SANTA MONICA RENT CONTROL BOARD MEMORANDUM
TO: Santa Monica Rent Control Board
FROM: Alison Regan, General Counsel
MEETING: July 28, 2022
RE: Administrative Item. Discussion of proposed ballot measure to amend the City Charter to eliminate the Annual General
Adjustment for certain categories of units for four years. _____________________________________________________________________ Subject Matter
The Board will discuss a proposed ballot measure initiated by Councilmember Negrete to amend the Rent Control Law to change the formula for calculating the Annual General Adjustment. The Board will also discuss a Council-proposed ballot measure to address the impact of the 2022 general adjustment.
Background
In November 2022, Santa Monica will hold a general municipal election. For such elections, the Rent Control Board may make recommendations that the City Council place proposed amendments to the Santa Monica City Charter, including the Rent Control Charter Amendment (RCCA), on the general election ballot.
The RCCA allows annual upward adjustments to rent ceilings according to a formula that was approved by Santa Monica voters in 2012 and is based on a percentage of the change in the annual CPI, not to exceed 6% or fall below zero.
This type of straightforward formula that adjusts rents based on inflation has been proven to meet the constitutional requirement of providing a fair and reasonable return to landlords while also stabilizing rents during a tenancy.
The annual general adjustment (AGA) is announced in June of each year and is based on the change in CPI from March to March. This year, faced with unprecedented inflation due to a global pandemic and other extraneous forces, the 6% cap was reached for the first time. The Board imposed a $140 maximum monthly increase pursuant to a formula specified in the RCCA.
Tenants were among the hardest hit during the pandemic, facing unemployment and other hardships, which left many unable to pay the rent.
Many of these tenants continue to struggle to make ends meet as evidenced by the high demand and utilization of rental assistance programs. These tenants can ill-afford a 6% rent increase and are at risk of displacement.
Item 12A
Both the City Council and the Rent Control Board are looking for solutions to blunt the impact of the 2022 GA and prevent a similar situation in the future.
One approach, discussed by the City Council on July 12 and approved by the Rent Control Board on July 14, has two components: 1) to address the immediate impact of the 2022 GA, the measure would lower the 2022 GA to 3% with a maximum increase of $70 beginning January 1, 2023 through August 31, 2023; and 2) permanently lower the cap on future AGA’s from 6% to 3%.
On July 26, the Council discussed an adjustment to the first part of this proposal to lower the 2022 GA from 6% to 0% effective as of March 1, 2023.
The Council noted that 6 months of a 6% GA combined with 6 months of no rent increases would result in a net GA of 3% for 2022, which would match the proposed change to lower the cap to 3% for future AGA’s. This modification would also provide additional time for the Rent Control Agency to notify landlords and tenants of the change in the general adjustment.
Also on July 26, Councilmember Negrete introduced a new proposal, which was offered as an alternative to the July 14 proposal. Under this proposal, all GAs would be eliminated for four years for a certain category of units. For units that did not fit within that category, the formula for calculating the GA would remain the same. It was not stated when this proposal would go into effect.
After discussing these proposals, the Council continued the item to a special meeting on August 5, 2022 at 6 p.m. and asked the Rent Control Board to weigh in on the new proposal and make a recommendation between the two proposals.
Below is staff’s analysis of the new proposal, a summary of the existing proposal with the suggested modifications, and staff’s recommendation.
Discussion
a. The proposal approved by the Board on July 14, 2022.
At its regular July 14, 2022 meeting, the Board recommended placing a ballot measure on the November 2022 ballot to amend the RCCA Section 1805(a)(3) to lower the current 6% cap on general adjustments to 3%. In addition, the Board recommended that the 2022 general adjustment be lowered to 3% beginning in January 2023.
That proposal was drafted as follows:
3. Subparagraph 1 of this subsection notwithstanding, in no event shall the general adjustment be less than zero percent or greater than six (6) three (3) percent; and
4. Notwithstanding the Board’s June 2022 announcement of the 2022 general adjustment, commencing on January 1, 2023, the 2022 general adjustment during the period from January 1, 2023 through August 31, 2023, shall be three percent (3%) of the maximum allowable rent (MAR) in effect as of August 31, 2022, with a maximum dollar amount limit of seventy dollars ($70) (“Adjusted GA”). The Adjusted GA shall be the general adjustment by which the MAR is calculated for purposes of future general adjustments.
At the July 26 meeting, the Council discussed modifying the proposed language above in (4) slightly to provide that the 2022 general adjustment would be lowered from 6% to 0 for the period March 1, 2023 through August 31, 2023.
In this way, the total 2022 general adjustment for the entire period would be a net 3%. This change was drafted as follows:
4. Commencing on MarchJanuary 1, 2023, the general
adjustment during the period from March January 1, 2023 through August 31, 2023, shall be zerothree percent (03%) of the maximum allowable rent (MAR) in effect as of August 31, 2022, with a maximum dollar amount limit of zeroseventy dollars ($70) (“Adjusted GA”). Absent an individual adjustment, the MAR during this eight six month transition period shall be the MAR in effect as of August 31, 2022, plus the adjusted GA.
Notwithstanding the Board’s June 2022 announcement of the 2022 general adjustment, the Adjusted GA shall be the
general adjustment by which the MAR is calculated for
purposes of future general adjustments. MAR for any period after August 31, 2023, shall be calculated pursuant to this Section 1805 as if the General Adjustment for the entire period from September 1, 2022, through August 31, 2023, had been three (3) percent, with a maximum dollar amount limit of seventy dollars ($70).
5. If any section, subsection, subdivision, paragraph, sentence, clause or phrase of this Section is for any reason held to be invalid, unlawful, or unconstitutional, such decision shall not affect the validity of the remaining portions of this Section or any portion thereof.
This proposal is in line with the Board’s goals of preventing displacement from historically-high inflation rates while also ensuring landlords receive a fair and reasonable return.
Adjusting the cap to 3% is a reasonable compromise that reflects the downward trend in all rent-stabilized jurisdictions of the number of units whose rents have not been set at market rates at least once. According to the Rent Control Board’s 2021 Annual Report, more than 70% of Santa Monica’s rentcontrolled units have been set at market rates at least once. At the same time, 50% of properties have had at least half of their units rented at market rates.
And there are some properties that have not experienced that level of turnover at all. The annual report also shows that it is mostly the smaller properties that house the longest-term tenants with the lowest rents.
Therefore, setting the cap at 3% is a recognition that, while Costa-Hawkins allows a landlord to set the initial rents for new tenancies, lowering the cap any further at this time risks denying a fair and reasonable return to some of Santa Monica’s landlords who own smaller properties with longer-term tenants. Other cities have reached the same conclusion. Cities like Oakland and Beverly Hills have also recently capped annual rent increases at 3%.
b. The alternative proposal presented on July 26, 2022.
At the council meeting on July 26, Councilmember Negrete introduced a proposal to amend the RCCA to change the formula for annual general adjustments for certain categories of units.
This proposal is the following (also attached as Exhibit A):
• The annual general adjustment will be zero for units with rents at or below the citywide median Maximum Allowable Rent for 2021 as reported by the Santa Monica Rent Control Board for each of the four unit-size classifications. • If this methodology had been in effect in 2022, the units that would not have received rent increases would have been as follows:
o Zero-bedroom units with MAR’s at or below $1,528
o One-bedroom units with MAR’s at or below $1,995
o Two-bedroom units with MAR’s at or below $2,500
o Three-bedroom units with MAR’s at or below $2,791
• For all other controlled rental units, the current Annual General Adjustment methodology will remain in effect.
• This charter amendment will sunset four (4) years after the date of enactment. Upon expiration, the annual general adjustment methodology will revert to the current methodology.
1. Legal analysis
The proposed measure, Tenant Income Inequality Relief Plan, denies the annual general adjustment to the landlords of half of the rent-controlled units in the city—units whose rents were below the median MAR for Santa Monica in 2021—for the next four years based on the general premise that the tenants in these units are low-income and the tenants in those units with MARs above the median MAR are not. The measure raises several legal and policy concerns, outlined as follows:
The proposed measure is constitutionally suspect because it denies the annual general adjustment to half of the city’s controlled units. A rent control law is constitutionally valid if it is reasonably calculated to eliminate excessive rents and provide landlords with a fair return on their property.1 The California Supreme Court found Berkeley’s initial rent control ordinance defective, in part, because it lacked an annual general rent adjustment generally available to landlords, forcing them to seek individual rent adjustments to ensure that they continue to receive a fair return under the rent control law.2 The adoption of a comprehensive scheme of across the board annual rent increases in Berkeley’s revised ordinance was material to establishing the ordinance’s constitutional validity. The general availability of the annual adjustment “was the exact remedy found wanting” in Berkeley’s initial ordinance where case-by-case adjudication of every rent ceiling adjustment for the city’s thousands of rental units “put the Board in a procedural straitjacket.” The mechanism for providing adjustments in rent to ensure landlords a fair return is constitutionally sufficient only if it is capable of doing so with no more greater delay than is reasonably necessary.3 By including a general annual adjustment, the revised ordinance avoided a confiscatory delay in providing most landlords a fair return by reducing the task of time consuming individual rent adjustments to manageable proportions, limiting those adjustments to the few cases that were not resolved by application of the annual general adjustment.4
Here, the proposed measure denies to landlords of half of its controlled units the very mechanism that Santa Monica’s rent control law adopted to ensure that it passes constitutional muster. Santa Monica’s annual general adjustment limits the more burdensome adjudicative petition process to those few landlords who contend that they are not receiving a fair return despite the annual general adjustment and state vacancy decontrol. Moreover, the proposed measure denies the general rent increase for four years, requiring those landlords to file individual petitions every year to ensure that they receive a fair return. And the proposed measure does so at a time of unprecedented inflation, putting further strain on the rent control law’s constitutional validity by denying those landlords the very mechanism that allows them to maintain a fair return during a time of high inflation without having to resort to individual petitions.
By denying the annual general adjustment to half of the city’s controlled units and forcing a substantial number of these landlords to file individual rent adjustment petitions to ensure a fair return, the proposed measure will also place additional burden on the Board’s hearing process, which is already dealing with a significant increase in the number of time consuming rent decrease and construction decrease cases. The measure could result in an unpredictable number of even more time-consuming rent increase petitions, which could in turn 1 Carson Harbor Village, LTD. v. City of Carson Mobilehome Park Rental Review Board (1999) 70 Cal.App.4th 281, 288.
2 Fisher v. City of Berkeley 1984) 37 Cal.3d 644, 687-690. 3 Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 169. 4 Searle v. City of Berkeley Rent Stabilization Bd. (1988) 197 Cal.App.3d 1251, 1257. lead to delayed decisions that would highlight the courts’ very concern with confiscatory delay in Berkeley’s initial rent control ordinance that lacked generally available annual adjustments.
The proposed measure raises additional concerns by freezing the rent for half of the city’s rent-controlled units. Rent freezes violate the constitution’s due process clause if they do not bear a rational relationship to the legitimate purpose for which the rent control law was enacted. They have been generally upheld to counteract rent increases imposed by landlords in anticipation of rent control.5 And as a public health measure in response to the global pandemic, a few cities also enacted a rent freeze where their local laws permitted such measures, and their ability to issue the emergency orders was permitted by the California Emergency Services Act under Government Code 8550 et seq. But the proposed measure does not seek to impose the freeze to counteract an anticipated rent control law. Nor does it seek to impose a freeze as a public health measure related to the global pandemic. Instead, it seeks to impose a four-year freeze to mitigate the burden on low-income tenants. Yet there is no substantiated evidence that tenant households paying below the median MAR are necessarily low income, while those paying above median MAR are not. Nor does the proposed freeze bear a rational relationship to the rent control law’s legitimate purpose, which is to protect tenants from unreasonable rents while providing landlords with a fair return. There is no evidence that tenants paying below the median MAR are paying unreasonable rents. The proposed measure’s questionable premise for the freeze, therefore, raises constitutional concerns because it does not necessarily bear a rational relationship to the legitimate purposes of the rent control law.6
The proposed measure also raises public policy concerns. By depriving landlords of a rent increase for a specific unit because the tenant in the unit was paying rent below the median MAR in 2021, the measure may only increase the financial incentives for a landlord to harass the tenant into vacating the unit because not only is that tenant paying lower rent but that very fact further deprives the landlord of the additional revenue made possible by the annual general adjustment. Moreover, the landlord could decide to evict the tenant using the Ellis process to leave the rental business altogether.
2. 6% cap remains intact with no relief for rent-burdened tenants.
This new proposal, unlike the Council’s initial proposal, does not lower the 6% cap or offer any relief to rent-burdened tenants for the 2022 6% GA. For tenants whose rent is above the median MAR, this measure provides no assistance. In addition, the 6% cap in the RCCA would not be changed, so these tenants could 5 Adamson Companies v. City of Malibu (1994) 854 F.Supp 1476, 1491. 6 The proposal also treats similarly-situated landlords differently without a rational basis for doing so, which raises equal protection concerns.
be faced with even higher rents in future years. This could exacerbate, rather than ameliorate, the existing affordability crisis and significantly widen the gap in rents between long-term and newer tenants.
c. Staff’s Recommendation
The Council’s initial proposal would both mitigate the worst impacts of the unexpectedly high 2022 general adjustment while also ensuring the constitutionally mandated fair return to Santa Monica’s landlords. It would also adjust the cap for future annual rent increases to bring GA’s more in line with the RCCA’s goals. For these reasons, and given the significant concerns of the legality of the alternative proposal as well as its unintended consequences, staff recommends that the Board approve the proposal adopted at its July 14, 2022 meeting as modified in the Council’s discussion at the July 26 council meeting.
Tenant Income Inequality Relief Plan (TIIRP)
THE INTRODUCTION TO THE MOTION
During the last two weeks since the initial July 12 Council discussion on a proposed Rent Control Charter Amendment, we have continued to consider alternatives for the best path forward that will adhere to our core principle of protecting those who are most vulnerable.
Consequently, we have developed a proposal that directly addresses the shortcomings of the existing Annual General Adjustment methodology.
The Current Annual General adjustment methodology was developed in 1979, when income inequality was not even on our public policy radar screen.
Since then, income inequality has become the defining housing issue, while our methodology has failed to address this escalating crisis.
The ballot measure proposed at the 7/12 meeting, for a maximum 3% increase, perpetuates the problem by applying a one-size-fits-all percentage rate across all units.
Further compounding the problem, is the inclusion of a dollar cap that disproportionately benefits higher rent units occupied by more affluent tenants.
Any solution we adopt this evening must mitigate the inequities inherent in the existing methodology.
I favor a rent increase approach that prioritizes rent relief for lower-rent tenants.
Exhibit A
Tenant Income Inequality Relief Plan (TIIRP)
THE MOTION:
I move that a Tenant Income Inequality Relief Plan Charter Amendment AKA (TIIRP) be placed on the November ballot, to amend the Rent Control Board Charter and modify the methodology for determining the Annual General Adjustment as follows:
• The annual general adjustment will be zero for units with rents at or below the citywide median Maximum Allowable Rent for 2021 as reported by the Santa Monica Rent Control Board for each of the four unit-size classifications. • If this methodology had been in effect in 2022, the units that would not have received rent increases would have been as follows:
o Zero-bedroom units with MAR’s at or below $1,528
o One-bedroom units with MAR’s at or below $1,995
o Two-bedroom units with MAR’s at or below $2,500
o Three-bedroom units with MAR’s at or below $2,791
• For all other controlled rental units, the current Annual General Adjustment methodology will remain in effect.
• This charter amendment will sunset four (4) years after the date of enactment. Upon expiration, the annual general adjustment methodology will revert to the current methodology.
Tenant Income Inequality Relief Plan (TIIRP)
MOTION COMMENTARY - USE IF NEEDED DURING DISCUSSION
The Tenant Income Inequality Relief Plan (TIIRP) is a much more equitable methodology in that it prioritizes protection for those arguably most in need while continuing to protect others based on the existing city charter.
No one has innovated to address the inequality that developed since rent control was introduced in 1979.
This plan allows Santa Monica to take a national lead in addressing the serious issue of growing inequality
Under this formula housing providers sacrifice annual increases for 50% of the city’s rental units meaning that 50% of our tenants will not be subject to an annual rent increase.
TIIRP provides zero rent increases for 50% (13,741) of our controlled units Said differently this proposal protects roughly 4,156 (43%) more units/households than the 9,585-household number that has been separately claimed as rent burdened.
Using the housing providers to supply financial resources in the form of reduced increases and to administer the program through their own rent increase submission to the Rent Control Board, this proposal DOES NOT ADD either additional cost or administrative overhead to the city.
The Sunset provision is intended to:
1. Provide a financial bridge to cross the currently evolving economic uncertainty of the next several years.
2. Provides a period of time to develop a thoughtful and robust and up to date rent control policy that permanently address the growing inequality in the community.