Come September, landlords with rent-controlled units will be able to charge their tenants as much as $26 more a month.
The Rent Control Board on Thursday set the annual rent increase, which takes effect Sept. 1, at 1.54 percent with a cap of $26. The board, which is selected by voters, is charged with adjusting rents annually based on increases in property owners' operating expenses.
The increase means someone living in an apartment that goes for $1,200 could see an increase of $18.48 a month, or $221.76 a year.
While always contentious, this year the debate was even more so as the board relied on a new formula that effectively lowered the annual increase by basing it on a higher average rent than in the past, which Rent Control Board officials say better reflects how much renters are paying, as well as how much landlord's are making in profit.
Landlords, however, believe the change was made in retaliation for a lawsuit they won last year that forced the rent increase higher than what was presented to the board.
Last year's increase was 3.2 percent for all those in rent-controlled apartments.
The new formula used to calculate the annual general adjustment — the maximum percentage by which landlords can raise rents under the law — is based on the median cost of a controlled unit in Santa Monica, which is now $1,395 a month.
That is cut into slices of a pie representing the costs landlords pay to keep up an apartment. Some of those slices, like property taxes and business license fees, are fixed. Others, like labor and cash flow, which in most cases is profit for the owner, are based on inflation.
If they hadn't made the switch, the calculation would have been based on a much lower base rent of $829.45, which reflects 30 years of annual rent increases on those who moved into their apartments when rent control first went into effect in 1979. The base rent at that time was estimated at $300.
The change hurts landlords by lowering the amount that's taken up by the fixed costs, making it look like there is more money from the rent to pay for other things like electricity, insurance and maintenance, which are all costs estimated using percentages.
In effect, the new formula assumes that landlords are making more money than they did in the past and don't need help from the Rent Control Board to make a fair return on their property, lowering the annual general adjustment.
Rent Control staff said they made the change to reflect a significant drop in the number of units rented at the lower base rent thanks to vacancy decontrol, a law that allows landlords to raise rents to what they can get on the open market when someone moves out. Staff said that 60 percent of rent control units are now being rented at market rate, which means landlords are collecting more cash.
"It's high time we removed this sort of false poverty line for landlords and started to talk about what a real median rent level is in this city, resulting in a much more just general adjustment," said Rent Control Board Commissioner Todd Flora, who praised staffers for making the change.
Landlords were not pleased, saying the change is depriving them of making a fair return on their investments, something which is required under the City Charter.
"Some may call this … reform. I call it a scam," said Wes Wellman of the Action Apartment Association, which represents landlords in Santa Monica.
Tenants should expect to see notices of rent increases from their landlords in the coming months.
Those who moved in after the last rent increase will not be required to pay more as their landlords should have already taken into account their increased operating expenses before leasing their units at market rate, Rent Control officials said.
Keep it simple
If the formula for adjusting rents sounds confusing, that's because it is. Tenants and landlords have complained for years about its complexity and have asked for a more basic formula.
That's why the board also voted Thursday to have Rent Control staff draft a ballot measure for November's general election that would base future rent adjustments on a factor — 75 percent — of the Consumer Price Index (CPI), which measures the change in costs for goods and services. CPI is often used as an indicator on how the economy is performing.
Most other cities with rent control laws use a straight CPI formula. West Hollywood, which has a rent control law very similar to Santa Monica's and is located only 10 miles away, calculates its annual rent adjustment based on 75 percent of the change in CPI.
Staff recommended using 75 percent because over the years the old methodology produced rent increase in line with that percentage of CPI, and because anything lower may open up the board to legal challenges. Berkeley, Calif. was sued for using a formula based on 60 percent of CPI. As a compromise it went to 65 percent.
Commissioners hope that using that formula instead of the more complicated pie methodology developed in 1983 will make the process more transparent and save money for the Rent Control Board, which is struggling with a structural deficit that reached $361, 977 this year.
Commissioners approved the board's roughly $4.5 million budget Thursday and used reserves to cover the difference.
Commissioner Robert Kronovet said it was time to get serious about closing the gap, which could include raising registration fees landlords pay each year for each unit they own that is under rent control. The fee, which is passed down to tenants as part of their rent, is $156, or $13 a month per unit.
"For this organization to run a deficit is inappropriate and sends an incorrect message," Kronovet said. "We are going to either stand up and declare … we are going to raise registration fees, which I have been dancing around and have not supported publicly, or we are going to cut the budget down."
Many commissioners are hesitant to raise the registration fee because it's ultimately paid by tenants. Four out of five of the commissioners are members of Santa Monicans for Renters' Rights, the city's leading political party which pushed for rent control in the late 1970s.
Rent Control Administrator Traci Condon said the board is also prohibited from raising the registration fee so high as to create a significant reserve fund. The board is only allowed to raise the fee to pay for current operating expenses.
"I don't think it is necessary to increase fees at this time, but … it is a possibility that we may need to increase fees next year," Condon said.
Flora suggested the commissioners vote to not accept the $75 they receive for each meeting they attend. That idea had no support from other commissioners.
The idea of raising registration fees could gain traction if the board decides to force landlords to shoulder some of the expense. Commissioners did discuss placing on the ballot an initiative to have landlords cover more of the fees and taxes passed down to renters, including taxes to fund schools and clean the Santa Monica Bay, as well as the annual registration fees.
The reasoning is that landlords do reap some benefits from those fees and taxes and should share the cost.
That did not gain any traction as commissioners were concerned how that would impact the other initiative to go to a straight CPI adjustment for the annual rent increase.
Wellman, a property owner, also said that if landlords were forced to pay the partial or full cost of some parcel taxes for schools or other fees, support for those measures would drop drastically. That could be a serious blow to public education, which is relying more on local dollars to pay for teachers and supplies.
The board will reconvene on June 28 to further discuss the CPI initiative and possibly study ways to reduce the budget deficit.
For more information on the methodology used for the rent increase and the proposed initiative, go to www.smgov.net/rentcontrol.
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