Chair Lou Milkowsky RSO commission
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RSO Commission Recommends Up to 10% Annual Increase (incl. pass-throughs)

Mark Elliot ,

Among the issues referred to the Rent Stabilization Commission for discussion by City Council in 2018 was the maximum annual rent increase. The percentage increase is the top-line figure that most of us care about: how much more rent can the landlord charge? We caution tenants to instead think about the bottom line: how much can the total cost of my housing rise if pass-throughs surcharges apply. The commission has recommended to allow the bottom-line total cost to rise by as much as a 10% over the prior year — just like the old exorbitant 10% cap on the Chapter 6 rent increase. How did we get back to the bad old days?

At the June meeting the Rent Stabilization Commission formally wrapped-up its consideration of the maximum allowable annual rent increase and, as a related issue, allowable pass-through surcharges. Over a dozen meetings, stretching over more than a year, the commission had discussed those two concepts in tandem.

The recommendations have now come forward. The commission has reached a recommendation on new pass-throughs (including for seismic retrofit) and also agreed upon on a recommendation concerning the maximum allowable annual rent increase. The latter we address here.

Recommended 10% Cap

The commission reached agreement on a recommendation concerning how high the rent can rise for Beverly Hills Chapter 6 rent-stabilized households: a maximum of 10% annually (inclusive of allowable pass-throughs). The adopted resolution in part reads:

The Commission hereby recommends that the City Council amend Chapter 6 of Title 4 of the BHMC to add a provision thereto requiring that in any given year, a tenant’s expense for rent and pass throughs and surcharges, if any, shall not exceed ten percent (10%) of the prior year’s base rent.

That 10% figure represents an overall cap on the total annual increase in rental housing cost inclusive of both the percentage annual rent increase and additional surcharges for allowed pass-throughs. These examples illustrate how the cap would function under two inflation scenarios with respect to the rent increase and pass-throughs:

  • Example 1: The annual change in consumer prices for our region (CPI) is 3.2%, as it is this year, which becomes the percentage rent increase for Chapter 6 tenants pursuant to the rent stabilization ordinance. Under the recommended 10% cumulative cap it would leave as much as 6.8% available for pass-through surcharges. In this example the pass-throughs if they add up to 6.8% would amount to triple the allowed rent increase.
  • Example 2: Inflation runs high and 7% is the annual rent increase for Chapter 6 tenants pursuant to the ordinance. That would leave 3% available for pass-through surcharges. Already the commission has recommended a seismic retrofit pass-through at a maximum of 2% of the base rent. If passed-through at that rate, after the seismic expense there is an additional 1% available for an additional surcharge under the 10% cumulative cap.

When you consider that inflation has averaged only 3% annually in our region over the past decade, the overall 10% cap offers way too much headroom for added pass-through surcharges. It is overly generous to the landlord who would pass-through the landlord’s cost of doing business.

From the tenant’s perspective, a pass-through may not technically be called rent but it certainly acts like rent, and failure to pay the surcharge is a ground for eviction.

Bad Deal or Good Deal?

The commission was tasked with discussing the appropriate rent increase for both Chapter 5 and Chapter 6 but chose to focus only on Chapter 6.

Today there is no percentage cap on the Chapter 6 rent increase. If inflation reaches 10%, for example, then the rent could be increased by that percentage. And if the tenant is subject to a pass-through then the surcharge, which is generally not considered rent, would be added. More than one pass-through may apply and the surcharges can stack-up.

Under the current ordinance language the total cost of housing for a Chapter 6 household inclusive of pass-throughs could rise more than ten percent from one year to the next if inflation is as high as ten percent.

The recommendation would limit the total annual increase in the cost of housing to 10%. However a 10% increase in the cost of housing is not sustainable for many renting households. And while inflation at ten percent is highly unlikely, it is far more likely that some combination of pass-throughs can push a more moderate rent increase up to the double-digits.

Again the commission’s recommendation affects the 95% of rent-stabilized tenancies that are regulated by Chapter 6 of the rent stabilization ordinance. The fewer than 5% that are regulated under the old form of rent control, Chapter 5, are not affected. Incidentally the chapters calculate the allowable rent increase differently although both reflect the annual percentage change in consumer prices for our region (CPI). For more about how these are calculated see our explainer: Maximum Allowed Annual Rent Increase: What You Need to Know.

The Long Road to The 10% Recommendation

In 2019 City Council tasked the future Rent Stabilization Commission with discussing the maximum annual rent increase. The expectation that the commission would make a recommendation to City Council which would then inform an amendment to the rent stabilization ordinance. But it took a while for the new commission organized and then many more months to get this issue onto the agenda.

The commission turned to the question of increases and pass-throughs in April 2022 and then continued that discussion to May and July. At the July 6, 2022 meeting the commission reached consensus on two aspects:

  1. The CPI increase would not change. Today Chapter 6 subsection 4–6–3(b) of the rent stabilization ordinance establishes the percentage rent increase at the greater of the annual change in consumer prices (CPI) for our region or 3%. If inflation is 4% then the rent increase would be 4% — unchanged in the commission’s recommendation.
  2. There would be a new 8% cap on the annual increase for Chapter 6 tenants. The new ceiling would protect tenants from a double-digit rent increase if inflation runs that high. Heretofore the Chapter 6 rent increase didn’t have a cap. For many years the ordinance allowed a 10% Chapter 6 rent increase but that was amended in 2017 to limit the increase to CPI.

The 8% cap as was preliminarily recommended would be a modest step forward for two reasons.

First, because the ordinance already has a floor at 3% that protects landlords when inflation runs very low. For example if inflation runs 1.5% annually, as it did in some years, the landlord still pockets a 3% rent increase because the ordinance allows the greater of 3% or CPI.

Second, the recommendation would harmonize the rent increase provisions for both chapters 5 and 6. Chapter 5 already limits the rent increase to 8% regardless of inflation; that provision would be extended to Chapter 6 of the ordinance.

The 8% notion didn’t survive the commission’s next discussion on October 3, 2022. At that meeting the 8% proposed cap on the rent increase was rejected in favor of an overall 10% cap inclusive of the rent increase and allowable pass-throughs.

Then-commissioner Zachary Sokoloff, who was appointed to represent tenants, reasoned that it would be more prudent to establish an upper limit on the total cost of housing and then proceed to decide allowable pass-throughs. “I would be uncomfortable with [additional] pass-throughs without a cap on the back end to protect tenants,” he said. “The state has established 10% as a reasonable year-over-year increase so I’m suggesting that a cap on the combination of allowable rent increase plus pass throughs cannot exceed 10%.” He added:

It is the certainty of that cap. I’m suggesting the total combined year-over-year increase the tenant may pay is 10%, which comprised of the 8% that we have determined for the rent increase and the 2% for ‘other’ whatever that may include.

Chair (and tenant representative) Kathy Bronte clarified, “Do you mean 8% rent increase plus 2% for pass-throughs, or 7% plus 3%?” She gave an example. “If the rent increase is only 3% then the pass-through is 2% — or is it the 3% increase plus the 7% for pass-throughs?”

That is a crucial difference! Sokoloff replied, “The rent increase and the surcharges together cannot exceed 10% year-over-year.”

Sokoloff found agreement from the landlord representatives. The two neutral members of the commission also agreed. Only tenant representative Bronte dissented. The motion to recommend a 10% cap carried. Watch the October 3, 2022 video cued-up to the commission’s discussion.

The 8% cap on the Chapter 6 rent increase would have been a modest step forward but, unfortunately, it was discarded in favor of the overall cap. The cap that allow as much as seven percentage points in additional pass-through surcharges to be added to the annual percentage rent increase.

Our Take

The only potentially positive aspect of the commission’s recommendation was an upper limit on the Chapter 6 rent increase. That fell by the wayside.
What we have from the commission is the recommended overall 10% cap on the annual increase in housing cost, inclusive of pass-throughs, plus a tandem recommendation to allow more pass-throughs. That is a recipe for a bank-breaking increase in housing costs.

And then there is the process that got the commission there. We have attended more than a year of commission meetings and watched as an ill-prepared commission did their best to balance competing landlord and tenant interests but asked the wrong questions and arrived at the wrong recommendation. It is worth noting that neither recommendation was evaluated for potential impact on economically-precarious households.

In fact it was the same process that led to the commission’s recommendation to change how the city calculates the relocation fee. In our analysis we found the recommended formula would result in a lower relocation fee for 90% of renting households. We called it a bad deal for tenants.

Next Step

The next step is City Council. It looks like councilmembers on June 27th will decide the percentage rent increase for this coming fiscal year but leave the commission’s recommendations on the increase and the pass-throughs for some future time. The key question is, Will City Council default back to the CPI rent increase, as mandated by the rent stabilization ordinance, or recommend some greater percentage in order to repay landlords for rental revenue missed due to the moratorium?

We can’t get a straight answer from our Magic 8-Ball!

[Pictured at top: Lou Milkowski, Rent Stabilization Commission Chair and at-large representative to the commission.]

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