Setting up a fierce debate, city-commissioned report recommends changes that would lower LA rent hikes

What is the cause of high rents in L.A.?  Government.

“The independent analysis found some of the city’s rules governing rent increases have favored landlords over tenants. The report recommends changes that could lower the rent hikes tenants face each year, setting up what is sure to be a fierce debate at city hall.

What’s in the report?

Over the course of 193 pages, the report offers an extensive analysis of the L.A. rental housing market, challenges facing both tenants and landlords, and the impact of the city’s Rent Stabilization Ordinance. Among the findings:

• About 35% of the rent L.A. tenants pay goes to operating expenses for apartment buildings, on average. This includes maintenance, utilities, insurance, payroll and other routine costs. Landlords can use the remainder to cover mortgages and turn a profit.
• From January 2020 through January 2023, 4 in 10 rent-controlled L.A. apartments became vacant. When a tenant leaves a rent-controlled unit, the city’s rules allow landlords to raise rents to market rates. These higher rents helped landlords absorb the impact of a nearly four-year freeze on rent hikes.
• Many expenses have risen sharply for landlords in recent years, outpacing inflation. Property insurance costs have roughly doubled since 2020. However, the report notes these expenses make up a relatively small portion of overall costs.”

Government harms the market place.  If rent control did not exist the value of the apartments should be higher, property tax collections would be higher.  Want affordable housing—get government out of the way.

Setting up a fierce debate, city-commissioned report recommends changes that would lower LA rent hikes

By David Wagner, LA1ST,  9/16/24  https://laist.com/news/housing-homelessness/los-angeles-housing-rent-control-increase-caps-rso-limits-economic-roundtable-report

In the city of Los Angeles, some 650,000 apartments are subject to local rent control. How much rents can go up each year has been the subject of ongoing controversy between tenants and landlords, who often disagree about what’s fair amid a regional crisis in affordable housing.

The L.A. City Council, which sets policy, has been at the center of that tension. Last October, Councilmembers Bob Blumenfield and Hugo Soto-Martinez put forward a motion calling for a fresh look at the city’s decades-old formula for setting annual limits on rent hikes. The council approved that motion and called for a study to “conclude within 3 months.”

This May, the Economic Roundtable, the nonprofit research organization the city commissioned to carry out the study, submitted its report to the L.A. Housing Department. Four months later, the city still has not released it publicly. LAist obtained the report through a public records request.

The independent analysis found some of the city’s rules governing rent increases have favored landlords over tenants. The report recommends changes that could lower the rent hikes tenants face each year, setting up what is sure to be a fierce debate at city hall.

What’s in the report?

Over the course of 193 pages, the report offers an extensive analysis of the L.A. rental housing market, challenges facing both tenants and landlords, and the impact of the city’s Rent Stabilization Ordinance. Among the findings:

• About 35% of the rent L.A. tenants pay goes to operating expenses for apartment buildings, on average. This includes maintenance, utilities, insurance, payroll and other routine costs. Landlords can use the remainder to cover mortgages and turn a profit.
• From January 2020 through January 2023, 4 in 10 rent-controlled L.A. apartments became vacant. When a tenant leaves a rent-controlled unit, the city’s rules allow landlords to raise rents to market rates. These higher rents helped landlords absorb the impact of a nearly four-year freeze on rent hikes.
• Many expenses have risen sharply for landlords in recent years, outpacing inflation. Property insurance costs have roughly doubled since 2020. However, the report notes these expenses make up a relatively small portion of overall costs.
• About one-fifth of L.A. renters are living below the federal poverty line. According to U.S. Census data, just over half of those renters spend 90% of their income or more on rent. Rent increases can leave these low-income renters vulnerable to displacement and homelessness.
• The city’s current range of allowable annual rent increases — anywhere from 3% to 8% depending on inflation — is higher than the increases permitted in most other California cities with rent control.

The report makes some recommendations on how the city could change its formula for determining annual rent increase limits:

• Either eliminate a provision allowing landlords to raise rents an extra 1% per year if they pay for a tenant’s gas, plus another 1% if they pay for electricity — or replace it. The report estimates each 1% increase could raise rents an additional $150 to $240 per month after 10 years, more than the actual cost of providing those utilities. One option, the report says, would be to instead use a surcharge that better captures the increased costs of providing those utilities.

The report recommends considering changing which version of the consumer price index is used to calculate allowable increased to one that excludes housing costs, shown as “Less Shelter” in the chart above.

(

Courtesy Equitable Rent report

)

• Change how annual rent increases are calculated. Instead of using a version of the consumer price index driven to a large degree by housing cost inflation, the report recommends a different index that excludes housing costs. The report argues this would stop the feedback loop of allowing high housing inflation to create further housing inflation.

What do landlord advocates say?

LAist shared the report with advocates for landlords and tenants.

Landlord advocates strongly disputed the report’s conclusions. Daniel Yukelson with the Apartment Association of Greater Los Angeles pointed to recent data from the National Apartment Association, a trade group for property owners, concluding that California landlords earn 7 cents of profit on average for every dollar of rent.

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About L.A.’s current formula

• L.A.’s formula for determining annual rent increase limits dates back to the 1980s, when inflation was especially high. At the start of that decade, the consumer price index rose 15.8% in a single year. Over the past year, the consumer price index has risen 2.9%.

“What [the report] is trying to do is make a PR effort to lay the groundwork to chip away at what little ability landlords have in L.A. to be able to raise rents and be able to keep up with their costs,” Yukelson said.

He said the report takes a macroeconomic view of the city’s rental market, but fails to capture the unique struggles facing many small landlords.

“There are plenty of owners out there who have had their renters in place for many years,” Yukelson said. “They’re way below market. And they’re having trouble today keeping up with the growing costs of insurance, maintenance and supplies.”

What do tenant advocates say?

Tenant advocates took a very different view of the report. They said it correctly identifies problems with L.A. rent control and validates their demands for stronger limits.

RENT CONTROL GUIDE

• How much can rent go up in my neighborhood?
  • Read our rent control guide to find out how much your rent can be legally increased each year, depending on where you live in L.A. County.

“Small landlords are able to maintain their profits and draw income above their expenses — they haven’t been overly burdened by rent stabilization,” said Christina Boyar, a legal fellow with Public Counsel and a member of the Keep L.A. Housed coalition.

Tenant advocates have called for a 3% ceiling on annual rent hikes and elimination of the 2% surcharge for landlords who provide gas and electricity. They point to other L.A.-area cities that currently limit rent increases to less than 3% with no add-ons for utilities.

“The report shows that rent costs exceeding what tenants can pay is a primary cause of homelessness,” Boyar said. “We are obviously in a homelessness crisis in L.A., and if this formula isn’t updated soon, more folks will just fall into homelessness.”

How LAist obtained the report

The city’s housing officials have been in possession of the Economic Roundtable report since May.

When LAist first requested the report, officials told a reporter the study was not subject to disclosure under the California Public Records Act, saying there was an exemption for “deliberative process.”

They provided the report shortly after LAist’s public records lawyer intervened.

Why had the city not released the report?

Daniel Flaming, president of the Economic Roundtable and a co-author of the report, said he didn’t have a good answer for why the report was kept under wraps.

“I think when it’s a politically contentious issue, there are attempts to manage the conversation,” Flaming said. “The substance of the report is final. It was submitted as a final report and accepted by the city as a final work product.”

Sharon Sandow, a spokesperson for the L.A. Housing Department, told LAist last week the document was still a “draft report,” and they didn’t have a specific date lined up for its release.

“There are several rounds of revisions left to go before this report is considered final,” Sandow said in an email. “Economic Roundtable is under contract to complete this report through January 2025 — though clearly we hope to have it finalized before then.”

By the end of last week, Sandow sent LAist a version of the report she described as “final.”

Under state public records law, preliminary drafts must be released if they are retained in the ordinary course of business, as this one has been. LAist noted in its correspondence with housing department officials that the report was not a draft but was a finished product submitted by the contractor.

Why it matters

The city’s rent increase limits apply to a huge number of L.A. residents. Almost two-thirds of L.A. households rent their homes. Local rent control rules cover about 650,000 apartments — 44% of the city’s entire housing stock. Apartments in L.A. are generally covered by local rent control if they were built before Oct. 1, 1978.

Housing costs are a major burden for many L.A. households. About 59% of the city’s renters spend more than 30% of their income on rent, a level considered unaffordable by federal government standards.

The report notes that because L.A. has a 3% floor on annual increases — even in years when the consumer price index is lower — landlords have often been allowed to raise rents above inflation. Between 2010 and 2020, the consumer price index in L.A. rose 21%. During the same period, rents in rent-controlled L.A. apartments were allowed to rise 36%.

The issues facing landlords

On the other hand, the report finds that landlords have faced unique challenges — particularly during the COVID-19 pandemic.

State and local regulations allowed tenants who lost income during the pandemic to delay rent payments. Annual increases in rent-controlled housing were banned. And landlords were restricted from evicting tenants who fell behind on rent. That all played out during a time when the cost of maintenance, utilities and insurance was rising faster than inflation.

L.A. kept COVID-19 protections in place far longer than many other jurisdictions. The city faced strong criticism from landlords who argued too little was being done to help property owners.

Some of these hardships were addressed by government rent relief programs, which provided funds to landlords with tenants behind on rent. The report also notes that high turnover helped landlords raise rents to market rates and keep rental income nearly at pace with inflation.

But landlord advocates say some property owners have yet to fully recover from the pandemic. They now worry about the potential cost of proposals to remove gas stoves and install air conditioners.

“The cost of electricity is just going to continue going up,” Yukelson with the Apartment Association said. If the city stops landlords who provide electricity from raising rents an additional 1% per year, he said, “The next tenant is going to have to pay that burden, because the rents are going to have to go up.”

How L.A. stacks up to other cities

On balance, Flaming said the report shows that L.A.’s policies diverge significantly from how other California cities handle rent control. He said the utility surcharge in particular seems “arbitrary.”

“The Los Angeles ceiling and floor are atypically high for rent-controlled cities,” he said. “Among cities that have elected to control rents — and not all cities have — Los Angeles appears to be tilted toward landlords.”

Some L.A. city council members have floated the idea of establishing different rent control rules for “mom and pop” landlords and larger, corporate landlords. The report recommends the city instead target aid to small landlords, rather than allowing additional rent increases on tenants.

What happens now?

The clock is ticking for the city to develop a new rent-control formula in time for Jan. 1, 2025. That’s when landlords will be required to give tenants notice of any rent increases starting in February. Many tenants in rent-controlled housing received a 4 to 6% annual rent increase on Feb. 1, 2024 due to the lapse of the L.A.’s COVID-19 rent freeze.

Soto-Martinez, one of the council members who requested the report be commissioned — has already called for capping increases at 3%.

In an email reacting to the Economic Roundtable report, Soto-Martínez told LAist, “As we await the finalized version of this report, it’s heartening to see so much data supporting the policy changes that renters have been demanding — especially when it comes to preventing excessive rent increases that can devastate working families.”

The city’s rent control debate is playing out against the larger backdrop of an election season where rent control — and many other housing-related measures — are up for a state-wide vote.

Read the full report

Link: Equitable Rent Rent Stabilization Standards in the City of Los Angeles