SM COURTHOUSE — Tenants in rent controlled buildings should pay more each month to cover the full cost of a landlord’s tax bills, according to a lawsuit against Santa Monica’s Rent Control Agency filed last week by a group of local apartment owners.

The lawsuit, filed in Santa Monica Superior Court by the Action Apartment Association, alleges the formula used by the Rent Control Agency to determine the annual maximum rent increase for controlled units is invalid because it doesn’t permit owners to “pass through” the full cost of new taxes established since rent control took effect in 1979.

Owners are also improperly disadvantaged because in many cases they aren’t allowed to factor in the full cost of their property tax liability when determining rents, the suit charges.

Rosario Perry, the attorney for Action, said if the lawsuit is successful the average tenant in a rent-controlled building would be required to pay about $140 more per month in rent. Santa Monica landlords stand to earn tens of millions of dollars annually if Action prevails in court, he said.

Wes Wellman, president of Action, said the lawsuit comes after the Rent Control Board for years has “consistently ignored” its mandate to “reimburse owners for actual increases in taxes and utilities.”

Under Rent Control Agency policy, some taxes, like the $346 school district parcel tax and the Clean Beaches and Ocean parcel tax, among others, are allowed to be passed on to tenants. Owners, though, are barred from increasing rent based on other taxes.

In the lawsuit, Perry stated there are five property tax surcharges that owners are barred from passing through. In one instance cited in the complaint, the five surcharges amounted to $1,020 per year for an 11-unit residential building.

The lawsuit argues that barring owners from passing through all taxes is a violation of the agency’s charter amendment, which states each year the Rent Control Board shall “adjust rents upward by granting landlords a utility and tax increase adjustment for actual increases in the city of Santa Monica for taxes and utilities.”

The suit also alleges the formula is flawed because it is “based upon an unfounded assumption that property taxes have not been increased due to sales or other transfers” since rent control took effect in 1979.

Under current policy, the property tax pass through amount is determined through a formula that adds 2 percent each year to the property’s assessed 1979 value.

But many buildings in Santa Monica have been sold since then, resulting in new assessed values based on sale price, Perry said. Since property values have increased at a rate greater than 2 percent per year, he said new owners are often required to cover a large portion of their property tax bills without passing on the cost to tenants.

Perry said that’s created a situation where owners have to charge higher rents to new tenants to cover their property tax expenses.

“Until [property tax] is equitably allocated between all tenants in the building, there will be an unequal treatment of the new tenants over the old and that inequality is unfair and unjustified,” he said.

Michaelyn Jones, the Rent Control Agency’s general counsel, declined to comment on the lawsuit’s allegations but said it was based on a long-standing disagreement between the agency and the association. For years apartment owners have argued they should be permitted to raise rents because of new taxes.

“I disagree with their interpretation [of the Rent Control Agency’s charter amendment] and that’s what the fight will be about,” she said.

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