CITY HALL — Tenants could see their rents increase by 1.54 percent, or $26 a month, under a new formula approved by the Rent Control Board Thursday that landlords are calling “black magic.”
The new formula effectively lowers the annual increase by basing it on a higher average rent than in the past, which Rent Control officials say better reflects how much renters are paying as well as how much landlord’s are making in profit.
Landlords, however, believe the proposal is retaliation for a lawsuit they won last year that forced the rent increase higher than what Rent Control officials put to the board.
Last year’s increase was 3.2 percent for all those in rent-controlled apartments.
“They’re coming up with a way to take back increases that we are entitled to under the [city] charter,” said Wes Wellman of the Action Apartment Association, which represents landlords in Santa Monica.
The new formula used to calculate the annual general adjustment, the maximum percentage by which landlords can raise rents under law, is based on the median cost of a controlled apartment in Santa Monica, which is $1,395 a month.
That $1,395 is cut into “slices” that represent 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 percentages of rent.
If they hadn’t made the switch, the calculation would have used a base rent of $829.45 — the average rent when rent control first came into effect in 1979, which was $300, plus the approved annual rent increases across the last 30 years.
That hurts landlords by lowering the amount of the “pie” 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.
What landlords are calling voodoo math, officials feel is a more accurate reflection of rent control reality.
The $829.45 figure didn’t take into account the effect of rent decontrol which, for the last 13 years, has allowed landlords to raise rents on controlled apartments to market rate when the previous tenant moved out, said Tracy Condon, Santa Monica’s Rent Control administrator.
“This is appropriate now because 60 percent of the units have been rented at market rate,” she said. “Using that old rent doesn’t reflect that.”
The change could hurt some landlords far more than others.
Those who attended the meeting Thursday invoked a hypothetical owner named “Ms. Jones” who had 20 units, 18 of which were rented out below the $1,395 median figure.
Staff attorney Stephen Lewis assured board members that there was a “safety valve” built into the proposal to protect landlords like “Ms. Jones.”
“If someone is not achieving the mandated fair return, we will address that through that process,” he said.
It’s the second assault on landlords’ profits, Wellman said.
According to the staff report, the Rent Control Board changed the formula in 2011 to reduce the “cash flow” component of the rent increase, which means that landlords’ profits could not keep up with the rate of inflation.
Rather than use the rate of inflation, also called the CPI-U, the Rent Control Board chose to apply 75 percent of that increase to the profits portion of the “pie.”
If approved, both changes are violations of the Rent Control law, Wellman said, but no real action has been taken yet.
“It’s too early to say what they’ll actually do,” Wellman said. “Right now, this is a recommendation. As the rent increase theater plays out, it’s just as likely they may reduce it more, or increase it or even accept this amount.”
If the 1.54 is accepted, it still won’t be as dramatic of a change as landlords make it out to be considering the vastly higher rents they’re getting, said Patricia Hoffman, co-chair of Santa Monicans for Renters’ Rights, the leading tenant advocacy organization in Santa Monica.
“If they were restricted to the old formula with no vacancy decontrol, then it would be a realistic argument,” Hoffman said.
A hearing on the matter will be scheduled for the board’s June meeting. The public will be able to comment on two proposals — a 1.54 percent increase, and a 1.54 percent increase with a cap of $26.
In the red
Landlords may be crying poverty, but not more loudly than the Rent Control Agency itself.
The agency had a $520,000 deficit for the year, which it managed to whittle down to only $27,000 with the help of $400,000 from a settlement with landlords over past-due registration fees.
That won’t save it for next year.
Despite a 4 percent reduction in spending between 2011-12, the board is expected to face a $362,000 deficit in the 2012-13 fiscal year. It will pay for that out of its reserves.
The Rent Control Agency gets most of its money from registration fees paid each year by landlords. Currently, that’s $156 per unit, per year.
The board may need to consider raising those fees in the 2013-14 fiscal year to cover ongoing deficits, Condon said.
That means higher rents as landlords are allowed to pass on the registration fee to their tenants.