City Council to Decide This Year’s Maximum Allowed Rent Increase [Updated]

Bureau of Labor Statistics data shows that inflation has moderated: the annual change in the cost of goods and services in our region is 3.2% which is down from a high of 8.5% last summer. That is good news for Beverly Hills rent-stabilized tenants because the maximum allowable annual rent increase is ordinarily pegged to inflation. But this is no ordinary year and City Council will contemplate a rent increase that is greater than the rate of inflation when it meets on June 27th. The key question: will moderating inflation mean a moderate allowed annual rent increase?

When City Council meets on June 27, 2023 it will determine the maximum allowable annual rent increase for rent-stabilized tenants in Beverly Hills for the coming fiscal year starting on July 1st. It appears from the staff report that the discussion will be limited to only to this year’s rent increase and not take into account the Rent Stabilization Commission’s recent pass-through surcharges recommendation or the commission’s companion recommendation to cap at 10% the annual rent increase inclusive of pass-through surcharges. Those recommendations are deferred for later consideration.

The gist of staff report:

Staff recommends that the City Council allow housing providers to return to the regular calculations for Chapter 5 and Chapter 6 units, as established under the Beverly Hills Municipal Code because this will bring back predictability and normalcy to both housing providers and tenants in the City.

If that recommendation is adopted then Chapter 5 tenants would face a 5.9% rent increase while the remaining 98% of rent-stabilized households would face a more moderate 3.2% maximum rent increase. The difference owes to the different formulas used to calculate the rent increase: the Chapter 5 maximum is calculated monthly and based on a moving average of two years of the percentage change in consumer prices; while the Chapter 6 maximum is calculated once yearly in a snapshot of the percentage change in consumer prices.

Bureau of Labor Statistics data show that inflation has moderated since last summer, so that makes the year-over-year change in consumer prices at 3.2% much more favorable for Chapter 6 households. In contrast, the moving average reaches back two years and includes the record-high inflation of mid-2022. The moving average at 5.9% is of course much less favorable for Chapter 5 households Read more about the latest inflation figure in our post: Consumer Prices in May Show Annual Decline of 3.2%.

But those are upper-bounds; if City Council agrees that does not mean the landlord must raise the rent by that percentage. However it is likely landlords will reach for the maximum rent increase available.

To cushion the disparate impact on the few remaining Chapter 5 households, the staff report indicates that the city is (still) considering a means-tested rent subsidy (p. 5):

Although there is a noteworthy increase on Chapter 5 tenants compared to recent years, the Rent Stabilization Division is currently in the process of proposing a means tested rent subsidy program to the City Council that is intended to offset the impact of the annual allowable rent increase on the City’s most vulnerable tenants.

We should be skeptical about the notion that a city rent subsidy would effectively protect Chapter 5 households tenants from a large maximum increase. After all the subsidy was not particularly effective when the city undertook it in late 2020; and since City Council last discussed the subsidy in the spring of 2022 it appeared to be left for dead. Curious about where it went sideways? Read our post: What Happened to the Beverly Hills Rent Subsidy?

City Council could instead establish even for this year the same means of calculating the Chapter 5 and Chapter 6 rent increase. That could be a moving average or a snapshot in time but it should reflect what the rent stabilization ordinance intends: the maximum allowable annual rent increase percentage is equal to the annual percentage change in consumer prices (CPI) for our region. What we don’t need are two different formulas but unfortunately that is not an option that was presented in the staff report.

Read more about how Beverly Hills approaches the rent increase in our explainer: Maximum Allowed Annual Rent Increase: What You Need to Know.

To Recoup or Not to Recoup?

The staff report acknowledges that, in the past, City Council has indicated an interest to allow landlords to recoup rent revenue that was lost due to the moratorium’s prohibition on rent increases.

In fact last year’s rent increase (3.1%) was a first step toward allowing landlords to recoup the revenue. If a landlords didn’t collect a 3.1% rent increase during fiscal year 2019-20, prior to the moratorium, then they could demand up to 3.1% starting July 1, 2022. Only one-quarter of tenants hadn’t paid a rent increase in the fiscal year period prior to the moratorium. Consequently landlords were able to raise the rent by 3.1% last year for only one-quarter of their tenants.

Essentially City Council pulled the 3.1% out of a hat last year. We walked through the reasoning in our explainer: Rent Can Rise Up to 3.1% for the 2019–20 Missed Rent Increase and city provided a FAQ about it.

Now it is time for City Council to establish the percentage rent increase again. Will City Council continue to allow landlords to recoup their lost revenue? Or will City Council agree to start fresh by, say, returning to the CPI rent increase?

The staff report notes that other cities that imposed a moratorium on rent increases didn’t allow landlords to recoup that money. They turned the page. The staff report does not make a recommendation on this aspect of this year’s rent increase.

City Council Options on the Rent Increase

1. Allow a rent increase as prescribed by the rent stabilization ordinance and disallow landlords from recouping lost revenue. This would effectively close the door on the pandemic and represent a return to normalcy. There would be no complicated carry-forwards of missed rent increases. Landlords who suffer hardship can apply for a ‘rent adjustment’ (and make the case) or else look to record-high asking rents and steep property appreciation to stay in business. We see this option as most likely.
2. Allow the rent increase as prescribed by the rent stabilization ordinance and defer action on the rent revenue foregone due to the moratorium on rent increases.. This option would mean City Council kicks the can down the road (as it did last year) on the question of lost rent revenue. This is an unlikely option. City Council has indicated an interest to close the book on the pandemic. We see this option as least likely.
3. Allow a percentage greater than the rent increases prescribed in the rent stabilization ordinance to allow landlords to recoup missed rent. This is the big unknown: will City Council agree to essentially make landlords whole for the moratorium? On one hand, councilmembers could argue that moderating inflation is an opportunity to return money to landlords. On the other hand, a generous rent increase during this time of record-high asking rents and steep property appreciation would, in our view, overcompensate landlords. After all, Council closed the book on the pandemic for tenants when it allowed the city’s moratorium to expire and declined our suggestion to extend the rent repayment deadline. Will Council keep the pandemic book open for landlords? We see this option as less likely.
4. Limit the rent increase for both Chapter 5 and Chapter 6 tenants pursuant to the Chapter 6 formula in the ordinance. That would mean a 3.2% rent increase for all rent-stabilized households. What reason is there to continue to use an arcane rolling-average formula for Chapter 5 rent increases that even the city had misapplied for probably a decade or more?. Harmonizing the rent increase makes even more sense as the inflation bump would saddle our few remaining Chapter 5 tenants with a rent increase that is close to double that of other tenants. This option is somewhat likely…if City Council even considers it.
5. Decide the appropriate maximum allowable annual rent increase as a policy matter and be done with it. This implies that City Council is ready to decide perhaps the most important issue outstanding where it concerns rent stabilization ordinance amendments: the annual rent increase. Prior to the release of the staff report we expected this could be at least a possible option. But with City Council likely at a future meeting to discuss pass-through surcharges and rent subsidy it now appears unlikely.

Read more about what’s on the City Council agenda for rent stabilization in the June 27, 2023 staff report on the CPI rent increase. It is item G-1 on an agenda that is jam-packed with fiscal year-end measures such as contract renewals and adoption of the city’s budget. That can make for a long night on the benches waiting for City Council to get around to an important issue like the rent increase….arguably the one issue on the agenda that directly affects more than half of all city households!

Our Take

We advocate for option #4 for practical reasons. It would mean closing the book on the pandemic for landlords just as City Council already has done for tenants when it declined in February to extend the June 1st rent repayment deadline. And it would mean closing the book on the arcane Chapter 5 rent-increase formula which is a headache to use even with a spreadsheet.

Moreover it would refrain from rewarding landlords with much more than they need to earn a ‘fair return,’ which is the legal standard for staying in business and making a sufficient profit. There may be some landlords who suffer hardship due to lost rent. But the majority have come through the pandemic in much better shape given asking rents and asset values. As the staff report reminds City Council, there is a ‘rent adjustment application’ whereby the landlord makes a case for a higher rent increase due to hardship.

That is exactly the reasoning West Hollywood use when it denied their landlords both the missed rent revenue and recovery of expenses for seismic retrofit. As far as we can tell, landlording in West Hollywood is still a pretty good business to be in.

Haircut?

As for the landlord’s ‘haircut’ on the lost rent revenue, how important is it really to their bottom line? Recall that the lost revenue is only marginal additional rent would have been collected through a rent increase. The haircut is the cumulative total of the addition rent over a maximum period of 27 moratorium months.

We did a back-of-the-envelope analysis which errs on the side of the landlord. At most, our figures show, a landlord would forego $600 in marginal revenue over the moratorium period per tenant for every $1,000 in contract rent for the tenant. For example, a tenant who pays a $3,000 monthly rent didn’t pay $1,800 ($600 x 3) in additional rent due to the moratorium on rent increases. At a $2,000 rent the revenue loss to the landlord is at most $1,200. (Read more about our methodology at the bottom of the post.)

If City Council embraces the concept of adding a few additional percentage points to the rent increase in order to allow landlords to recoup lost revenue, we will ask, Where is the analysis to support the claim that the lost revenue is material to the landlord’s bottom line? Indeed if Council agrees to allow landlords to recoup lost revenues it will have come without any analysis at all.

As the staff report points out, neither Santa Monica nor West Hollywood allowed landlords to recover that marginal revenue. Neither should Beverly Hills.

Get Involved

We encourage our neighbors to contact our councilmembers with your perspective. Reach them by email together at mayorandcitycouncil@beverlyhills.org or individually:

• Mayor Julian Gold: JGold@beverlyhills.org
• Vice-Mayor Lester Friedman: LFriedman@beverlyhills.org
• Councilmember Sharona Nazarian: SNazarian@beverlyhills.org
• Councilmember John Mirisch: JMirisch@beverlyhills.org
• Councilmember Lili Bosse: LBosse@beverlyhills.org

Please let us know if you do not get an acknowledgement of your comment to our councilmember(s).

You can also speak about your perspective on the rent increase at the June 27th meeting. Provide your comments live in one one of three ways:

1. Attend in person at council chambers in city hall (the meeting starts at 7pm). To comment submit a speaker card to the city clerk next to the council dais and your name will be called.
2. Call-in your comment as the item is introduced (or shortly before) at (310) 288–2288 and choose option #1 to comment.
3. Email your comment to cityclerk@beverlyhills.org and ask that it be read during consideration of item G-1. In the subject line be sure to indicate that it is public comment for the rent stabilization agenda item.

Remember to keep your comments succinct and under 300 words (less than 3 minutes of speaking time). We are happy to provide talking points if you get in touch.

Additional Resources

• June 27, 2023 City Council staff report for item G-1 annual rent increase
• Consumer Prices in May Show Annual Decline of 3.2%
• Moratorium Rent Repayment Deadlines are Approaching!
• Rent stabilization ordinance Chapter 5 section 4-5-303 Rent Increases
• Rent stabilization ordinance Chapter 6 section 4-6-3 Rent Increases

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The’Haircut’ Methodology

To generalize about the landlord loss in revenue we took the worst case: a landlord that was going to raise the rent in March 2020, just prior to the pandemic, by the statutory maximum of 3.1% after not having raised the rent in the preceding 12-month period. That rent increase was prohibited by the moratorium in mid-March of 2020.

In such a case the landlord will have lost a cumulative 27 months of incremental revenue from missed rent increases. (Thereafter City Council allowed a 3.1% rent increase in July 2022.)

When we add up the maximum missed revenue over that 27-month period, including compounding, we calculate that a landlord would forego roughly $600 in marginal additional revenue per tenant per every $1,000 they pay in base rent. On a $3,000 rent the worse case is $1,800 in loss to represent three times the $1,000 base rent multiplier. At the city’s average rent, $2,400, the maximum cumulative loss of revenue is $1,440 ($600 x 2.4 (to represent 2.4 times the base rent multiplier).

Again, this estimates the maximum loss if all rent increases were taken at the maximum amount and the moratorium deprived the landlord of those rent increases over the maximum number of months. Did we miscalculate? Please get in touch!