten.

Appreciation at that scale should cover any and all costs of maintaining the property and improving it as the law considers appreciation part of the landlord’s ‘fair return.’ There is no need to compensate the landlord twice with a pass-through for improvements at the tenants’ expense.

Have Your Say

You can comment on pass-throughs at the Rent Stabilization Commission’s meeting tonight, January 4, 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 in the subject line, ’Public comment for item #3 POSSIBLE AMENDMENTS TO THE RENT STABILIZATION ORDINANCE.’
Comment remotely via Zoom: https://beverlyhills-org.zoom.us/my/bevpublic (passcode: 90210)

Live comments are taken shortly after a brief staff presentation on the discussion item from Helen Morales, deputy director of the rent stabilization division. The pass-through item will be heard probably at about 6:05 pm.