Title
Introduction of Ordinance Establishing an Annual General Adjustment in Rent, a Rent Registry, Banking, and a Petition Process for an Upward or Downward Adjustment of Rents. (Rent Program 265)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
The City of Alameda’s (City) current Rent Stabilization Program does not cap the amount that a landlord can increase a tenant’s rent annually. Rather, the program requires that any rent increase above 5% must be heard by the Rent Review Advisory Committee (RRAC), and depending on the type of rental unit, e.g., a rental unit in a multi-unit building or a rented single-family home, the RRAC’s decision is binding (the former) or non-binding (the latter).
This staff report recommends that the City Council introduce an ordinance that establishes an annual general adjustment in rent (also known as a maximum allowable rent increase or a “rent cap”) and related programmatic components as follows:
• An annual general adjustment (AGA) based on 100% of the Consumer Price Index (CPI), with a 1% floor and 5% ceiling;
• “Banking,” or the ability to carry-over any unused portion of the AGA to any subsequent year. However, any banked amount used in a given year cannot exceed 5% in addition to the AGA. Any banked amounts expires if the property is sold or a new tenancy is established;
• A rent registry (initial registration and re-registration when there is a new tenancy); and
• A petition process that utilizes a Hearing Officer for upward or downward rent adjustments.
The Ordinance would be uncodified but will be included in a revised Rent Review, Rent Stabilization and Limitations on Evictions Ordinance to be presented to the City Council in September.
BACKGROUND
In March 2016, the City Council adopted a Rent Review, Rent Stabilization, and Limitations on Evictions Ordinance (Ordinance 3148). In spring 2017, the City Council made a number of amendments to the Ordinance that were mostly technical and clean-up in nature; however, the City Council also amended the Ordinance to eliminate “no cause” terminations of tenancy. The resulting ordinance, Ordinance 3180, was subject to a successful referendum petition. The City Council subsequently rescinded Ordinance 3180. In addition, an initiative was placed on the November 2018 ballot that would have included Ordinance 3148 in the City Charter, thereby requiring a vote of the people to make any changes to the Ordinance. The initiative failed and as a result, the City Council has the authority to revise Ordinance 3148 as it determines necessary and appropriate.
On April 2, 2019, City Council provided direction to staff regarding a number of proposed amendments to Ordinance 3148 it would like to consider. City Council directed staff to prepare an ordinance to eliminate “no cause” terminations of tenancy. City Council also directed staff to prepare an ordinance establishing an Annual General Adjustment in rent for its consideration. Staff recommended that both the “just cause” and AGA ordinances be prepared as stand-alone ordinances so that if either ordinance were subject to a referendum, any referendum would impact solely the “single issue” ordinance. Lastly, staff recommended that a third ordinance be prepared for City Council consideration that would include the clean-up and technical revisions that were initially included in Ordinance 3180, and other changes that Rent Stabilization Program staff is recommending based on implementing the Ordinance over the last 24 months.
Following a community open house and several stakeholder meetings, the ordinance eliminating “no cause” terminations of tenancy was adopted on June 4, 2019, and will be effective on July 5, 2019. Staff originally planned to bring City Council in July two ordinances, an ordinance establishing the AGA and an ordinance with the clean-up/technical amendments, at the same time. However, if the City Council adopts an ordinance establishing an AGA, it will in turn inform the additional changes needed to Ordinance 3148. Therefore, staff has prepared the attached ordinance to establish an AGA and will prepare the subsequent ordinance in September that will make all of the necessary changes to Ordinance 3148 to ensure consistency with the new Rent Stabilization Program that is the result of action on the AGA.
One of the concepts presented to City Council at its April 2 meeting was the idea of rent increases over a certain percentage constituting a “constructive eviction,” and a strategy for mitigating those rent increases that are too costly for a tenant to pay. A constructive eviction is a significant rent increase, the result of which causes a tenant to give notice to vacate as they cannot afford the new rent. While the City of Alameda cannot legislate a rent cap for Costa Hawkins-exempt units (see the Discussion section below for details about the State Costa Hawkins Rental Housing Act) or preclude a landlord from earning a fair return, it may be able to compel payment of relocation benefits if a tenant elects to relocate rather than pay the new rent based on a rent increase above a certain percentage. City Council expressed interest in exploring this concept. Staff is still discussing this idea and will make a recommendation in September, along with the “clean-up” amendments.
A second community meeting was held on June 6, 2019, to solicit feedback and input on establishing an AGA and related issues such as the amount of the permitted increase, how it should be adjusted annually, whether fees and special assessments, etc. should be “passed-through” to tenants, the ability to “bank” any portion of an allowable rent increase that was not imposed, etc. Over 100 people attended the meeting, with landlords representing well over 75% of those present. The strong consensus at the meeting was to maintain the status quo. Exhibit 1 is the results of the “voting with dots” exercise with those present, and a summary of comments received. Exhibit 2 is a summary of the comments/feedback received at the first community meeting (previously provided as part of the May 21, 2019 staff report).
Based on the two community meetings (May 2 and June 6), stakeholder meetings, analysis of other jurisdictions with rent stabilization programs, experience with the local rental market, and implementing Ordinance 3148 over the last three years, staff has prepared an ordinance establishing an AGA for Council’s consideration. That proposed ordinance is discussed in detail below.
DISCUSSION
In most jurisdictions with rent stabilization programs, the jurisdiction sets an annual general adjustment, i.e., a fixed annual rent increase that a landlord may impose by right, such as the percentage change in the CPI or a flat percentage rate increase established by ordinance or regulation.
At present, Ordinance 3148 does not limit annual rent increases by an annual general adjustment. Rather, the City has a rent mediation/hearing procedure designed to incentivize landlords to stabilize rents by keeping rent increases at or below 5%. Under the current system, landlords may, without restriction, impose an annual 5% (or less) rent increase without triggering a requirement to file a rent increase notice with the City’s Rent Stabilization Program for review by the Rent Review Advisory Committee. Rent increases above 5% are subject to binding decisions by the RRAC unless the unit is a single-family home, condominium or multi-unit building built after February 1995, as these units are subject to non-binding decisions. While rent increases above 5% trigger a mandatory hearing at the RRAC, tenants are entitled to request a review for a non-binding decision by the RRAC for increases of 5% or less.
The distinction between rental units that are subject to a binding versus non-binding decision at the RRAC is due to the State Costa Hawkins Rental Housing Act (Costa Hawkins). Costa Hawkins permits local jurisdictions to establish rent control programs but regulates the types of rental units that can be covered by a rent control program. Multifamily properties built before February 1995 may be subject to rent control. Multifamily properties built after February 1995, single-family homes and condominiums are exempt under Costa Hawkins, and as a result, at this time, local jurisdictions cannot subject these units to rent control. When the City Council adopted Ordinance 3148, it felt that it was important to apply its mediation/hearing process to the maximum number of rental units and tenants, and because the Ordinance does not establish a maximum allowable rent increase, the Ordinance requires that all rental units (multifamily as well as single-family/condominium), except those to which the Ordinance does not apply at all, e.g., rental units regulated by rent-restricted agreements, be subject to the mandatory hearing at RRAC for rent increases above 5%.
This regulatory framework has been implemented over the past three years and it emerged from the City’s long-standing voluntary mediation process that had been in place since the late 1970s. The program has evolved in an attempt to keep pace with rapidly rising rents in Alameda specifically and the Bay Area generally. In addition to rapidly rising rents, housing trends in the City demonstrate continued low vacancy rates and tenant incomes that do not keep pace with rent increases resulting in high rent burdens.
The 2017 American Community Survey One-Year Estimates reveal the following data:
• 1.4% rental vacancy rate;
• 54% of households in the City are renters;
• 49% of renters spend at least 30% of income on rent;
• 29% of renter households have lived in the City for 10 or more years; and
• $72,063 is the median renter household income.
Given the current rent regulations, tenants have expressed concerns that the compounding effect of annual 5% rent increases will quickly price many residents out of the Alameda housing market, especially those on fixed incomes. American Community Survey data demonstrates that renter households had a 12% increase in median household income between 2008 and 2017, while rents increased by 34% during the same period.
Tenants have requested that the City Council continue the evolution of the City’s rent stabilization program by adopting an AGA and thereby limiting, presumably below 5%, annual allowable rent increases. An AGA would provide landlords with an automatic right to increase rents (to the capped amount) and eliminate the requirement for a hearing before the RRAC. A landlord or tenant would be permitted to petition for an upward or downward adjustment of the rent with review by a Hearing Officer.
It should be noted that while adoption of an AGA would eliminate the requirement for a hearing before the RRAC for Costa Hawkins non-exempt units, under Ordinance 3148, owners of Costa Hawkins-exempt units would continue to be required to appear before the RRAC for non-binding decisions regarding rent increases above 5% until the clean-up ordinance is considered by City Council in September and becomes effective in mid-October. One of the recommended amendments will be to eliminate any form of rent regulation for Costa Hawkins-exempt units.
Annual General Adjustment
As indicated above, an AGA, which establishes a maximum allowable rent increase, would be applicable only to those multifamily rental units built before February 1995. Rental units exempt under Costa Hawkins (multifamily units built after February 1995, single-family homes and condominiums) would not be subject to an AGA. The ordinance, as drafted, would eliminate the requirement for owners of these Costa Hawkins exempt units to notify the Rent Stabilization Program staff of future rent increases or to appear before the RRAC for rent increases above 5%. However, it should be noted that all rental units (regardless of their status pursuant to Costa Hawkins) would continue to be regulated under Ordinance 3148 relative to terminations of tenancy and the associated requirement to pay relocation fees. All rental units would also continue to be subject to the annual program fee.
At its April 2, 2019 meeting, the City Council provided direction to staff to draft an ordinance that would impose more traditional rent increase limitations under an annual general adjustment. While there is no precise judicial standard for establishing an AGA, there are many best practices from decades of implementation in other jurisdictions as well as numerous judicial opinions. The amount of the AGA must be set low enough to mitigate negative impacts of excessive rent increases on tenant households while also be set high enough to provide landlords a fair return on their property and provide a financial incentive and means for landlords to maintain their properties. As a result, local jurisdictions have the ability to tailor the AGA to meet their local needs.
In addition to raising the rent based on an AGA, Costa Hawkins permits a landlord to raise the rent to market rate, or some other level at the landlord’s discretion, when the previous tenant vacates the property voluntarily or the tenancy is terminated for cause (e.g., failure to pay rent). In those instances, any rent increase is subject to the AGA after the new tenant moves in (this process is sometimes referred to as “vacancy de-control/re-control”). Therefore, a landlord’s opportunity to reset rents to market following a tenant’s voluntary departure, or the tenancy ending for cause, must be considered in determining the appropriate AGA. Data from the 2017 American Community Survey One-Year Estimates indicates that at least 36% of tenants have lived in their units less than four years and at least 71% of tenants have lived in their units less than nine years. This data demonstrates, in general, that tenants do not remain in their units for many years and indicates that landlords will be presented with opportunities to reset most rents to market on a regular basis.
As part of establishing a rent stabilization program, including an AGA, local jurisdictions must allow landlords to raise rents to receive a fair return on property. A fair return on property is often defined, and has been upheld by the courts, as permitting an increase in rents that allows for maintenance of a property owner’s net operating income (NOI), as adjusted by inflation. In simple terms, under that formula, a fair return analysis would compare the NOI of the property (gross income less expenses, not including debt service) in the year before rent control to the NOI of the property after rent control. As long as the NOI, as adjusted by inflation, remains constant, then there is a presumption that the property owner is receiving a fair return on property.
Therefore, the challenge when establishing the AGA is to consider the burden of rapidly rising rents on tenants, the provision of vacancy de-control/re-control that allows rents to be set to market rates on a regular basis, and the need to ensure a process for a landlord to receive a fair return on his/her property. Selecting an AGA that minimizes a tenant’s rent burden and maximizes a landlord’s ability to achieve a fair return will reduce the number of petitions for reduction in housing services and fair return hearings (discussed further below) and ensure a fair and legally sound program.
The following is a discussion of establishing the AGA based on a percentage change in the CPI.
Annual General Adjustment Based on the Consumer Price Index
The CPI is generated by the U.S. Bureau of Labor Statistics and measures the increase in prices paid by urban consumers for goods and services. Because the index is considered a reliable, accessible and credible source of the changing costs of goods and services, including housing, the majority (six out of eight) of rent-regulated jurisdictions in the Bay Area set the AGA to a ratio of the CPI (60% to 100%). In addition, with the CPI fluctuating each year, some rent-regulated jurisdictions also set a minimum percentage increase (floor) and a maximum percentage increase (ceiling) for the annual rent increase to establish greater stability and predictability for tenants and landlords. For example, the City of Mountain View has an AGA set at 100% of CPI with a floor of 2% and a ceiling of 5%. [See Table 1].
|
Table 1: Comparison of allowable rent increases in Bay Area cities with rent regulations |
|
City |
Fixed Percentage |
CPI |
Applicable Percentage of CPI |
Floor: Allowable Minimum Increase |
Ceiling: Allowable Maximum Increase |
|
Berkeley |
- |
X |
65% |
- |
- |
|
East Palo Alto |
- |
X |
80% |
- |
- |
|
Hayward |
X |
- |
- |
- |
5% |
|
Mountain View |
- |
X |
100% |
2% |
5% |
|
Oakland |
- |
X |
100% |
- |
10% |
|
Richmond |
- |
X |
100% |
- |
- |
|
San Francisco |
- |
X |
60% |
- |
7% |
|
San Jose |
X |
- |
- |
- |
5% |
Source: Rent Stabilization Program staff
As Table 1 shows, while most jurisdictions set their AGA based on a percentage of CPI, there is a range of indexing. Jurisdictions that set the AGA at 100% of CPI state that the full CPI must be applied to the allowable rent increase to keep up with changes in real operating costs and inflation to provide the landlord a fair return on the property. However, the courts have upheld AGA ratios at less than 100% of CPI provided that the jurisdiction has a hearing process for landlords to receive higher increases if determined necessary to provide a fair return on property.
The table below (Table 2) illustrates historic CPI trends in the San Francisco-Oakland-Hayward, CA region and is helpful in understanding what 100% of CPI is as an actual number over time and how that might inform establishing a floor and ceiling, or if a floor and/or ceiling are necessary given these trends.
Table 2: Historic CPI trends in the San Francisco-Oakland-Hayward, CA region
|
2018-2009 |
2.5% |
10-year average |
|
2018-1999 |
2.8% |
20-year average |
|
2018-1979 |
3.8% |
40-year average |
Landlords have voiced concern that the CPI does not accurately account for increases in inflation or operating expenses. In particular, landlords contend that older buildings have higher operating costs that may not be reflective of the change in the CPI. 2017 American Community Survey One-Year Estimates data indicates that 89% of the rental housing stock in the City is more than 30 years old (built before 1989). Courts, however, have held that rent-regulated jurisdictions employing CPI as the annual general adjustment, along with other provisions that allow a landlord to petition for a greater rent increase, provide ample safeguards for a landlord to receive a fair return on property. Moreover, in reviewing the history of other jurisdictions that use the CPI, staff finds there is a low volume of fair return petition filings when compared to the overall number of rental units, indicating that, in combination with vacancy de-control/re-control, an annual increase at or under the CPI does not create an undue financial hardship for the majority of landlords. (See Table 3, Fair Return Petitions Filed, Other Jurisdictions.)
|
Table 3: Comparison of fair rate of return petitions filed in Bay Area cities with rent regulations |
|
City |
Annual General Adjustment |
Number of Units Subject to Rent Increase Limitations |
Number of Fair Return Petitions Filed |
|
Berkeley |
65% of CPI-U |
20,000 units |
As of 2017, no petitions have been filed in 13 years. |
|
East Palo Alto |
80% of CPI-U |
2,500 units |
As of 2017, one filed in the history of the program, but was found to be in error and was never resubmitted. |
|
Hayward |
5% flat rate |
9,500 units |
Adopted in 2018; no petitions to date. |
|
Mountain View |
100% of CPI-U |
15,300 units |
About 15 petitions filed since the program was implemented in 2016. |
|
Oakland |
100% of the average between CPI-U and of CPI-Less Shelter |
65,000 units |
7 petitions filed since June 2018. |
|
Richmond |
100% of CPI-U |
19,000 |
7 petitions filed since the program began hearing petitions in 2018. |
|
San Francisco |
60% of CPI-U |
173,000 |
100 petitions filed in FY2017-2018. |
|
San Jose |
5% flat rate |
19,000 |
About 6 petitions filed since the program was implemented in 2017. |
Source: Management Partners and Rent Stabilization Program staff
Staff Recommendation
Based on the above analysis, staff recommends the City Council introduce an ordinance for rental units, unless exempt under Costa-Hawkins, that sets the AGA to 100% of the percentage change in the CPI, with a floor of one percent and a ceiling of five percent. Staff makes that recommendation for several reasons. First, using 100% of the CPI mirrors recent ballot measures in Mountain View and Richmond in which the voters themselves have approved a rent stabilization ordinance that establishes the annual general adjustment at 100% of the CPI. Second, using 100% of the CPI, rather than, for example, 65% of the CPI (which percentage courts have upheld), provides additional income to landlords in order to maintain the landlord’s NOI and the property itself. Third, because the CPI is intended to reflect the percentage change in the overall cost of goods and services, using 100% of the CPI is the most readily available data that adequately reflects increases in operating expenses that a landlord may incur. If 100% of the CPI were adopted as the index for establishing the AGA, the AGA for September 2019, when the “base rent” for those rental units subject to the AGA would go into effect, would be 4%.
Banking
Under Ordinance 3148, a landlord may, without limitation, impose an annual rent increase of up to five percent without the requirement that the RRAC review the rent increase. A landlord does not have the option to defer any portion of the five percent to a subsequent year without triggering the mandatory review by the RRAC.
Many rent-regulated jurisdictions provide that a landlord may defer some or all of an annual general adjustment by “banking” what is not used in that year and carrying the unused portion to a future year or years. See Table 4 below. Typically, such provisions cap the percentage of the “bank” that can be used at any one time in order to minimize sharp rent increases that could arise if the full banked amount were imposed in a given year.
|
Table 4: Comparison of rent banking in Bay Area cities with rent regulations |
|
City |
Rent Banking Allowed |
|
Berkeley |
Banking allowed |
|
East Palo Alto |
Banking allowed, no more than 10% annually |
|
Hayward |
Banking allowed, no more than 10% annually |
|
Mountain View |
Banking allowed, no more than 10% annually though tenant has right to petition for less if they experience an “undue hardship” |
|
Oakland |
Banking allowed, no more than 3x the current year’s annual maximum rent increase |
|
Richmond |
Banking allowed, no more than 5% above the annual maximum rent increase |
|
San Francisco |
Banking allowed |
|
San Jose |
No banking |
Source: Rent Stabilization Program staff
Tenants may benefit from “banking” when they experience circumstances where the full amount of the annual general adjustment would constitute a financial hardship in a particular year. For example, unforeseen circumstances may arise from a tenant’s change in employment. Landlords may also benefit from the option to bank rent increases as they are provided certainty that any deferred annual general adjustment amount (as that amount might be capped) could be recovered in subsequent years.
Moreover, without banking, a rent registration database will be very difficult to administer. Once all base rents have been entered into the registration database, calculating the rent ceiling for a particular unit will be simple because the AGA can be added to the base rent, regardless of whether such rent increase has been imposed. Tenants will therefore always be able to determine whether their rent is at or under the rent ceiling. Without banking, each year the staff would need to ascertain from each rental property owner what rent increase had been imposed and individually enter that amount into the database in order to determine the rent ceiling. Such process will take significant staff time and increase program costs.
Staff Recommendation
Staff recommends that landlords be allowed to bank any deferred portion of the annual general adjustment with certain limitations, including that a landlord may not impose a rent increase more than the AGA plus 5% in any given year. For example, if the AGA is 3%, the maximum banked amount that could be used is 5%, for an 8% total rent increase. Moreover, any banked rent increases would expire when, for whatever reason, a new tenancy is established or the landlord transfers the property. In the first situation, vacancy decontrol applies, allowing the landlord to reset the rent at the landlord’s discretion. In the latter situation, the purchasing landlord should not benefit from the decision of the selling landlord to defer rent increase(s).
Pass-throughs
In addition to the AGA, some rent-regulated jurisdictions allow a landlord to pass through certain costs to tenants. A common example involves the pass-through of rent program registration fees. That is, some rent-regulated jurisdictions allow a portion of the program fee to be passed through to tenants on top of the AGA, generally half of the annual fee, paid by the tenant over a 12-month period. Other common pass-through costs include a portion of qualifying capital improvements expenses, increases in utility costs or newly imposed assessments.
At present, the City permits certain capital improvement expenses that meet a threshold dollar amount to be passed through to tenants as a rent increase when the landlord receives from the Program Administrator an approved Capital Improvement Plan (CIP) under Resolution 15138. In the future, the City Council may want re-evaluate the CIP policy to ensure it adequately provides an incentive for landlords to make capital improvements to their properties. Anecdotally, landlords have provided feedback that the current CIP policy cannot be used by many landlords as the qualifying criteria, such as the dollar threshold, are too high. Staff, however, does not recommend any changes at this time.
Staff Recommendation
Staff recommends allowing for 50% of the program fee to be passed through to the tenants in addition to the AGA, although this pass-through would not be considered a rent increase for purposes of calculating the AGA increase. The ability to pass through 50% of the program fee will be included in the amendments to Ordinance 3148 that will be considered by the City Council at its September 3 meeting. Staff also recommends making no changes to the current CIP Resolution 15138 until further analysis is completed, if requested by Council.
Staff is also not recommending any additional pass-throughs at this time. By establishing an annual general adjustment set at 100% of CPI and providing a petition process for fair return on property, any additional pass-throughs, such as for increases in utility expenses, property taxes, etc., would be a redundant system for requesting an upward adjustment in allowable rent and needlessly increase program administration and costs. Should the Council decide to set the AGA at something less than 100% of CPI, it may want to revisit items that could qualify for pass-throughs, as such pass-throughs may reduce the number of petitions for an upward adjustment in rents.
Rent Registry
The ordinance establishes a rent registry to allow staff to implement the AGA. Landlords would be required to register their units at program inception and re-register the units when a new tenancy is established. The registry allows base rents to be set and includes a list of all of the housing services provided. The ordinance provides that the design and implementation of the rent registry will be set by regulation.
Staff Recommendation
Staff recommends a rent registry because it is essential to establishing base rents, tracking “banked” rent increases, and evaluating petitions for downward rent adjustments due to a reduction in housing services.
Petition Process
A rent stabilization ordinance that provides for an annual general adjustment must include a petition process to ensure a landlord receives a Constitutionally required fair return on property. The City’s current Rent Stabilization Ordinance provides landlords this process. In addition to the landlord’s option to request an upward rent adjustment, most rent-regulated jurisdictions also permit a tenant to file a petition for a downward rent adjustment, for example, due to a reduction in housing services. Ordinance 3148, however, does not provide a process for downward adjustments in rent.
At present, for rental units that are not exempt under Costa Hawkins, a landlord’s request for rent increases above 5% are first reviewed by the RRAC after which a tenant or landlord may file a petition and have the rent increase considered by a Hearing Officer. The Hearing Officer’s decision is final and binding unless judicial review is sought. With more traditional rent regulations based on an annual general adjustment, often, petitions for both upward and downward rent adjustments are reviewed first by staff and then by a Hearing Officer, or directly by a Hearing Officer. Any appeals are reviewed by a Rent Board or taken to court. For example, in Los Angeles and San Francisco, the first step in the petition process is a determination made by staff with appeals of staff’s decision submitted to an administrative law judge. By comparison, in Berkeley and Richmond, all petitions are directly sent to a Hearing Officer for review. Those petitions can then be appealed to the Rent Boards.
Staff Recommendation
Staff recommends establishing a petition process for upward or downward rent adjustments. Given the technical nature of the basis on which petitions for upward adjustments can be filed, i.e., ensuring that a landlord is receiving a fair return, staff recommends that petitions be heard solely by a Hearing Officer. While petitions for downward adjustments may be less technical, the need to have those issues determined by a person schooled in law remains and it is therefore appropriate that those petitions are also be heard by a Hearing Officer. As is now, staff recommends that a Hearing Officer’s decision be final, subject to judicial review. Staff is also recommending that prior to the hearing, the Program Administrator offer mediation to the parties in an effort to try to resolve the petition without the need for a hearing. This process has worked well under Ordinance No. 3148 and it is worthwhile to continue such an offer to mediate under this Ordinance.
Conclusion
All of the elements discussed above, taken together, represent a new approach to rent stabilization in the City - the establishment of an annual maximum allowable rent increase (“rent cap”).
The attached ordinance addresses each of these program components as described above based on staff’s recommendation. The Alternatives section below provides alternate approaches to each of the program components. City Council could adopt the ordinance as prepared, it could retain Ordinance 3148, or it could direct preparation of an ordinance that is based on a combination of alternate approaches discussed below or combine staff’s recommendations with alternate approaches.
Staff’s recommended ordinance is composed of the following elements:
• Establishes an AGA based on 100% of CPI, with a 1% floor and 5% ceiling;
• Allows banking, however any banked amount used in a given year cannot exceed 5% in addition to the AGA. Any banked rent increases expire when the building is sold or when a new tenancy is created;
• Establishes a rent registry (initial registration and re-registration when there is a new tenancy); and
• Provides a petition process that utilizes a Hearing Officer for upward or downward adjustments in rent.
ALTERNATIVES
Alternatives include:
• Annual General Adjustment
• No Annual General Adjustment
• Council may choose not to introduce an ordinance to establish an annual general adjustment. If so, the current process under the Rent Stabilization Ordinance for rent increases will continue to apply. That is, landlords by right will continue to impose rent increases of 5% or less; the RRAC will continue to review rent increases above 5% but, depending of the type of rental unit, the RRAC decision may or may not be binding.
Annual General Adjustment Based on Less than 100% of CPI
The City Council could determine that 100% of CPI does not sufficiently address tenants’ rent burden and generally exceeds the necessary fair return on property for the landlord. Courts have upheld that AGAs as low as 60% of CPI allow a fair return for landlords provided there is a petition process for a landlord to request an upward adjustment in order to receive a fair return on property. Therefore, an AGA ranging from 60% - 90% may be preferred. This option must also consider the potential that a lower AGA will likely result in more fair return petitions which will increase program costs. As noted above, the AGA effective September 2019, would be 4% if based on 100% of CPI. Therefore, an AGA of 60% would be 2.4% and an AGA of 90% would be 3.6%.
Council may also decide that it does not want to provide a floor and/or ceiling for the AGA, or it wants a floor and/or ceiling established at a different percentage than recommended by staff.
Annual General Adjustment Based on Flat Rate
Assuming the City Council wants to impose an annual general adjustment, but does not want to tie such increase to the percentage change in CPI, another approach is to set the annual general adjustment at a flat percentage, such as four percent. A flat percentage provides certainty for the landlord and tenant on the amount of future rent increases and is a similar concept to the current regulations, by which a landlord may impose a five percent increase without mandatory review. With a flat rate annual general adjustment, the rate is typically set above the CPI and no additional pass-through costs, such as utility costs or a portion of program fees, are permitted. There is less to administer in this system, which results in lower program costs. On the other hand, a flat percentage that exceeds some ratio of change to the CPI may result in a higher rent burden for tenants and/or increase displacement for current households that cannot sustain the compounded effect of increases above the CPI.
Annual General Adjustment + RRAC Process for Costa Hawkins-Exempt Units
One of the ways that Ordinance 3148 differs from other rent stabilization ordinances is its application to Costa Hawkins non-exempt units as well as Costa Hawkins-exempt units. Landlords of all units that serve a tenant with a rent increase over 5% must file the notice of rent increase with the Rent Stabilization Program and appear before the RRAC for a hearing. The hearing may result in a binding or non-binding decision depending on the unit type. While the decisions for units exempt under Costa Hawkins are non-binding, the mediation-centered review process before the RRAC has resulted in some landlords voluntarily reducing the proposed rent increase.
Most rent-controlled jurisdictions regulate solely those units not exempt under Costa Hawkins. In those jurisdictions, single-family homes, condominiums, and multifamily housing built after February 1995 are not subject to a rent cap and landlords may increase rents annually at their discretion. In Alameda, these exempt units make up approximately 14% of the City’s rental housing stock.
As noted above, the ordinance establishing the AGA does not remove the requirement in Ordinance 3148 that owners of Costa Hawkins-exempt units who raise a tenant’s rent more than 5% must notify the Rent Program and are subject to a hearing before RRAC. While staff will be recommending elimination of that requirement when it introduces an additional ordinance in September, the Council may want to consider maintaining the requirement in Ordinance 3148 that rent increase notices above 5% be filed with the Rent Stabilization Program and subject to non-binding decisions before RRAC. Retaining this requirement may provide some measure of protection to tenants in units exempt under Costa Hawkins, but because the RRAC’s function would be only to hear these cases, retaining this requirement could increase program costs.
Banking
Eliminate the Option to Bank Rent Increases/Reduce the Amount of the Increase that can be Carried Over
Council may conclude that banking, long-term, may be to the financial detriment of tenants, as it could result, in any given year, in a rent increase larger than the annual maximum allowable rent increase and therefore, landlords should annually either “use it or lose it.” Or, City Council may want to reduce the amount of the deferred AGA increases that can be carried over each year to something less than 5% plus the AGA.
“Reverse Banking” for Implementation
The Alameda Renters Coalition (ARC) has requested that the City Council consider what staff is calling “reverse banking.” This regulation would apply only for the first few years of implementation of the AGA. To allow tenants time to adjust to previous years’ rent increases, a landlord would be prohibited from increasing rents based on the AGA if the landlord had previously raised the rent by 5% or more for several years. For example, assume that since rent stabilization was established in 2016, a landlord has increased rents by 5% each year (which, when compounded, translates to more than 15%). Assume that City Council adopts an annual general adjustment increase tied to 100% of the CPI and assume, for the sake of simplicity, that the CPI for each of the last three years was 3%. Under that circumstance, the landlord could not increase the rent until the annual general adjustment totaled 15%, as compounded, most likely not for another two years.
ARC’s position is that the annual 5% rent increase, allowed by the City Council as a matter of right, is a higher percentage than the wage increase percentages of most tenant households. Therefore, the City Council should consider “reverse banking” to mitigate the risk of displacing tenant households that have received high rent increases over the last few years. To address this, ARC is proposing that landlords be precluded from increasing the rent until these previously imposed increases balance out with the annual general adjustment of the new regulations.
Many of the significant rent increases have been for single-family homes to which the AGA, and hence reverse banking, would not apply. Implementing such a program would also entail significant staff resources to track the rents and educate landlords as to this regulation. Lastly, the City’s regulations regarding rent stabilization have been evolving over the last three years and it may not be appropriate to further restrict the ability to implement rent increases under a new rent control framework based on the rules and regulations of the prior program. Accordingly, staff is not recommending this approach.
Pass-Throughs
Rent Program Fee
City Council may decide that landlords should not be permitted to pass through to tenants any portion of the program fee on grounds that (a) such fee is a legitimate operating costs that a landlord alone should absorb, and (b) such a pass-through operates, de facto, as a rent increase to the tenants, which runs afoul of establishing an annual general adjustment.
Other Pass-Throughs
City Council may also decide that it is equitable for tenants to pay for some, or all, of a landlord’s increased costs due to increases in utilities or special property taxes and/or assessments, and allow those increases to be passed through to the tenants. As mentioned above, if the City Council believes that the current CIP policy does not adequately provide for capital improvement costs to be passed through to the tenants, City Council should provide direction to staff to revise the policy and return such revisions to the City Council for further consideration.
Additional Roommate Pass-Through
A landlord and tenant may benefit by having the flexibility to add an additional roommate to the unit that was not originally on the lease. An additional roommate may reduce the rent burden for all tenants. Landlords may believe that an increase in rent is warranted for this additional occupant. To allow for this flexibility, the City Council may consider an automatic pass-through when a landlord agrees to allow an occupant to be added to the lease.
For example, San Jose allows tenants and landlords to file a joint petition for an automatic pass-through of five percent on top of the annual general adjustment for an additional occupant. The pass-through ends in the event the additional occupant vacates the unit.
If such a pass through were included, note that State law prohibits a landlord from charging additional rent for a spouse, dependent child, domestic partner, minor in tenant’s care, or parent.
Rent Registry
City Council could decide it does not want to require registration of rental units subject to the AGA. Such a decision would make it virtually impossible to administer a rent stabilization program over time as it would be difficult to establish base rents, track any banking of rent increases and when those banked rent increases were imposed, and reliably document housing services when considering a petition for a downward adjustment in rent due to a reduction in housing services. A rent registry is a neutral tool that establishes “facts” (e.g., base rent, banked rent increases, and housing services provided) that are not subject to dispute between landlords and tenants. This therefore allows for efficient administration of the Rent Stabilization Program.
Petition Process
A rent stabilization program must retain a process for ensuring that a landlord receives a fair return on property. Therefore, there is no viable alternative other than allowing for such a process. In contrast, a rent stabilization program does not need a process for allowing tenants to petition for a downward adjust in rent for a reduction in housing services. Ordinance 3148 does not contain such an option. However, when an AGA is put in place and there is no petition process for downward adjustments in rent tied to a reduction in housing services, there may be more incentive for a landlord to reduce or remove services such as laundry facilities, swimming pools, parking spaces, etc.
The City Council does, however, have options in determining who reviews the petitions and the order in which appeals are heard. As opposed to all petitions directly being reviewed by a Hearing Officer, the City Council may choose to first require staff to review and render decisions on petitions, similar to what occurs in Los Angeles and San Francisco. Those decisions could then be appealed to a Hearing Officer. Alternatively, the City Council may choose to keep the RRAC and allow decisions to be made in the first instance by the RRAC or appealed to the RRAC after a Hearing Officer’s decision. Moreover, in lieu of the RRAC, City Council itself could serve as an “appeals board.” At the conclusion of any of these processes, judicial review could be sought.
Staff does not recommend any of these alternatives. While it may be more cost- effective to have staff hear petitions, the technical nature of the petitions, especially those seeking an upward adjustment in rent to ensure a fair return, may require specialized expertise. Moreover, the Ordinance does provide for staff to provide mediation to the parties which has proven successful under the current rent program. Because of the specialized expertise in handling these petitions, staff is concerned that the RRAC, even with training, may not be equipped to handle these matters and, in any event, would require RRAC members to devote substantially more time to the endeavor than they do currently. Although the City Council could serve as the appeals board, City Council already has many difficult issues to consider and adding these matters to the City Council’s agenda does not seem prudent.
FINANCIAL IMPACT
There is currently no financial impact from the Rent Stabilization Program as an annual program fee is assessed to cover the costs of administering the Program. However, it is possible that the cumulative impacts of changes to the Ordinance, from elimination of “no cause” evictions and adoption of an AGA to other clean-up measures and requiring payment of relocation benefits following constructive eviction, could increase (or decrease) the cost of administering the new program. Therefore, staff will be conducting an updated fee study to determine actual costs and the required program fee to cover those costs when the City Council has completed its update of the Rent Stabilization Program.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This Ordinance, albeit an uncodified one, is consistent with the Alameda Municipal Code process for adopting ordinances. City Council-directed changes in the City’s Rent Stabilization Program are based on data contained in the Program’s Annual Reports and American Community Survey 2017. These changes support policies contained in the City’s Housing Element and Economic Development Strategic Plan.
ENVIRONMENTAL REVIEW
Adoption of this ordinance is exempt from review under the California Environmental Quality Act (CEQA) pursuant to the following, each a separate and independent basis: CEQA Guidelines, Section 15378 (not a project) and Section 15061(b)(3) (no significant environmental impact).
CLIMATE IMPACTS
There are no climate impacts to adopting this ordinance.
RECOMMENDATION
Introduce an Ordinance establishing an annual general adjustment in rent, a rent registry, banking, and a petition process for an upward or downward adjustment of rent.
CITY MANAGER RECOMMENDATION
In April the City Council requested that staff move forward with public input and bring back an Ordinance with AGA and other alternatives for City Council consideration.
Respectfully submitted,
Debbie Potter, Community Development Director
Financial Impact section reviewed,
Elena Adair, Finance Director
Exhibits:
1. Community Meeting Feedback, June 6, 2019
2. Community Meeting Feedback, May 2, 2019
Cc: Eric J. Levitt, City Manager