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The Rent Control Board Thursday will attempt to tackle an unintended consequence of Proposition 13 and Santa Monica’s booming real estate market: skyrocketing surcharges passed along to tenants when the worth of their building (and thus tax bill) is reassessed after a sale or construction. Board members say they want to hear from stakeholders before deciding whether to cap the surcharges or find other ways to give already rent-burdened tenants some relief.

“This is madness and it needs to stop and we need to address it as soon as possible,” Boardmember Nicole Phillis said at the Jan. 11 RCB meeting, calling the surcharges a “crisis.” Phillis is suggesting a sunset clause on the pass throughs that would not allow new property owners to pass specific surcharges to tenants. It could also spare new tenants from paying pass-throughs.

Thursday the Board will discuss a proposed Regulation 3120, which does just that, prohibiting surcharges for local taxes and voted indebtedness (bonds) for tenants who moved in after Sept. 1, 2017 (the day of the last general adjustment). It would also prohibit surcharges reassessed as the result of sale or improvement. Staff is proposing the law go into effect March 1.

City staff say nothing in the City Charter requires the Board to continue to permit pass-throughs to rent controlled tenants. The median monthly surcharge is $20.73 but varies greatly from property to property, depending on the timing of the last sale and the number of units. The Board is concerned new landlords are taking advantage of the pass-throughs when they purchase multi-million dollar apartment buildings in the City.

“I am still horrified by these surcharge pass throughs,” Nani Granell told the board, who says she is paying $121 a month in surcharges on her rent controlled apartment. Granell lives at 1025 Ocean Avenue, which was sold in 2016 for $22.7 million, according to real estate websites.   “I was never told when I moved to Santa Monica that I would have to pay a tax surcharge. There’s nothing in my lease (to allow it).”

City staff members say San Francisco is the only other jurisdiction that allows landowners to pass surcharges on bonds to rent controlled tenants. A change in the charter here in 2012 prohibits any automatic surcharges based on new bonds. Still, the board is concerned about surcharges linked to property assessments, including pass throughs for previous bonds like Measures X (1998), S (2004), BB (2006) and AA (2008). Landlords can also pass along a stormwater management user fee, the clean beaches and ocean parcel tax, a 2008 School District Special Tax set at $396.23 per parcel.

“I think we’ll all need to get much more input from stakeholders…as to what to do if anything on past pass-throughs, some which had very specific functions,” Board member Anastasia Foster said, explaining a sunset clause would not help tenants currently in distress. Extensive rehabilitations by a long-term owner can also trigger a reassessment on the value of a property. “There is absolutely no doubt this is an issue.”

“Long term owners can make a credible argument that they relied upon the understanding that they would be able to pass through their surcharges,” the board’s general counsel J. Stephen Lewis said. “They would have built that into their financial planning and their thoughts…with new owners, that’s less true.”

Because of vacancy decontrol, some board members argue landlords can factor the taxes into rental rates for new tenants when their units turn over, instead of tacking on the charges to existing tenants.

Landlord Lori Brown, who serves on the Recreation and Parks Commission, argued property owners should not be the only ones paying for tax increases approved by voters.

“The pass throughs, that’s what other people voted for,” Brown said. “That’s what you voted for and now you’re going to decide that only a certain percentage of people should pay for it.”

Board member Caroline Torosis asked staff to look at whether a tenant could petition for a rent or surcharge decrease based on hardship.

“I would like to see quick implementation of this because I fear we are in danger of losing tenants because of these turnovers,” Torosis said.

Under the proposed regulation, any landlord who has been collecting a surcharge from a new tenant would be required to reduce the affected unit’s rent by the amount of the surcharge going forward. No collection of a surcharge occurring before Feb. 1 would constitute an overcharge.

Kate Cagle

Senior reporter for the Santa Monica Daily Press