RSO Commission OKs Pass-Through of Seismic Retrofit, Other Fees

The Beverly Hills rent stabilization commission in June agreed to recommend certain pass-through surcharges for rent-stabilized tenants. If city council agrees then landlords could pass-through half the cost of seismic retrofit and half the cost of the $67 rent stabilization fee that is paid by landlords. There is a pass-through of $100 monthly for each additional occupant not on the lease and a utility surcharge too. This could mean a few additional percentage points on top of the annual rent increase.

What is a Pass-Through Surcharge?

A pass-through surcharge is a charge over and above the maximum allowable annual rent increase that allows the landlord to recover some or all of a cost related to the business of providing rental housing. A couple of examples from Beverly Hills will illustrate.

The city allows the landlord to pass-through 100% of the cost of refuse collection to a rent-stabilized tenant unless the rental agreement says the landlord pays. Some tenants are surprised to receive a bill even if the tenant’s cost of refuse is not mentioned in the agreement. The city also allows the landlord to pass-through 90% of any city penalty for excessive water consumption to all rent-stabilized households. The reasoning? Because water metering is building-wide, the landlord cannot control individual consumption. Tenants should shoulder most of the penalty.

Over the decades city hall has added pass-throughs to provide additional revenue to the landlord. A good example is the capital-expenditure pass-through surcharge. It is limited to Chapter 5 tenants only. It obligates tenants to pay for the landlord’s new roof, paint job or other upgrade if the landlord passes-through that cost. Tenants who pay this surcharge are non-equity partners in the landlord’s apartment leasing business: they shoulder the expense while receiving none of the benefit.

Read more about pass-throughs in our explainer: Pass-Throughs and Surcharges: What You Need to Know.

How Much Could a Pass-Through Add to the Rent?

Currently there is no cap in our rent stabilization ordinance concerning the cumulative impact of monthly passed-through surcharges. That’s why it is so important to limit pass-throughs generally and to limit the cumulative impact of pass-through surcharges.

State rent control placed enacted 10% cap on the annual rent increase but it is not clear that it would apply to surcharges. And even if it did a 10% year-over-year increase in the cost of rental housing is precisely what rent control is supposed to protect against.

Only one pass-through on our city’s books today limits the magnitude of a surcharge: capital expenditures when passed-through to Chapter 5 tenants (only) may not exceed 4% of the base rent. To put that in perspective, 4% for capital expenditures passed-through on top of a 4% rent increase, for example, would mean an 8% year-over-year rise in the cost of housing. Additional pass-throughs would add additional expense.

Commission Recommendations on Pass-Throughs

At the June 7, 2023 meeting the Rent Stabilization Commission wrapped up the last of twelve (!) meetings about pass-throughs with the adoption of seven recommendations to variously expand, make no change, or to eliminate certain pass-throughs currently on the books. These recommendations are made via resolutions to city council. We summarize the commission’s action in this table with detailed descriptions that follow. Read the June 7, 2023 staff report for more information about the meeting.

Commission-recommended NEW pass-throughs for ALL rent-stabilized tenants
Rent Control fee $5.58 monthly All tenants would pay 50% of annual per-unuit RSO fee which would be allocated monthly. Fee is subject to change.
Seismic retrofit $57/monthly (avg) All tenants at retrofit property would pay 50% of expense capped at 2% of monthly rent. Estimate is based on $50k cost allocated over 8-unit property and amortized over ten years
Commission-recommended NEW pass-throughs for Chapter 6 only (95% of households)
Additional tenant $100 CHAPTER 6 tenants would pay $100 per additional occupant no matter the new occupant’s age. Adult non-family tenants must also be screened and approved by landlord.
Utility expense varies CHAPTER 6 tenants would pay the difference between percentage annual increase in cost of “essential utility services,” if paid by the landlord, and the percentage maximum allowable annual rent increase.
Commission-recommended for ELIMINATION
Water service penalty N/A Currently applies to ALL tenants if the landlord pays an excess-usage water penalty. Recommended to be eliminated.
Commission-recommended as UNCHANGED
Refuse and alley fee up to $47.52 monthly Currently applies to ALL tenants who may pay up to $47.52 monthly (effectively) if the landlord does not pay for refuse collection per the rental agreemen. Refuse fee varies with means of collection.
Utility expense varies Currently applies to CHAPTER 5 tenants who may pay the difference between percentage annual increase in cost of “essential utility services,” if paid by the landlord, and the percentage maximum allowable annual rent increase.
Capital expenditures varies Currently applies to CHAPTER 5 tenants who may be assessed their share of 100% of the cost of property improvements as allocated across all units.

RSO fee

This year landlords will pay an annual per-unit Rent Control fee of about $67 per unit. The fee was established decades ago and adjusted for inflation. However it does not cover the added costs of today’s expanded Rent Stabilization Division. That cost may well increase if city council wants total ‘cost recovery’ for the program or if city council creates a rental housing inspection program.

Regardless of the amount of the fee the recommendation is to share it 50–50 with landlords as is typical in rent control cities. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council amend Chapters 5 and 6 of Title 4 of the BHMC to add a provision to each Chapter that allows a landlord to pass through to a tenant of an apartment unit fifty percent (50%) of the then current cost of the Rent Control Enforcement/Administration fee, allocated over a twelve (12) month period.

For the record tenants and landlords were in unanimous agreement. And in our view we don’t mind paying half of the fee if it: 1) quiets landlord grousing about the issue; and 2) if it delivers a better rent stabilization program.

Seismic Retrofit Pass-Through

Five years ago city council enacted the seismic retrofit program to mandate structural improvements to wood-frame apartment buildings that feature two or more dwellings above a ‘soft-story’ of open parking. City council was keen to cushion the financial impact on smaller ‘mom-and-pop’ owners by putting half of the cost on tenants but it was not enacted as a policy. Instead it was referred to the future Rent Stabilization Commission for discussion.

With city council behind it, staff put its collective thumb on the scale for this pass-through. It was among the first to be discussed by the commission. Last August the commission tentatively agreed to a 50–50 cost-share and affirmed it in January. Final adoption of this resolution came at the June 7, 2023 Rent Stabilization Commission meeting:

The Commission hereby recommends that the City Council amend Chapters 5 and 6 of Title 4 of the BHMC to add to Section 4–5–305 and also to add to Chapter 6, a provision that allows a landlord to pass through to the tenant of an apartment unit fifty percent (50%) of the cost of seismic retrofit work mandated by law, for work commencing pursuant to the law enacted in 2018, allocated among all of the dwelling units of the building in proportion to their size** determined in square feet, and annualized in accordance with the straight-line depreciation schedules allowed under Federal income tax laws, and charged at no more than two percent (2%) of each tenant’s then-current rent at the time the pass-through is approved by the City. — draft resolution (emphasis ours)

For the record the commission’s two tenant representatives voted not to allow landlords to pass-through a seismic retrofit surcharge.

Were this pass-through enacted along with the retrofit requirement in 2018 it may have made sense in terms of effectiveness. But that was five years ago and some tenants have already vacated after the work was performed; they won’t pay the surcharge. Incoming tenants shouldn’t pay because in theory the retrofit is already expensed in the fair market rent they pay.

In our view the many meetings spent on this pass-through were a waste of the commission’s time because tenant turnover will continually undermine the effectiveness of this pass-through. Indeed the tenants who are left holding the bag for this expense are the longest-term tenants less able to move. They will shoulder the expense for this work. That’s our presumption, of course, but the commission did no analysis to suggest otherwise.

This more pertinent question was not even discussed by commissioners: does a landlords need to recover retrofit expense given today’s asking rents? The cities of Santa Monica and West Hollywood didn’t think so. They did undertake some analysis and found that landlords were likely to continue to earn their fair return despite paying for the retrofit. Those cities don’t allow the pass-through. The City of Los Angeles limits its pass through to $38 per month.

Regardless, this pass-through is likely to sail through city council with conditions like the amortization period to be determined…also without any analysis.

Additional Tenant

Under Chapter 5 rent stabilization the landlord can demand $100 monthly for each additional tenant not on the lease subject to landlord approval. After lengthy debate about the reasonableness of imposing such a surcharge for a minor child, or even a baby, the commission majority declined to modify the existing Chapter 5 language to add any exclusion. Instead the commission recommended that the current language be extended to Chapter 6 also. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council make no change to BHMC Section 4–5–307 (Surcharge for Additional Tenants) and to amend Chapter 6 of Title 4 of the BHMC to add thereto the provisions of BHMC Section 4–5–307.

For the record the commission’s two tenant representatives voted not to amend Chapter 6 to allow the landlord a $100 per additional occupant due to no exclusion for minor children.

Utility Expense

This surcharge would compensate the landlord for the landlord’s marginal cost when the annual price change of a utility outpaces the percentage rent increase allowed by the rent stabilization ordinance. This applies only to “essential utilities” such as electricity, gas, or water and only in cases where the landlord pays the utility. For a full description of the surcharge refer to ordinance section 4–5–306.

In cases where a utility is billed directly to the tenant, or the landlord has specified in the rental agreement some means to allocated a tenant’s share of a utility (like water service) that is not individually metered, then this surcharge would not apply. It also does not apply to telephone or cable service because these are deemed non-essential utilities.

Today this surcharge applies only to Chapter 5 households; the commission has recommended that Chapter 6 rent stabilization include the pass-through. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council make no change to BHMC Section 4–5–306 (Utility Expense Surcharge) and to amend Chapter 6 of Title 4 of the BHMC to add thereto the provisions of BHMC Section 4–5–306.

For the record the commission’s two tenant representatives voted not to allow the utility expense pass-through to apply to Chapter 6 tenants.

In the discussion the landlord representatives no only supported extending it to all tenants; they wanted to expand this provision to include any conceivable future utility (for example city-sponsored broadband service). However the current language is broad enough to apply to future utility services, said staff.

In our view this pass-through has outlived its usefulness. It was apparently added to the rent stabilization ordinance in 1988 to protect landlords against inflation. But we are talking here about a marginal cost to landlords from only the change in utility pricing that would exceed the percentage annual rent increase. That suggests a limited benefit. For example if the additional marginal cost due to a spike in any utility price were $250 per year, say, that would be literally less than a penny on the rent dollar out of the landlord’s pocket for a tenant at the city’s average rent of $2,400 per month.

Second, this might only really apply to water rates anyway which are stable and established by the city for five-year periods. Electricity and gas costs in contrast can vary. In any case individually-metered and billed electric and gas is now the rule. It seems like only pre-remodeled old units still share the meter. So it is even worth the landlord’s time to track these costs tenancy-by-tenancy? Is it worth city administrative effort to monitor it? What a headache!

Water Service Penalty Surcharge

The commission agreed to recommend the elimination of a current pass-through that allows the landlord to add a surcharge to the monthly rent for both Chapter 5 and Chapter 6 tenants that is equivalent to 90% of the cost of any water service penalties or surcharges imposed by the city. The 90% tenant share is allocated across units.

Multifamily customers are billed a multifamily rate for water service and there is no penalty or surcharge for water use on the books today. While the commission discussed reducing the pass-through to 50% of the penalty, ultimately a commission majority, comprised of tenant commissioners and at-large commissioners, agreed to eliminate it. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council amend Chapter 5 of Title 4 of the BHMC to delete Section 4–5–308 therefrom and to amend Chapter 6 of Title 4 of the BHMC to delete Section 4–6–7 therefrom.

For the record the commission’s two tenant representatives voted to eliminate the water penalty surcharge pass-through. However landlords favored retaining it in part to encourage conservation. Because water is not billed individually the landlord has no control over tenant water use.

In our view this is one of the two pass-throughs we could support precisely because it is conservation-minded…but also because it has no application today.

Refuse Fee

Since 1991 the rent stabilization ordinance has allowed the landlord to pass through to all tenants the per-unit fee that a landlord pays for refuse collection and alley maintenance. These fees are charged by the city and in fiscal year 2023–24 they add up to $95.05 per unit on a bimonthly basis.

Refuse fees from schedule of taxes and fees for FY2023-2024

However the refuse fees can only be passed-through if the rental agreement does NOT assign that cost to the landlord. Read more about refuse in our explainer: How Much Can My Landlord Bill Me for Trash Pickup?

While the commission did discuss removing this pass-through in order to allow tenants and landlords to negotiate the refuse fee, after much discussion the commission agreed to leave it as-is: applicable to all tenants. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council make no changes to Section 4–5–309 of Chapter 5 of Title 4 of the BHMC or to Section 4–6–8 of Chapter 6 of Title 4 of the BHMC.

For the record the commission’s two tenant representatives did not vote to recommend keeping the refuse fee pass-through.

In our view, this pass-through should have been eliminated. Either the landlord assigns the cost to the tenant explicitly in the lease or the landlord assumes that cost explicitly or implicitly. Regardless, we don’t think it is good policy to have this provision on the books where a tenant would be surprised by by a $47.53 monthly surcharge (FY 2023–24) simply because the rental agreement was not clear about the responsibility for refuse.

Moreover, the city’s fast-rising refuse and alley fees for multifamily customers will certainly prompt more landlords to put the cost of refuse collection on the tenant explicitly. We have to wonder why anybody would pay those exorbitant fees when our multifamily alleys look like rubbish.

Capital Expenditure

The most potentially-contentious pass-through is the surcharge for capital expenditure 4–5–304. The rent stabilization ordinance defines this as a “permanent improvement or renovation…other than ordinary repairs or maintenance, the use of which will continue for at least five years.” Contrary to that stated exception for maintenance, though, the landlord can pass-through the cost of painting or exterior ‘texturing.’ Arguably exterior finishing is part of maintenance. Also this provision has been known to include a new roof (at tenants’ expense).

This pass-through is applicable only to Chapter 5 tenants. How does it work? The expenditure is amortized over a period of years in accord with the IRS depreciation schedule for the specific improvement. The monthly surcharge is then passed-though to affected tenants and prorated according to square footage. If an expenditure relates to the entire property then all tenants pay based on the size of the unit. If the expenditure is related to specific unit(s) then only tenants in those affected units pay the surcharge.

The commission discussed extending this pass-through to Chapter 6 households which effectively include all rent-stabilized households. However after much discussion the commission chose to make no change: it will continue to apply only to Chapter 5 tenants. From the resolution adopted by the commission:

The Commission hereby recommends that the City Council make no changes to Section 4–5–304 (Capital Expenditure Surcharge) of Chapter 5 of Title 4 of the BHMC and to not add a capital expenditure surcharge to Chapter 6 of Title 4 of the BHMC.

For the record our two tenant commissioners voted in favor of making no change — this restricting it to Chapter 5 and not extending it to Chapter 6 — while landlords argued that the pass-through should apply to all tenants.

In our view this pass-through should come off the books. Most important, it is subject to abuse: a landlord can argue that expenses related to deferred maintenance (such as a new roof or weathered exterior finishings) should be undertaken at tenant expense. Tenants already pay rent to inhabit properly-maintained premises. And because the city says it has not tracked capital expenditure pass-throughs, we can’t be sure there are tenants aren’t improperly charged.

And second, as written the capital expenditure surcharge alone can comprise up to 4% of base rent. That represents $96 monthly on top of an average rent of $2,400 and $200 for the typical 3-bedroom rent of $5,000. In reality Chapter rents are lower and that has mitigated the harm to date. But were this pass-through extended to Chapter 6 then we would see many more tenants paying significant monthly surcharges.

Again, the commission should have removed this pass-through entirely.

What’s Next?

City council on June 27, 2023 will discuss the maximum allowable annual rent increase allowed for the fiscal year spanning July 1st through June 30th but will not be discussing pass-throughs at that meeting. “We will likely bring forward pending Commission recommendations, including those related to pass-throughs/surcharges, as discrete agenda items at future Formal Session meetings,” said RSO analyst Cameron Kesinger in response to a query.

That is a bit of a surprise because staff at this Rent Stabilization Commission meeting mashed the accelerator on the seismic pass-through. We expected that pass-through to come forward at the first opportunity. We don’t have a crystal ball but it is possible that pass-throughs may come back to city council in conjunction with a long-delayed rent subsidy. Coupling pass-throughs with a rent subsidy may deflect some political heat if city council agrees to the commission’s recommendation.

In the meantime we are interested to hear from Beverly Hills tenants Chapter 5 tenants who pay a capital expenditures surcharge today. In confidence we would like to understand for what purpose the expenditure was made and how long ago…and especially if the seismic retrofit expense was passed-through as a surcharge. The city has said it doesn’t monitor landlords who are passing-through a capital expenditures surcharge. Somebody should!

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