sr-071712-8a (2)ID_
ity of City Council Report
Santa Monica
City Council Meeting: July 17, 2012
Agenda Item: 8`A
To: Mayor and City Council
From: Marsha Jones Moutrie, City Attorney
Subject: Proposed Amendments to Rent Control Law
Recommended Action
Staff recommends that the City Council: 1) consider the Rent Control Board's (Board)
proposal to amend provisions of the City Charter related to the computation of the
annual adjustment to rent ceilings 2) either approve the proposed amendments or direct
staff to make specified revisions, 3) direct staff to return with the resolutions necessary
to place a measure on the November ballot.
Executive Summary
Rent Control Board staff has forwarded to this office for presentation to Council a
request to place on the November ballot a measure that would amend Title XVIII of the
City Charter (the Rent Control Law) by changing the method for establishing the amount
of the annual general adjustment to rent ceilings for controlled units. The proposed
measure would:
(1) Require that the general adjustment be based on a formula consisting of seventy -
five percent of the annual percentage change in the March to March Consumer Price
Index but limited to a range consisting of a minimum adjustment of 0% and a maximum
of 6 %; and
(2) Give the Rent Control Board discretion, after holding a public hearing, to impose a
dollar limit, within that 0 -6% range, which would be calculated using the same formula
that is employed when imposing such a limit under the existing general adjustment
formula.
Background
City Charter Section 1805, last amended by the voters in 1984, governs the annual
general adjustment to the ceilings on allowable rents for controlled rental units. Section
1805 (a) allows the Board, after holding a public hearing to adjust the rent ceiling up or
down for all controlled rental units and /or for particular categories of units and to
postpone the effective date of the change. Subsection (b) presently requires the Board
1
to generally adjust rents upward by granting landlords upward adjustments for actual
increases in utility costs and taxes and for increases in City "maintenance expenses"
and to generally adjust rents downward for actual decreases in taxes pursuant to a
formula of general application. Subsection (e) currently applies to both individual and
general adjustments. It authorizes the Board to adopt any lawful fair return standard
and requires the Board to consider all factors relevant to the formula it employs,
including expenses, utility costs, capital improvements replacement and maintenance,
increases or decreases in living space, and substantial deterioration of the unit other
than from ordinary wear and tear and failure by the landlord to provide adequate
housing services or substantially comply with applicable housing, health and safety
codes.
Thus, while the existing language specifies minimum factors that must be considered in
calculating the General Adjustment, it does not expressly limit the factors that may be
considered or specify the calculation methodology. For nearly thirty years, the Board
has implemented Section 1805 by using a complex methodology known as the
"component ratio to gross rent" formula. In order to apply this methodology and satisfy
the requirements of Section 1805, the Board conducts annual surveys to determine
changes in landlords' costs. However, Board staff observes that the surveys can
encompass only a small percentage of landlords' expenses considered under the
component to gross ratio formula; and the survey process is both costly and time
consuming. Moreover, Board staff observes that the component ratio to gross rent
formula is so complex that it can make results unpredictable and certainly is difficult for
the public to understand.
Thus, at its May 31, 2012 meeting, the Board heard public comment on whether to
recommend that the City Council place on the November ballot a measure that would
change the methodology for calculating and establishing the allowable annual general
adjustment to controlled rents. The Board took public testimony, deliberated and
directed staff to place the matter on the June 14th agenda for additional discussion. At
K
its June 14th meeting, the Board directed staff to return on June 28th with proposed
Charter language that would: require calculation of the adjustment based on 75% of the
annual percentage change in the Consumer Price Index, limit the adjustment to a range
of zero to five percent, and grant the Board authority to impose a dollar amount limit
within the zero to five percent range, said limit to be calculated using the present
formula for calculating the adjustment.
At the June 28th meeting, Board staff supplied a report, which includes a brief
explanation of the reasons for the proposed changes and their potential effects and
recommended that the general adjustment's upper limit be seven percent. A copy is
attached. The Board again discussed the proposal and voted to recommend for Council
consideration of a six percent maximum to the general adjustment. Otherwise, the
Board approved its staff's recommendation.
Discussion
The proposed ballot measure would amend Sections 1803, 1804 and 1805 of the City
Charter and would thereby significantly change the way that the annual general
adjustment is calculated. The present complex formula would be replaced with an
adjustment based on the Consumer Price Index and circumscribed by limits consisting
of a statutory minimum adjustment of zero percent and a maximum of six percent.
Board staff explains that adopting a minimum and maximum range would conform
Santa Monica's standards to those of other jurisdictions with rent control laws most
similar to Santa Monica's.
Additionally, the proposed Charter amendment would include a dollar- amount limit to
the general adjustment. It would be akin to the limits that the Board has imposed in
many, but not all recent years (e.g., in 2012, the Board authorized an adjustment of
1.54 %, but also imposed a dollar limit of $26; thus, as to any maximum allowable rent
(MAR) for which the ,1.54% general adjustment would yield a rent increase of more than
$26, that limit applied).
3
Board staff explains that in setting these dollar limits, the Board has consistently used a
formula which averages the 85th percentile of rents for all controlled units with the 85th
percentile of rents for long -term controlled units, and multiplied the resulting average by
the general adjustment. This approach is incorporated into the proposed Charter
amendment.
The specific proposed changes to the Charter language are as follows. As to Section
1803, establishing the qualifications, powers and duties of the Board, the ballot measure
would modify Section 1803 (g) on rules and regulations. Current language requiring the
Board to hold a public hearing "prior to the adoption of a general adjustment" would be
deleted, because the general adjustment would be determined solely by a non -
discretionary formula. It would be replaced with language requiring the Board to
conduct a public hearing before deciding whether to impose a dollar- amount ceiling on
the general adjustment.
As to Section 1804, governing maximum allowable rents, the measure would delete
language stating that the base rent ceiling is "a reference point from which fair rents
shall be adjusted upward or downward." It would be replaced with similar language
stating that the base rent ceiling is "the reference point from which the rent ceiling shall
be adjusted upward or downward ".
The bulk of the proposed amendments would be to Section 1805, which governs both
individual and general adjustments to rent ceilings. The amendments would separate
and thereby clarify the law applicable to the two types of adjustments. Thus, in Section
1805(a), the first sentence of that section currently provides that the Board may adjust
rents up or down for all units or categories of units and may select a reasonable
effective date for an adjustment. The proposed language would promote certainty by
requiring the Board to announce the new percentage adjustment, which would be
effective on September 1St of that year, and by specifying the formula (75% of the CPI
M
increase, with a floor and ceiling of 0% and 6 %). The proposed language also specifies
that numbers of .04 and below shall be rounded down, and others rounded up.
Section 1805 (b) would be significantly changed. It currently requires that rents shall be
general adjusted upward to reflect actual utility and tax increases and increases in City
"maintenance" costs and shall be adjusted downward to reflect decreases in City taxes.
These requirements would be eliminated. They would be replaced with the language
allowing the Board to impose a dollar- amount limit to an annual general adjustment and
specifying the methodology for calculating that limit. It is as follows: the 85th percentile
of the MAR for all controlled units and the 85th percentile of the MAR for all controlled
units with a base rent established before January 1, 1999 would be averaged and that
average would be multiplied by the annual general adjustment.
Finally, Section 1805(e) would also be revised to clarify the distinction between the
methodologies for determining individual adjustments and general adjustments. Thus,
the first sentence would be revised to strike a reference to general adjustments, wording
clarifying the distinctions between downward and upward individual adjustments would
be added, and there would be other minor, non - substantive changes to promote clarity
by differentiating between individual adjustments upward and downward adjustments.
If Council opts to place either the proposed measure or a revised version of that
measure on the ballot, staff will return with the appropriate resolutions at the next
Council meeting on July 24, 2012.
Alternatives
Council could modify the language of the proposed Charter changes. Alternately,
Council could decline the request to put a measure on the ballot.
5
Financial Impacts & Budget Actions
There are no significant costs to the City to placing the measure on the ballot. Ballot
materials would be more expensive to prepare, but the additional cost would be
reimbursed to the City by the Rent Control Board.
Prepared by: Marsha Jones Moutrie, City Attorney
Approved: Forwarded to Council:
Mar hta J ne Moutrie Rod Gould
Cit ttor e City Manager
Attachments:
A. Rent Control Board Staff Report — May 31, 2012
B. Rent Control Board Staff Report - June 14, 2012
C. Rent Control Board Staff Report - June 28, 2012 (including proposed change to
Rent Control Charter Amendment)
N
ATTACHMENT A
SANTA MONICA RENT CONTROL BOARD MEMORANDUM
TO: Santa Monica Rent Control Board
FROM: Staff
FOR MEETING OF: May 31, 2012
RE: Public Hearing on Consideration of Alternate Methods to Determine Future
Annual Rent Increases (General Adjustments)
Introduction
The City Charter requires the Rent Control Board to approve an across- the - board, .
once -a -year adjustment to controlled rents based on increases in landlords' utility and
maintenance costs, as well as increases or decreases in local taxes. This is known as the
"annual general adjustment.
While the Charter specifies the "what," spelling out which broad categories of
expenses are to be considered, it is silent on the "how." For almost 30 years, the Board
has used a complex methodology known as the "component ratio to gross rent" formula.
Though the formula itself is complex, the idea behind it is relatively simple. First, come
up with a list of common landlord expenses that fall within the three Charter- specified
categories (this is the "component" part of the formula) and figure out how each of those
expenses changes from year to year. Second, based on local median rents, assign each
component a weight relative to all the other components (this is the "ratio to gross rent"
part of the formula). Finally, calculate the percentage by which the weighted categories
collectively have increased: this yields an annual general adjustment percentage. The
formula's conceptual simplicity belies the complexity of its actual implementation. The
staff report explaining the 2012 general adjustment runs to 40 pages.
The advantage of this complex formula is that it captures some changes in
landlords' actual expenses. The Board regularly surveys annual changes in local property
taxes, tax assessments, business license costs, and City - provided services. The Board
periodically surveys changes in other costs, such as utilities and insurance. But these
expenses account for only about 12% of component costs. For the remainder, there is no
reliable data readily available, so most cost categories are adjusted using some factor of
the Consumer Price Index (CPI). It is therefore no surprise that, in the aggregate, the
general adjustment calculated using the component ratio to gross rent has tracked a factor
of the change in the CPI — historically, about three- quarters of the annual percentage
change.
Almost since its inception, the formula — or rather its application in any given
instance —has been subject to public controversy and threats of litigation. Last year, the
threat ripened into actual litigation, resulting in the inclusion in the formula of tax
assessments not previously included, and yielding a general adjustment substantially
higher than the inflation rate. In 2009, an increase was instituted during a year when
there was a net decrease in the rate of inflation, resulting in a GA that exceeded the
inflation rate by more than 100 %. Over the past two years, interest groups have
complained that the formula isn't being calculated fairly, or is being calculated in a way
that, even if fair, is inconsistent with the Charter. Regardless of the range of credibility
of the complaints, however, one thing seems clear: they are partly a product of the
complex methodology.
The Board last year authorized the formation of a subcommittee to investigate
whether it is possible to overcome some of these concerns by finding a means of
calculating the general adjustment that is fair, transparent, and, to the extent possible,
capable of meeting standards imposed by the judicial process.
Subcommittee Research
Through the first part of 2012, the two- member subcommittee conducted basic
research. It solicited public input, meeting with representatives of both tenant and owner
organizations, and looked into how other California rent control jurisdictions calculate
their annual general adjustments. After doing these things, the subcommittee identified
two broad possible options: continue to use the current formula, or use a new formula
based on a percentage of the change in the CPI.
Public Input
The representatives from both landlord and tenant groups both said initially that
they believe that the current methodology is fine. But, almost uniformly, they said that
the formula is fine so long as it is adjusted in some result- oriented fashion.
Representatives of landlord groups want the formula to be applied in a way that allows it
to be adjusted upward, to yield higher increases than it would otherwise or to include a
floor, while representatives of tenant groups want it to be applied in a way that yields
lower increases. Of course, if the formula is adjusted in such a way, it is not the current
formula, but rather some results- oriented variation of it. Such an adjustment would tend
to erode public confidence and invite litigation, and these are not welcome outcomes.
Other Jurisdictions
Although in rent control's early days in California (the late 1970s and early 1980s)
a number of jurisdictions used the component ratio to gross rent formula, Santa Monica is
the only jurisdiction that continues to do so. Most other jurisdictions have now moved to
a percentage of the annual percentage change in the CPI. Two jurisdictions, Hayward
2
and San Jose, have adopted a fixed percentage that is the same every year. The following
chart shows each jurisdiction's methodology:
city
Annual Rent Adjustment
2012 GA (if decided)
'5° ogpt'ch19e1n
U�� �
� �J'ani�ary�412�IAd" '
�JAW-
CPI (12 mo. total,
June 2011 —1.60% (Ch 5 tenants)
Beverly Hills
year -to -year % change)
0% to 10% (Chapter s tenants)
A.
5 4
�a t alq /{Ito
80 % %-ary CF o
X i Jii[Iy�20f 1 Ind a�
._,
JS6ftFf4#%J98oarea�GPi --1t ),
't �'� ��TOtt tdec[ff�m =1
Hayward
5%
Annually — 5.0%
£
�Tj Y r fo year
�OS ((l�@IS,
ehahg# Vaffh ailiitii(htRi o3%
; 4 zl4tiy,20
4
i. I.L
Ri
j
.- -•
r.>�i � .3;�`±C.,��.
t}
�' Z i.
e =�.. e -
...� �. :42itN
.�_ � .�_n. v. ._.11��
Oakland
CPI 12 month March to February
% average change
July 2012 -- 3.0%
San �fariasGOhlt1%
MafChQ 4 149 °,
cPl��aas�4�(1t�nCPtl
,
San Jose
8%
Annually — 8.0%
West #�R[l�+wQOd
7aI° of`May,to iNayxPl Gha4e 3
Se)s#
>
,
£ - 1
F. sue.
r �r2
Appendix A includes a summary of general adjustments for Berkeley, Los
Angeles, Oakland, San Francisco and West Hollywood.
Subcommittee Recommendation
At the Board's May 10 meeting, the subcommittee announced that it had
concluded that there are, broadly, two possible options available for the calculation of the
annual general adjustment. One is to retain the current formula, with adjustments
consisting of additions, subtractions, or other modifications that appear necessary, as has
been done since the beginning. The other is to join other California rent control
jurisdictions and move to a CPI -based formula. The remainder of this report summarizes
the pros and cons of each approach.
Option One: Retain the Existing Formula
The Pros
There is one primary benefit to staying with the current formula: the current
formula is (to the Board and its staff, if not the public at large) a known quantity. A
second benefit is that the current formula gives the Board at least some discretion in
setting the general adjustment. A third benefit is that, because it is based on components
that comprise owner expenses, it has some tendency to reflect Santa Monica landlords'
actual costs of doing business.
The first of these three benefits is mainly psychological rather than practical and
should probably, therefore, be accorded little weight. If the current system is good, it
should be retained for the reasons that make it good; if it is problematic, it should not be
retained merely because it is a long- standing process.
The discretion the second benefit provides is limited. Each component makes up a
percentage of the total of owner costs, and each is adjusted by either the degree to which
that cost is known to have actually changed or by a factor of the CPI. Thus, any
discretion that the current formula affords the Board in setting the general adjustment is
constrained. Although the Board has, from time to time, made relatively minor,
common -sense adjustments, those adjustments have been within the parameters of the
existing formula. For example, last year the Board adjusted the "cash flow" component
by 75% of the percentage change in CPI, rather than the traditional 100 %. This year it
will consider basing the "gross rents" portion of the formula on the median of all
controlled units (rather than only long -term controlled units). Each of these ideas is in
response to the reality that, while owners' costs may have gone up, their income has gone
up even more due to vacancy decontrol. These adjustments are relatively minor and are
made within the current formula's framework.
Beyond this ability to make minor adjustments, the Board could not depart from
the formula in more material ways without exposing itself to the danger of litigation.
More importantly, an attempt by the Board to exercise much broader discretion in setting
each year's general adjustment could seem ad hoc to an extent that might corrode public
confidence.
The third benefit of the current formula —that it accounts for actual changes in
owner costs —is limited by the availability of information. As noted in the introduction,
only a small percentage of owner costs are adjusted annually based on actual, known
changes in local owner costs. The rest, comprising more than 80% of the overall
expenses, are either not adjusted at all (in the case of debt service), or are adjusted by a
factor of the CPI. There is no firm evidence that the formula yields a rent adjustment
pegged to Santa Monica - specific conditions, given the small percentage of components
based on actual changes in local expenses. As the below chart shows, annual general
adjustments in the nearby City of West Hollywood, which has since 1985 based the
adjustments on 75% of the percentage change in CPI (rounded to the nearest quarter
percent), are remarkably similar to Santa Monica's over the years. The adjustment is in
some years higher in one city than the other, but the difference is usually slight, and in
the aggregate is insignificant.
The Cons.
The most obvious disadvantage to the current formula is that it is complex, which
leads to a number of subsidiary problems. The formula often appears opaque to the
public who are affected by it, such that they have expressed concern that it may not be
free from the sort of ad hoc determination discussed above. It also can be costly.
Gathering information to support even the small percentage of the formula accounting for
West Hollywood GA
Santa Monica GA
2011
2.25
3.20
2010
1.25
2.00
2009
0.00
1.00
2008
2.75
2.70
2007
2.25
2.30
2006
4.00
4.00
2005
3.25
3.00
2004
2.75
1.30
2003
1.50
3.00
2002
2.25
1.75
2001
2.75
4.20
2000
2.25
3.00
1999
1.75
1.00
1998
1.25
1.00
1997
1.00
2.00
1996
1.25
1.60
1995
1.75
1.50
1994
2.00
2.00
1993
0.75
3.00
1992
2.75
3.00
1991
3.50
3.50
1990
3.75
6.00
1989
3.75
3.00
1988
3.25
3.00
1987
3.50
4.00
1986
2.50
2.50
1985
3.00
3.00
% of CPI
75.00
77.85
The Cons.
The most obvious disadvantage to the current formula is that it is complex, which
leads to a number of subsidiary problems. The formula often appears opaque to the
public who are affected by it, such that they have expressed concern that it may not be
free from the sort of ad hoc determination discussed above. It also can be costly.
Gathering information to support even the small percentage of the formula accounting for
actual changes in owner expenses sometimes requires the services of highly specialized
consultants who bill for their work at a rate commensurate with the degree to which it is
specialized. Finally, the formula's complexity necessitates a great deal of staff time to
ensure its fair and accurate application every year. As noted above, the most recent
general- adjustment staff report is 40 pages long.
The second disadvantage to the current formula is that it seems to invite litigation.
This may be related to the complexity of the formula as described above. Because the
formula has so many highly detailed component parts, and because those parts will
directly affect the amount by which rents are permitted to increase, each part is subject to
scrutiny.
Option Two: A Formula Based On a Factor of the CPI
The Pros
The most obvious benefit of a general adjustment formula based on a factor of the
CPI is simplicity. The federal Bureau of Labor Statistics publishes the CPI. The CPI's
inflation index is readily available online or in print (it is also widely reported in all forms
of media), so there can be no dispute about what it is. A formula based on a simple factor
of that index would be a mathematical calculation that could be performed quickly and
easily. Because the CPI is a widely accepted, widely understood index of inflation and is
commonly used across industry and government, it is (as much as anything can be) free
from controversy.
A simple adjustment, based on some percentage of the CPI, would therefore be as
invulnerable to challenge as any methodology could be. The general adjustment's
purpose is to ensure that rents keep up with some factor of inflation in order to broadly
ensure landlords their constitutionally - mandated fair return without unfairly burdening
renters. It is difficult to conceive of a basis on which it could be claimed that a CPI -
based formula would not achieve this result. It is likely for this reason that other
jurisdictions that have switched to a CPI -based general adjustment calculation are neither
threatened with litigation over their formula nor actually sued.
Another benefit of a CPI -based formula is that it would cost nothing. There would
be no need to hire consultants; no need to engage in detailed economic research; and no
need to devote hours of staff time and limited financial resources on research and
calculations that contribute minimally to a result influenced so significantly by the CPI.
A third and final benefit of a CPI -based formula is that it could yield a result that
is historically consistent with what the Board is already doing. Again, the current
formula has yielded a general adjustment that, over time, has been roughly equivalent to
three quarters of the annual percentage change in CPI. But it could achieve that result
without expense, without public controversy and without the threat of litigation.
v
The Cons
A disadvantage to a CPI -based general adjustment formula is that it would divest
the Board of discretion in what many view as one of the Board's most important tasks.
But this disadvantage may be overrated. First, as detailed above, the Board actually has
limited discretion under the existing formula. Second, a lack of broad discretion is not
necessarily a bad thing. Public bodies are routinely challenged over the reasonableness
of the choices they make in discretionary matters.
Moreover, to the extent that there is a concern that a simple mathematical formula
could yield a too -harsh result for tenants in a year of anomalously high inflation, or a too -
harsh result for landlords in an anomalous year of deflation (which we experienced
recently) those peaks and valleys can be blunted by establishing parameters at the outset.
For example, there could be a rule that a general adjustment cannot exceed a particular
percentage in a given year and that, in the case of a negative CPI, maximum rents will
remain unchanged, rather than go down. This is an approach that has been taken by other
jurisdictions.
A second consideration, which might be thought of as a disadvantage, is that it is a
change. The current formula, while not spelled out in the existing charter language, is
based on that language. A purely CPI -based formula would require a Charter
amendment.
Next Steps
If the Board chooses to retain the current methodology, it need do nothing. If, on
the other hand, it opts to seek a change in the methodology to a CPI -based formula, the
Board must vote to direct staff to prepare proposed language for the necessary changes to
the Rent Control Law and to forward to the City Council a formal request to put a
proposal for the necessary change on the ballot for the November 2012 municipal
election.
7
APPENDIX A
Info: Annual General Adjustments - City of Berkeley, CA
ANNUAL GENERAL ADJUSTMENTS APPROVED BY THE
BERKELEY RENT STABILIZATION BOARD
1981: 5% OR 6.2% if owner paid for space heating
Page 1 of 2
1982: 9% plus, if the owner paid for gas and electricity, including space heating, the
following additional increases were authorized: $4 for studio; $7 for 1- bedroom; $9 for
2- bedroom; $10 for 3- bedroom; $12 for 4- bedroom; $16 for house with 3+ bedrooms.
Rental property owners who deferred the 1982 rent increase are entitled to a banking
bonus of an additional 1 % for each year of deferral.
1983: 4.75% OR 5% if owner paid for electricity or gas
1984: 0%
1985: 2%
1986: 3% plus $2.50 per month
1987: 3.5%
1988: $25.00 per month OR $15.00 per month for residential hotels
1989: 3% OR 3.5% if owner paid for gas, electricity, or heating within the unit
1990: $16.00 per month
1991: 4% or $17.00 per month, whichever is higher
1991: 1991 Inflation Adjustment Order -45% of the 5131/80 rent (Searle Increase)
1992: $26.00 per month
1993: $20.00 per month
1994: $18.00 per month
1995: 1.5%
1996: 1 %
1997:
1.15%
1998:
0.8%
1999:
1 % not to exceed $8.00
2000:
$6
2001 $10, plus an additional $8 if the owner pays for all gas service to the rental unit
http: / /www.ei, berkeley ,ca.us /ContentPrint.aspx ?id =8870 05/23/2012
Info: Annual General Adjustments - City of Berkeley, CA
Page 2 of 2
2002: 3.5% or $30, whichever is less, plus an additional $9 if the owner pays for interior
space heating to the rental unit
2003 : 0%
2004: 1 %, plus an additional 3$, for units with new tenancies between 1/1/99 and
12/31/02; 1.5 %, plus an additional 3$; for units with no new tenancies since 1/1/99.
2005 :
0.9%
(9 /10th' of a
percent)
2006 :
0.7%
(7 110th' of a
percent)
2007.: 2.6%
2008: 2.2%
2009: 2.7%
2010: 0.1 % (1 /1 0th of a percent)
2011: 0.7% (7 /10ths.of a percent)
2012: 1.6%
• Rounding to the nearest dollar amount was allowed for 1981 -1987, and for 1989 and
1990. Rounding was required for 1988.
• Beginning with the 1991 AGA, rounding has not been allowed.
• The yearly increases must be taken sequentially. For example, the 1988 increase may
not be taken before the 1987 increase.
• Beginning with the 2000 AGA, the AGA is not applicable to units with new tenancies
starting in the previous calendar year. Examples: the year 2000 AGA does not apply
for units with qualifying new tenancies during 1999; the year 2001 AGA does not apply
for units with qualifying new tenancies during 2000.
http: / /www.ei. berkeley .ca,us /ContentPrint,aspx ?id =8870 05/23/2012
The Rent Stabilization Ordinance (RSO) was designed to protect tenants from excessive
rent increases while allowing landlords a reasonable return on their investments. The
Ordinance became effective May 1, 1979. The following information reviews the allowable
rent increases for those rental units subject to the RSO.
AUTOMATIC ADJUSTMENTS
The rent for a rental unit may be increased without the permission of the Rent Adjustment
Commission or the Rent Stabilization Division under the following circumstances by:
1. Three percent (3 %) to eight percent (8 %) every 12 months in accordance with the annual
rent increase percentage, which is based on the Consumer Price Index (CPI) average for
the twelve (12) month period ending September 30 of each year. The annual adjustment
may be applied once to each year. An exception to this allowable increase exists for
substandard housing units for which a notice of non - compliance has been sent to the
Franchise Tax Board. The 3% to 8% annual increase is NOT cumulative or retroactive.
2. THE CALCULATED ANNUAL INCREASE PERCENTAGE EFFECTIVE JULY 1, 2011
THROUGH JUNE 30, 2012 IS THREE PERCENT (3 %). The allowable rent increase for the
period of July 1, 2012 through June 30. 2013 will also be 3 %. This annual increase may
be imposed only if twelve (12) months or more have elapsed since the last such rent
increase. Landlords are required to serve tenants with a written 30 -day notice for rent
increases that are less than 10% of the tenant's rent, or provide a 60 -day notice for rent
increases over 10% of the tenant's rent within a 12 -month period.
3. An additional 1% for gas and 1% for electric service into the dwelling unit when service is
provided by the landlord.
4. Nineteen percent (19 %), plus 2% if the landlord provides the gas and electricity, for a
rental unit which has not had a rent increase since May 31, 1976.
5. Thirteen percent (13 %), plus 2% if the landlord provides the gas and electricity, for a
rental unit which has not had a rent increase since May 31, 1977.
6. Ten percent (10 %) for each additional tenant exceeding the number of tenants allowed
in the original rental agreement. A corresponding reduction in rent is required when the
additional tenant vacates the unit. Security deposits may be raised for additional
tenants by the same dollar amount as the rent is raised.
7. An increase of 3% to 8% in the security deposit which is allowed at the same time and
by the same percentage as the annual rent increase.
6640 VAN NUYS BLVD.
s VAN NUYS, CA 91405
FM1- 3550 WILSHIRE BLVD.
Las Angeles usipgpep�tment W- FLOOR
AH LOS ANGELES, CA 90010
2215 N. BROADWAY AVE.
690 KNOX ST., SUITE 125
LOS ANGELES, CA 90031
LOS ANGELES, CA 90502
8475 S. VERMONT AVE.
1645 CORINTH AVE.
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LOS ANGELES, CA 90044
LOS ANGELES, CA 90025
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8. A landlord may collect a monthly surcharge of $3.61 from the tenant to recover the
paid Systematic Code Enforcement fee.
9. A $12.25 surcharge collected only in June to recover half of the $24.51 paid
registration fee.
The chart below briefly provides the chronology of allowable rent increases:
CHRONOLOGY OF ALLOWABLE RENT INCREASES SINCE 1979
DATE
PERCENTAGE
ALLOWED
DATE
PERCENTAGE
ALLOWED
5/1/79- 6/30/85
7%
7/1/99 - 6/30/00
3%
7/1/85- 6/30/86
4%
7/1/00 - 6/30/01
3%
7/1/86 - 6/30/87
5%
7/1/01 - 6/30/02
3%
7/1/87. 6/30/88
4%
7/1/02 - 6/30/03
3%
7/1/88- 6/30/89
40%
7/1/03- 6/30/04
3%
7/1/89 - 6/30/90
5%
7/1/04 6/30/05
3%
7/1/90- 6/30/91
5%
7/1/05- 6/30/06
3%
7/1/91- 6/30/92
5%
7/1/06 - 6/30/07
4%
7/1/92- 6/30/93
5%
7/1/07 - 6/30/08
5%
7/1/93 -6/30/94
3%
7/1/08- 6/30/09
3%
7/1/94 -6/30/95
3%
7/1/09 - 6/30/10
4%
7/1/95. 6/30/96
3%
7/1/10 - 6/30/11
3%
7/1/96- 6/30/97
3%
7/1/11 - 6/30/12
3%
7/1/97- 6/30/98
3%
7/1/12- 6/30/13
3%
7/1/98- 6/30/99 3%
RENT ADJUSTMENTS THAT REQUIRE APPROVAL BY THE RENT STABILIZATION DIVISION
The rent for a rental unit may also be increased through the proper submission and
approval of the appropriate application to the Rent Stabilization Division. A landlord may
apply to the Rent Stabilization Division for a rent adjustment for the following reasons:
1. Capital Improvement - When the landlord makes an addition or replacement to the
rental unit or to the common areas, provided that the improvement has a useful life
of five years or more.
2. Rehabilitation Work - Rehabilitation or repair work done by the landlord due to
changes in the housing code since January 1, 1979, or to repair damage resulting from
fire, earthquake or other natural disasters.
3. Just and Reasonable - When the automatic adjustment prescribed by the Ordinance
does not provide a just and reasonable return on the rental unit or units (refer to the
Just and Reasonable Regulations issued by the Rent Adjustment Commission).
4. Primary Renovation - The landlord has completed Primary Renovation Work and any
related work in accordance with a Tenant Habitability Plan accepted by the
Department and has not increased the rent to reflect the cost of such improvement.
The allowable rent level after a vacancy depends on the reason for the vacancy. The
RSO provides that the rent may be raised to any amount upon re- rental if the vacancy
resulted because:
+ The tenant voluntarily vacated the unit.
• The tenant was evicted for non - payment of legal rent.
• The tenant was evicted for violating the terms of the rental agreement and failing to
cure the violation.
The Ordinance requires the rent to a new tenant to remain the same if the vacancy
occurred for any other reason. Examples of circumstances under which the landlord may
not raise the rent upon re- rental include the following:
+ An eviction of the previous tenant to recover the unit for the use of the landlord, his
immediate family or resident manager.
An eviction for occupancy by the landlord, his immediate family or resident manager,
where the landlord, his family member or resident manager subsequently vacated the
rental unit.
• An eviction for using or permitting the rental unit to be used for an illegal purpose,
unless the eviction is based upon information provided by a law enforcement agency.
• An eviction based on the tenants refusal to enter into a new written rental
agreement, with similar provisions, and terms which are not inconsistent with the
Ordinance.
• An eviction based on the tenant's refusal to allow the landlord reasonable access to
the rental unit.
• The rental of an existing mobile home is the land upon which a mobile home is
located. (Rent increase limited to 10 percent.)
• Rental 'assistance paid to the tenant was terminated when the landlord canceled or
failed to renew a Section 8 Housing Assistance Payment contract. As of April 9, 2002,
Section 151.04 - ARestriction on Rents@ of the RSO was amended by Ordinance
174,501, which states: AB. It shall be unlawful for any landlord to terminate or fail to
renew a rental assistance program with the Housing Authority of the City of Los
Angeles (HACLA), and then demand that the tenant pay rent in excess of the tenant =s
portion of the rent under the rental assistance contract.@ (LAMC 151.04)
03 - WILL Allowable Rent Increases 5 -10 -2012 (Color)
05/23/2012 16:15 510 - 238 -6181 RENT ADJUSTMENT PAGE 02/02
Oakland
ANNUAL ALLOWABLE RENT INCREASE
A CPI increase of 2% will become
effective on July 1, 2011. Tenants may
only receive one increase in any
12 -month period, and the rent increase
cannot take effect earlier than the
tenant's anniversary date. In addition,
California law requires that for tenancies
receiving greater than a 10% increase,
a 60 -day notice is required; if the
increase is 10% or less, a 30-day
notice Is required, Owners can only
impose "banked" rent increases equal
to three times the current annual
allowable rent increase rate.
i+ryl
3u111 1> 10-_Jknf,30,13 5 "9
PERICIb AMOUNT (Yo1 S
4
JULY 1 '11 -JUNE 3012 .. , ..:..:'2.0
JULY 1 '10 -JUNE 30'11 .........2.7 I
JULY 1'09 -JUNE 30'10 .........0.7 `
JULY 1 '08 -JUNE 30'09 .......
, .3.2
JULY 1'07 -JUNE 30'08 ......
...3.3 ,Ii
MAY 1 '06 -JUNE 30'07.... ,
.....3.3
MAY 1 '05 - APRIL 30'06 .........1.9
1 '99 - DEC. 31 '99 ...........
JUNE 1'04- APRIL 30'05.........
0.7
JUNE 1'03- MAY 31'04..........
3.6
JULY .1'02 -MAY 31'03..........0.6
1 '97 - DEC. 31 '97 ...........
2011 (2.0 %)
PERIOD AMOUNT I %)
JAN. 1 '02 -JUN. 30'02 ........... 3
JAN.
1 '01 - DEC, 31'01 ... ....,..,3
JAN.
1 '00 - -DEC. 31 '00 ...........
3
JAN.
1 '99 - DEC. 31 '99 ...........
3
JAN.
1 '98 - DEC. 31 '98 ......
I .... 3
JAN.
1 '97 - DEC. 31 '97 ...........
3
JAN.
1 '96 - DEC. 31 '96 ...........
3
MAR.
1 '95- DEC. 31 '95 ..........
3
JAN.
1 '95 - FEB. 28'95............
6
JAN.
1 '94 - DEC. 31 '94 ...........
6
FOR FURTHER INFORMATION CONTACT.
Oakland Rent Board 1 250 Frank H. Ogawa Plaza I Suite 5313 1 Oakland, CA 194612
510.238.3721 1 www.oaklandnet.com
City and County of San Francisco Residential Rent Stabilization
and Arbitration Board
ALLOWABLE ANNUAL RENT INCREASES
NEWI Effective March 1, 2012 through February 28, 2013, the allowable annual increase amount is 1.9 %. This amount is
based on 60% of.the increase in the Consumer Price Index for All Urban Consumers in the Bay Area, which was 3.2% as
posted in November 2011 by the Bureau of Labor Statistics. To calculate the dollar amount of the 1.9% annual rent increase,
multiply the tenant's base rent by .019. For example, If the tenant's base rent is $1,250.00, the annual Increase would be
calculated as follows: $1,250.00 x .019 = $23.75. The tenant's new base rent would be $1,273.75 ($1,250.00 + $23.75).
Effective Period
Amount of Increase
March 1, 2012
- February 28, 2013
1.9%
March 1, 2011
- February 29, 2012
0.5%
March 1, 2010
- February 28, 2011
0.1%
March 1, 2009
- February 28, 2010
2.2%
March 1, 2008
- February 28, 2009
2.0%
March 1, 2007
- February 29, 2008
1.5%
March 1, 2006
- February 28, 2007
1.7%
March 1, 2005
- February 28, 2006
1.2%
March 1, 2004
- February 28, 2005
0.6%
March 1, 2003
- February 29, 2004
0.8%
March 1, 2002
- February 28, 2003
2.7%
March 1, 2001
- February 28, 2002
2.8%
March 1, 2000
- February 28, 2001
2.9%
March 1, 1999
- February 29, 2000
1.7%
March 1, 1998
- February 28, 1999
2.2%
March 1, 1997
- February 28, 1998
1.8%
March 1, 1996
- February 28, 1997.
1.0%
March 1, 1995
- February 29, 1996
1.1 %
March 1, 1994
- February 28, 1995
1.3%
March 1, 1993
- February 28, 1994
1.9%
*December 8,
1992- February 28, 1993
1.6 %*
*March 1, 1992 - December 7,1992
4 %*
March 1, 1991
- February 29, 1992
4%
March 1, 1990
- February 28, 1991
4%
March 1, 1989
- February 28, 1990
4%
March 1, 1988
- February 28, 1989
4%
March 1, 1987
- February 29, 1988
4%
March 1, 1986
- February 28, 1987
4%
March 1, 1985
- February 28, 1986
4%
March 1, 1984
- February 28, 1985
4%
March 1, 1983-
February 29, 1984
7%
April 1, 1982 -
February 28, 1983.
7%
* Caution: Only ONE of these two increases maybe Imposed for the period from March 1, 1992
through February 28, 1993, based on the tenant's anniversary date or date of last increase.
571 Allowable Annual Rent Increases 1217/11
25 Van Ness Avenue #320 Phone 415.252.4602
San Francisco, CA 94102 -6033 FAX 415.252.4699
f
WEST HOLLYWOOD'
o'ENERA►L. ADJUSTMENTS. (1985 - 2011,
09/01 /11 ............................ ..........................2.25%
09/01/10 ............................ ..........................1.25%
09/01/09 ............ ............... .........................0.0.0%
09/01/08.. r ........... I ...:.. ..........................2.75%
09/01107............ r:..... .:... r . ..........................2.25%
09/01/06.. ...... ............................... ..........................4.00%
09/01/05, ...... won .... m ... m. r................... ........................3.25%
09/01/04 ....... .......:....................... ..........................2.75%
09/01/03 ........ ............................... .........................1.50 %0
09/01/02 ...... ............................... .....:.....x..............2.25%
09101/01 ...................... ............................r: :............2.75%
09101 / 00 ......... ............................... .........................2.25%
09/ 01/99 .... ............ ... ............... :............ r..........0.....1.75%
09/01 /98. ....... .................. . w . 0 . w ... 11.25%
09/01/97 ........... .. .... ...:............ ...................::.......... 0 1 .00%
0 9/0 1 /96 ...................... 0 ..... a ......... ..........................1.25%
09101195 ........ ............................... .........:................1.75%
09/01/94 .................. ... :' ..............,. ..........................0.75%
09/01193.. m 0 w w 0 0 m v 0 m 0 u " 0 " 0 0 m 0 Y;r • r ............................... 2.0 0 %
09/01 / 92 .....:.. ............................... ..........................2.75%
09/01/91 ....... ......9........................ ...............:..........3.50%
09/01/90 ........ ............................... .........................3.75%
09/01/89* ....... ............................... ..........................3.75%
09/01/88 ....... ............................... ..........................3.25%
09/01/87 ....... ............................... ..........................3.50%
09/01/86 ........ ...............:............... .........................2.50%
09/01/85 ................. 0.................... ............::............3.00%
WEST HOLLYWOOD
ATTACHMENT B
SANTA MONICA RENT CONTROL BOARD MEMORANDUM
TO: Santa Monica Rent Control Board
FROM: Staff
FOR MEETING OF: June 14, 2012
RE: Discussion of Possible Charter Amendment Relating to the Method for
Calculating the Annual General Adjustment and Apportionment of
Registration Fees and Surcharges
Subject Matter:
The Santa Monica Rent Control Board will consider whether it should recommend
that the City Council place on the November 2012 municipal election ballot a measure to:
1. Require that annual general adjustments be calculated based on a factor of
the Consumer Price Index ( "CPI "), and, if so, what that factor should be;
and
2. Apportion or otherwise limit the degree to which registration fees and tax
assessments may be passed through to tenants as a surcharge beyond the
maximum allowable rent.
How This Agenda Item Was Initiated:
At its May 31 meeting, the Rent Control Board heard public comment on the
question of whether to recommend that the City Council place on the November ballot a
measure to amend the City Charter to provide for a different methodology for calculating
the annual general adjustment ( "GA ") than the one currently in use. After hearing from
the public, Commissioners Flora, Winslow, and Rosenstein directed staff to prepare a
report discussing the merits of a GA calculation based on a factor of the CPI, between
60% and 80% of the annual percentage change in that index, for discussion at the next
Board meeting.
Several members of the public who spoke at the May 31 meeting urged the Board
to also consider limiting landlords' ability to pass through registration fees and tax
assessments to their tenants. In response to those comments, Commissioners Winslow,
Korade- Wilson, and Flora directed staff to also place on the agenda for discussion at the
next Board meeting consideration of whether the Charter should be amended to apportion
or otherwise limit landlords' ability to pass registration fees through to tenants; and, if so,
what that apportionment or limitation might be. In the week after the May 31 meeting,
Commissioner Korade - Wilson directed staff also to include in the agenda item
consideration of whether the Charter should be amended to apportion or otherwise limit
landlords' ability to pass local tax assessments through to tenants as a surcharge.
Discussion
11 If the Charter is amended to call for a CPI based General Adjustment, what
factor of CPI (and what CPI index) should he used?'
At the May 31 Board meeting, the Board directed staff to analyze the relative
merits of a GA- calculation methodology at levels between 60% and 80% of the annual
percentage change in CPI. As noted at that meeting, with the exception of Los Angeles,
all California jurisdictions with rent control laws similar to Santa Monica's calculate their
GAS with reference to a CPI factor within that range.
Each of those jurisdictions uses the same CPI index: All Urban Consumers. This
is a broad index that measures changes in a wide range of consumer costs, including, for
example, basic foodstuffs (cereals, meats, poultry, fish, eggs, fruits, vegetables, and non-
alcoholic beverages), food away from home, home gas and electricity, fuel oil, gasoline,
clothing, new and used vehicles, other transportation costs, and medical care and
equipment. It also measures changes in the cost of shelter, including actual rents and
owners' equivalent of rent on residences. Perhaps most relevantly from landlords'
perspective, it also measures changes in the cost of tools, home repairs, gardening
services, and other costs specifically related to property ownership and maintenance. In
order to ensure that the resulting index is meaningful, the changes in these costs are
measured regionally —costs may change at different rates in the New York City
metropolitan area than in Des Moines, for example. The region for the All Urban
Consumers Index that includes Santa Monica is Los Angeles - Riverside - Orange County.
There are other CPI indexes, each of which is based on some subset of All Urban
Consumers. There is, for example, an index that excludes changes in the cost of food and
fuel (the so- called "core rate of inflation "), and another that excludes changes in the cost
of shelter. But because these adjusted indexes measure only more narrow subsets of
changes in consumer costs, they are, necessarily, less representative, of people's actual
experience of inflation. It is for this reason that the full index is used by the other rent
control jurisdictions and, indeed, is most commonly used in other contexts in which the
' The competing merits of a CPI -based method of calculating the general adjustment and the current method were
discussed at length in the staff report on this issue presented at the Board's May 31 meeting. This report therefore
includes no further discussion of that issue.
z The cities of Oakland and Beverly Hills both use 100% of the annual percentage change in the CPI, but those
cities' rent stabilization ordinances are markedly different from those of Santa Monica, West Hollywood, San
Francisco, Berkeley, East Palo Alto, and, to some extent, Los Angeles, which also uses a factor of 100 %.
2
rate of inflation is measured. Thus, "CPI," as used throughout this report, refers to the
full All Urban Consumers index.
Although in some years Santa Monica's GA has been much higher than the CPI, it
has been lower in others, resulting in a leveling out over time. Over the past three
decades, the current GA- calculation methodology has yielded, in the aggregate, a result
roughly equal to three quarters of a percent in the change in the CPI. This fact alone
provides some argument in support of using 75% of the annual percentage change in CPI
as the basis for a CPI -based GA- calculation methodology. The Board has, over the years,
adjusted the GA upward and downward in a purposeful effort to ensure that tenants and
landlords are treated fairly. It is likely that a CPI -based methodology would achieve the
same level of fairness to the extent that it yields the same ultimate result.
Litigation settled by the City of Berkeley Rent Stabilization Board further suggests
the soundness of this approach. When it first changed from a "component ratio to gross
rent" formula to a simple CPI -based formula, the Berkeley rent board used 60% of CPI,
identical to neighboring San Francisco. Local landlords sued, noting that Berkeley's
prior formula yielded an actual GA over time of approximately 65 %, such that a 60%
formula would unfairly lower returns. To settle that litigation, Berkeley instituted a 65%
of CPI formula. Use of a CPI -based formula in Santa Monica that departs significantly
(upward or downward) from the result achieved by the current methodology would likely
result in similar complaints from landlords or tenants here.
It is also noteworthy that West Hollywood, a jurisdiction with a rent control law
almost identical to Santa Monica's and only ten miles away, such that it is likely to share
Santa Monica's economic climate, calculates its GA based on 75% of the change in CPI.
The reasons not to use a CPI -based formula of significantly less than 75% are
largely prudential: the current methodology yields a GA approximately equal to 75% of
the change in CPI, so it is difficult to conceive of a rational basis on which such a change
could be successfully challenged. The reasons not to use a CPI -based formula with a
factor of greater than 75% of the change in that index are more philosophical; they are
rooted in the very purpose of the Rent Control Charter Amendment. The law's purpose is
to keep rents fair to tenants while limiting owners' return to a level that is constitutionally
fair. Due to vacancy decontrol, most landlords charge market -rate rents for at least some
of their controlled units and the vast majority of owners do so for more than half of their
units (see the chart on page 4). Thus, most Santa Monica landlords already achieve
greater than the constitutionally guaranteed fair return, even under the current formula.
Changing the formula in a way that would yield still larger returns would be a dramatic
departure from the Charter Amendment's stated purpose.
Share of Units at Market Rate by Property Size
(4 —15 Units)
a. Limiting highs and lows by means of establishing a minimum and maximum
percentage change
Other jurisdictions with rent control laws similar to Santa Monica's limit the upper
and lower extent to which their CPI -based GAs may affect rents. West Hollywood, for
example, does not permit negative GAs in the event of deflation (the GA may never be
less than 0 %), and provides for a maximum GA of 7% in most instances. Berkeley, too,
provides for a minimum GA of 0% and a maximum of 7 %. San Francisco provides for
no explicit minimum, but refers to GAs only as rent "increases," implying a floor of 0 %.
Like West Hollywood and Berkeley, it explicitly provides for a maximum GA of 7 %.
East Palo Alto provides for a minimum GA of 0% and a maximum of 10 %. Los Angeles
provides for a minimum GA of 3% and a maximum of 8 %.
The jurisdictions with rent control laws most similar to Santa Monica's are
Berkeley, San Francisco, East Palo Alto, and West Hollywood. Because, of those, the
majority provide for a floor of 0% and a ceiling of 7 %, those limitations have been tested
by experience and would appear to be sound.
It is worth noting that a ceiling of 7% could pose constitutional problems if there
were a sustained, multi -year period of inflation dramatically exceeding 9.3 %; but such
periods are exceedingly rare in U.S. history, and if such a period were to occur in the
future, the danger of depriving owners of the constitutionally - mandated fair return would
likely be substantially mitigated by vacancy decontrol.
Because vacancy decontrol already undermines the Charter's stated goal of
limiting owner's return to no more than an amount that is constitutionally fair, the Los
Angeles model, with a 3% floor that guarantees years of increases exceeding 100% of the
inflation rate, would appear to move still farther from that stated goal, and thus be
antithetical to the Santa Monica Rent Control Law's purpose.
b. Rounding
At least one jurisdiction —West Hollywood— provides for the rounding of GAS to
the nearest quarter percent. While this is likely in some years to yield a GA that is
slightly higher than what it would otherwise be, in other years it is likely to be slightly
lower, evening out over time. What rounding lacks in its minimal deviation from strict
accuracy it makes up for by an equally minimal increase in the ease with which the GA
can be calculated.
z May the Charter be amended to apportion or otherwise limit landlord's right to
pass annual registration fees and tax assessments through to tenants?
a. Registration Fees:
The Charter allows the Board to charge owners of controlled properties
registration fees to be used to fund the Board's operations. Under Charter Section
1803(n), "[tlhe Board may direct that all or part of such fees may be passed through from
landlords to tenants and may establish applicable conditions and procedures."
Historically, the Board has allowed owners to pass through to tenants 100% of the
registration fee.3 If it wished to limit landlords' right to pass through all or part of the
registration fee, the Board could do so by regulation; a Charter Amendment would not be
required.
That a Charter amendment would not be necessary to limit the registration fee
pass - through does not mean that such an amendment would be impermissible or
inappropriate. The sole effect of such an amendment, however, would be to limit the
Board's discretion to enact future changes by regulation.
The Board has asked staff to describe how, if the Charter were to be amended with
respect to the registration fee pass - through issue, it could be done in a manner that
ensures equity to tenants and owners alike.
3 See current Board Regulation 11200(e), under which owners may pass through 100% of the current annually -paid
fee in equal monthly installments.
Because registration fees have increased and decreased over the years, staff
recommends that, if the Board opts to seek a Charter Amendment to limit or apportion
the pass - through of registration fees, it recommend to Council that any amendment state
the - percentage (rather than the dollar amount) of fees that may be passed through to
tenants. If the Board does this, staff recommends that the permitted pass - through amount
be 50 %. Staff makes this recommendation because landlords and tenants benefit equally
from the services for which the fees are paid.
Staff recognizes that many landlords do not consider themselves to "benefit" from
being regulated by the rent control law. But the fees do not pay for the fact of regulation.
The regulation itself the series of laws describing rights and responsibilities —costs
nothing, What costs money is the implementation of that regulation. It is this
implementation that the fees finance; they fund the services that are necessary to enable
owners to comply with the regulatory system, and to that extent benefit owners. This is
why the fees are the owners' responsibility to pay.
But there is no question that the effect of rent control's regulatory system is to
benefit tenants by limiting rents to an amount that is fair and ensuring a quality of
housing commensurate with fair payment. It would therefore appear equitable to allow
owners to be reimbursed for half of the fees that they pay, so that, ultimately, the fees are
shared between tenants and owners equally.
b. Tax Assessments:
As with registration fees, there is no Charter provision that specifically requires or
permits the pass - through of tax assessment surcharges. Thus, a change in the
apportionment of those assessments by means of surcharges in addition to the MAR
could also be achieved by regulation, rather than by Charter amendment. As with
registration fees, a Charter amendment would limit the Board's discretion in this area.
Should the Board wish to consider a Charter amendment relating to tax assessment
pass- throughs, staff recommends that the Board provide direction as to the broad
parameters within which it would like the issue to be considered, and direct staff to place
the issue on the agenda for the next meeting.
Because the subject matter of this agenda item is limited to a possible Charter
amendment, staff recommends that, should the Board wish to consider reapportionment
of tax assessments by regulation, it direct staff to place the issue on the agenda for
discussion at a future Board meeting.
ATTACHMENT C
SANTA MONICA RENT CONTROL BOARD MEMORANDUM
TO: Santa Monica Rent Control Board
FROM: Staff
FOR MEETING OF: June 28, 2012
RE: Proposed Change to the Rent Control Charter Amendment Relating to Calculating
the Annual General Adjustment and Allowing for a Dollar- Amount Ceiling
Subject Matter:
The Santa Monica Rent Control Board will consider whether it should recommend
that the City Council place on the November 2012 municipal election ballot a measure to:
1. Require that annual general adjustments be calculated based on seventy -
five percent of the annual percentage change in CPI from March to March
with a zero percent minimum and a five percent maximum; and
2. Permit the Board, in its discretion, to impose a dollar- amount ceiling on the
annual general adjustment.
How This Agenda Item Was Initiated:
At its May 31 meeting, the Rent Control Board heard public comment on the
question of whether to recommend that the City Council place on the November ballot a
measure to amend the City Charter to provide for a different methodology for calculating
the annual general adjustment ( "GA ") than the one currently in use. After hearing from
the public, the Board directed staff to place the matter on the agenda for the June 14
meeting for additional discussion. After again hearing from the public and discussing the
matter further on June 14, the Board directed staff to return to the June 28 meeting with
proposed Charter language that would:
• require calculation of the GA based on seventy -five percent of the annual
percentage change in CPI;
• limit the GA by mandating a zero percent minimum and a five percent
maximum; and
1
1
• grant the Board authority to impose a dollar amount limit within the zero to
five percent range using the same formula that it has employed when
imposing such a limit under the existing GA formula.
Discussion
1. The Board directed staff to propose specific statutory language that would
effectuate a Charter amendment requiring a CPI -based GA formula.
Under the existing Charter language, the Rent Control Board is required to
approve an across- the -board annual adjustment to controlled rents based on increases in
landlords' utility and maintenance costs, as well as increases or decreases in local taxes.
This is called the "annual general adjustment," or, more informally, the "GA."
While the Charter specifies certain minimum factors that must be considered in
calculating the GA, it does not specify the calculation methodology. For nearly thirty
years, the Board has used a complex methodology known as the "component ratio to
gross rent" formula. While this formula captures some changes in landlords' actual
expenses —the Board regularly surveys landlords' annual expenses for tax assessments
and City - provided services and licenses, and periodically surveys such costs as utilities
and insurance —those actually- surveyed expenses account for only about 12% of the
factors that go into determining the GA. Because there is no reliable data by which to
measure actual changes in much of the remaining 88% of landlord expenses considered
under the formula, they are adjusted with reference to the federal government's
Consumer Price Index ( "CPI "). This has yielded an aggregate GA since the late 1970s
equal to about three quarters of a percent of the percentage change in the CPI.
At the May 31 and June 14 meetings, the Board asked staff how much is spent on
surveying the 12% of landlord expense changes that are actually ascertainable. Staff
replied that, though survey costs vary, they have ranged from about $15,000 to $25,000
in recent years.
Members of the public as well as Board Commissioners noted at the June 14
meeting that the existing formula is sometimes difficult for the public to fully understand
due to its complexity; that the existing formula results in a not insignificant expenditure
of funds, and that the existing formula takes a great deal of staff time to implement, only
to reach a result approximately equal to the simple CPI-based GA formula employed by
nearly all other rent - control jurisdictions. The Board therefore directed staff to return on
June 14 with an analysis of the relative merits of a GA- calculation methodology at levels
between 60% and 80% of the annual percentage change in CPI.
In its June 14 report on this item, staff recommended a CPI -based formula that
uses a factor of 75% of the percentage change in CPI (All Urban Consumers). Staff
made that recommendation because that percentage is readily justifiable based on the
result historically achieved by the current formula; reference to historical results is
consistent with what other jurisdictions, notably Berkeley, have done when changing to a
CPI -based formula; a lower percentage could invite costly and distracting challenges; and
a higher percentage would be antithetical to.the Charter's stated goal of limiting
increases, as nearly as possible, to the amount necessary to ensure landlords their
constitutional right to a fair return.
Based on all of the factors discussed at the May 31 and June 14 meetings, the
Board stated a tentative inclination to recommend a charter amendment that would
require future GAS to be based on 75% of the percentage change in CPI. In order to help
it to reach a final decision, the Board directed staff to return to the June 28 meeting with
specific proposed statutory language showing how the Charter might be amended to
achieve this result. The relevant language is included in Exhibit A at proposed amended
Charter Section 1805(a), generally, and. Section 1805(a)(1) specifically.
As noted above, the majority of landlord expenses considered under the current
GA- calculation methodology are adjusted by the annual percentage change in CPI. The
annual period used in the current formula is March to March. Because the Board and
public have supported a change to a CPI -based formula to the extent that it achieves a
result determined to be fair under the current methodology, staff recommends that the
March to March period be retained as the annual period for any Charter - mandated CPI -
based GA formula. It is for this reason that an annual period ending in March is specified
in the proposed statutory language, despite the absence of specific direction by the Board
on this point.
2. The Board also directed staff to propose for its review specific statutory language to
effectuate a Charter amendment that would include a 0% minimian and a S%
maximum to any CPI -Lased GA.
As noted in the June 14 staff report, other jurisdictions with rent control laws
similar to Santa Monica's limit the upper and lower extent to which their CPI -based GAS
may affect rents. West Hollywood, for example, does not permit negative GAS in the
event of deflation (the GA may never be less than 0 %), and provides for a maximum GA
of 7 %. Berkeley, too, provides for a minimum GA of 0% and a maximum of 7 %. San
Francisco provides for no explicit minimum, but refers to GAS only as rent "increases,"
implying a floor of 0 %. Like West Hollywood and Berkeley, it explicitly provides for a
maximum GA of 7 %. East Palo Alto provides for a minimum GA of 0% and a maximum
of 10 %. Los Angeles provides for a minimum GA of 3% and a maximum of 8 %.
The jurisdictions with rent control laws most similar to Santa Monica's are
Berkeley, San Francisco, East Palo Alto, and West Hollywood. Because, of those, the
majority provide for a floor of 0% and a ceiling of 7 %, those limitations have been tested
by experience and would appear to be sound as an upper limit. But the 7% upper limit
used by other jurisdictions was first imposed before vacancy decontrol became state law.
As several public speakers and Commissioners noted, because vacancy decontrol now
gives most landlords a return that is substantially greater than the constitutional minimum
of a fair return, a lower limit would still meet constitutional muster and would be
consistent with the.Rent Control Charter Amendment's existing goals.
The Board therefore directed staff to propose statutory language effectuating a
Charter amendment that would provide for a lower limit on CPI -based GAs of 0% and an
upper limit of 5 %. The relevant proposed Charter amendment language is included in
Exhibit A at Section 1805(a)(3).
3. For public convenience, staff recommends that the GA be rounded to the nearest
I/1 Yh of one percent.
As explained by staff and commented on by Commissioners, 75% of the
percentage change in CPI in any given year is liable to be a figure with a inulti -digit
decimal. In order to avoid difficult calculations carried out to one -one hundredth or one -
one thousandth of a percent, staff recommends that the GA be 75% of the annual
percentage change in CPI, rounded to the nearest one tenth of a percent. The relevant
proposed Charter amendment language is included in Exhibit A at Section 1805(a)(2).
4. The Board directed staff to draft for its review proposed statutory language to
effectuate a Charter amendment that would give the Board discretion to impose a
dollar- amount limit within the 0% to 5% limit discussed in paragraph 2 of this
report.
In many, but not all, years, the Board has imposed a dollar limit to the general
adjustment. For 2012, for example, the Board authorized a GA of 1.54 %, but also
imposed a limit of $26. Thus, as to any maximum allowable rent for which a 1.54%
increase would be greater than $26, the increase is allowed only up to that dollar amount,
resulting in lower general adjustments.
In setting such dollar- amount limits, the Board has followed a consistent formula:
it has averaged the eighty -fifth percentile of rents for all controlled units with the eighty -
fifth percentile of rents for long -term controlled units, and multiplied the resulting
average by the general adjustment. The Board directed staff to propose Charter language
that would give it discretion to impose dollar- amount limits in future years under a CPI-
based GA formula, consistent with its long - standing formula. The relevant proposed
Charter amendment language is included in Exhibit A at Section 1805(b).
5. Because they include references to the existing GA- calculation methodology,
incidental changes to Charter Sections 1803(8) and 1805(e) are necessary if the
methodology is changed.
If the methodology for calculating the GA is changed to a non - discretionary CPI -
based formula, there is no reason for the Board to hold a public hearing every year to
gather public input on what the GA should be. Indeed, it would likely be a disservice to
the public to solicit opinion and testimony as to a matter as to which mathematics, and
not Board discretion, determine the result. Thus, staff recommends that the requirement
to hold an annual public hearing before announcing the GA be eliminated from the
Charter as to that issue. Should the Board wish to impose a dollar- amount limit to the GA
in a given year, however, it would be appropriate for the Board to first solicit public
input. Staff therefore recommends that a public- hearing requirement for consideration of
that issue be added to the Charter. The relevant deletions and additions are included in
Exhibit A at Section 1803(g).
Finally, Section 1805(e) states criteria to be used in determining annual general
adjustments, individual increases, and individual decreases. If the GA calculation
methodology is changed to a simple CPI -based formula, references to the current GA
formula, which would become irrelevant, should be excised from Section 1805(e). As
currently written, the subsection mixes together factors relevant for general adjustments,
individual increases, and individual decreases in one long, 188 -word sentence. Staff
recommends that, if the Board proposes a Charter Amendment requiring a change to a
CPI -based formula, the Board also recommend that concepts relevant to the rent increase
process be placed in one sentence dedicated to that subject matter, while concepts
relevant to the decrease process be placed in another sentence dedicated to that subject
matter. This would not effect a substantive change in the law, but would merely make
subsection (e) easier to read and understand.
6. 1f the Charter is amended to change to a simple CPI -based formula, Section 1804
should be revised also.
It has always been true that maximum allowable rents begin with a base rent
ceiling. It has therefore also always been true that any adjustment to maximum allowable
rents— whether as the result of a general adjustment or an individual one — necessarily
uses the base rent ceiling as a reference point.
When vacancy decontrol was imposed by state law in the 1990s, Section 1804 was
amended to state that, for most tenancies beginning on or after January 1, 1999, a unit's
base rent ceiling is the first rent charged after a vacancy. Unfortunately, the sentence in
Section 1804 stating that the "The base rent ceiling is the reference point from which the
rent ceiling shall be adjusted upward or downward in accordance with Section 1805" was
not relocated within the Section to make clear that it applies to all base rents, and to all
rent adjustments. Because the sentence was not moved, some have mistakenly suggested
that any adjustment to rents under Section 1805, including market -rate rents, must be
made with reference to base rents established in 1979.
To eliminate any confusion on this point, staff recommends that the quoted
sentence be moved to the end of the Section. This change would not effect a substantive
change in the law, but would merely make existing law easier for the reader to
understand.
Law Offices of
Michael Millman & Associates
June 27, 2012
Todd Flora
Santa Monica Rent Control
City Hall
Second Floor
1685 Main Street
Santa Monica CA
Mailing Address: P.O. Box 64637
2100 Sawtelle Boulevard, Suite 105
Los Angeles, California 90064
(310) 477 -1201
FAX (310) 477 -0260
Re: General Adjustment /Formula Constitutionality
Dear Mr. Flora:
RIkCEIVED
CONTROL
ADMINIS1 R l'iUN
'12 JUN 28 All .36
SANTA. MUND
As an Owner of an Apartment, we oppose the suggestion that you place on the
November Ballot a new formula. We agree on certain principles: Rent control
has been Constitutionally tested, and the Courts have agreed that if the
Owners receive a fair return on their investment, and the protocols are not
Too Oppressive so as to represent a Constitutional "taking" of the property,
the rent control system may be upheld as legal. However, there are certain
obstacles and requirements that need to be satisfied. I suggest to you that
your proposal wherein you limit the recovery of an Owner to 750 of the
adjusted CPI is illegal, Unconstitutional, and unenforceable.
Here my reasons:
1. It fails to address the rent control settlement in the Action
Lawsuit;
2. The use of an arcane formula where you discount the CPI by
averaging does not accurately reflect a true recovery on
investment; and
3. Voter approval will not insulate the Board from Lawsuits based upon
the theories /principles set forth above.
Based upon the foregoing, I urge you to vote "No."
Happy Summer,
Michael Millman
1�
Section 1803. Permanent Rent Control Board.
(g) RULES AND REGULATIONS: The Board shall issue and follow such rules and
regulations, including those which are contained in this Article, as will further the
purposes of the Article. The Board shall publicize its rules and regulations prior to
promulgation in at least one newspaper of general circulation in the City of Santa
Monica. The Board shall hold at least one (l) public hearing to consider the views of
interested parties prior he adoptio ^r, aief, - '; ° onbefore
deciding whether to impose a dollar- amount ceiling on n a general adjustment under
Section 1805(b) or deciding to decontrol or reimpose control for any class of rental
units under Section 1803(r).. All rules and regulations, internal staff memoranda, and
written correspondence explaining the decisions, orders, and policies of the Board
shall be kept in the Board's office and shall be available to the public for inspection
and copying. The Board shall publicize this Article so that all residents of Santa
Monica will have the opportunity to become informed about their legal rights and
duties under Rent Control in Santa Monica. The Board shall prepare a brochure which
fully describes the legal rights and duties of landlords and tenants under Rent Control
in Santa Monica. The brochure will be available to the public, and each tenant of a
controlled rental unit shall receive a copy of the brochure from his or her landlord.
Section 1804. Maximum Allowable Rents
(b) ESTABLISHMENT OF BASE RENT CEILING: Beginning one - hundred - twenty
(120) days after the adoption of this Article, no landlord shall charge rent for any
controlled rental units in an amount greater than the rent in effect on the date one year
prior to the adoption of this Article. The rent in effect on that date is the base rent
ceiling - arms -a- reference -point from f +, shall be- adjusted -up,,
.'-�^.w^, and in accordanee Auith- &etien-1905. If there was no rent in effect on the date
one year prior to the adoption of this Article, the base rent ceiling shall be the rent that
was charged on the first date that rent was charged following the date one year prior to
the adoption of this Article. For tenancies commencing on or after January 1, 1999,
which qualify for a vacancy rent increase pursuant to state law, the base rent ceiling is
the initial rental rate in effect on the date the tenancy commences. As used in this
subsection, the term "initial rental rate" means only the amount of rent actually paid by
the tenant for the initial term of the tenancy. The base rent ceiling is the reference
point from which the rent ceiling shall be adjusted upward or downward in accordance
with Section 1805.
Section 1805. Individual and General Adjustment of Ceilings on Allowable Rents.
(a) ANNUAL GENERAL ADJUSTMENT: The Board-4m 1, fter holding se- public
he- aritfg"izeseribed-by�€Etion I 88 %g), set anck adjastu} }ward -or dow7w,ard the e, �t
contr units - deemed appropriate b the- R>ard:- c.,,a, ,
hovae�€r,- need- no�tal�effeEt- insirredi atel3�; and tlt �Na d- �;;a- y- deeifle��a�, =r�=�
periodsNa later than June 30 each year, the Board shall announce the percentage by
which rent ceilings for eligible units will be generallyaadjListed effective September I
of that year.
1 The adjustment shall be equal to seventy five percent of the percentage
increase in the Consumer 'Price Index (All Urban ConSUmers, Los Angeles,
Riverside, Orange County region, or any successor designation of that index
that in , later be adopted by the U.S. Bureau of Labor Statistics) as repotted
and published by the U.S. Department of Labor, Bureau of Labor Statistics, for
the 12 -month period ending as of March of the current year.
�2) bi determining the allowable percentage increase, numbers of .04 and below
shall _be rounded down to the nearest tenth decimal place and numbers of .05
and above shall be rounded up to the nearest tenth decimal place.
3 Sub 7aragraph 1 of this subsection notwithstandin Y, in no event shall the
general adjustment be less than zero percent or greater than six percent.
(b) DOLLAR- AMOUNT CEILING:
Faeh year the Board ,.hall generall)-- adf'ust
(44-Adjust-rents-up and by granting laricllerds-a-tttil4y— and -tam tiereas"4ju4f e+it
( , " land !Eir{{S -a- nia'1-n �Ciiiiiii:i', ;_ case adjustm
€et�ae#aal -insr- ease- s -in- the- C- it3�- c� €- Saa�ta- Mcinic -a-for r ^�.�e -e-kpe -rises:
I..- —, of Santa Monica for taxes.
The Board may, in its discretion, impose a dollar - amount limit to any annual general
adjustment. The dollar- amount limit shall be calculated using the following
inethodol:
(1) . The Board shall determine the eight f� percentile of the maximum
allowable rent of all controlled units;
�2)J e Board shall then determine the eiahtv fifth percentile of maximum
allowable rent of all controlled units with a base rent established before
January 1, 1999;
The dollar- amount limit shall be the average of the two rents arrived at under
paragraphs 1) and 2) multiplied by the annual general adjustment determined
under paragraph (a) of this Section.
in ..,a:,, +: ,, ,. +., tinder this ,
general
apron}
(e) In malting individual and general adjustments of the rent ceiling, the Board shall
consider the purposes of this Article and the requirements of law. In making an
individual downward adjustment, the Board may consider decreases in living space
furniture, furnishings, equipment, or services; substantial deterioration of the
controlled rental unit other than as a result of ordinary wear and tear; or failure on the
partt ofthe landlord to provide adequate housing services or to_compiy substantially
with applicable housing, health and safety codes. In malting an individual upward
Ad justment, Tthe Board may adap�-ernplo as its fair return standard any lawful
fonYx ula, inck not limited to one based on investment or net operating income.
The ]Board sider all factors relevant to the formula it employs;— _s5uch factors
may i nclude�s or decreases in operating and maintenance expenses„ the extent
of uti lities pr landlords; necessary and reasonable capital improvement of the
controlled rep, as distinguished from normal repair, replacement and
or decreases in living space_, furniture, furnishings,
equip:vnent, Cesi, snbstantial a t +' n-oAhe eorurolleA rental Otheff
and state income tax benefits;; the speculative nature of the
investment,, or not the property was acquired or is held as a long term or short
term investrllp landlord's rate of return on investment;; the landlord's current
and base da4erating Income;; and any other factor deemed relevant by the
Board in projhe landlord a fair return.
5