Opinion: A Fairer Way to Share the Costs of Retrofitting Rent-Stabilized Housing

Living in West Hollywood, most of us know a catastrophic earthquake may strike at any time.

One of us, Karen, went to law school in New Orleans, and moved away two years before Hurricane Katrina upended life for the city’s 460,000 residents. Everyone, including government officials, knew a devastating hurricane would strike the city some day. Many of us figured officials had a plan. Authorities surely had an evacuation plan for the jails, the hospitals, and the more than 100,000 people who did not own a car. Right? Surely, the levees were up to par in such a vulnerable city? Sadly, no. At least 1,833 people died, and many more were traumatized. Virtually the entire city was displaced. Less than half of New Orleans residents had come back as of 2006. Now, 13 years later, the population is still at only 391,000 — a 15% reduction.

We’re grateful West Hollywood’s head isn’t in the sand. And anyone who thinks Northridge’s relatively limited damage means an earthquake won’t be too destructive: If an 8.0 earthquake hit — like the 1985 earthquake in Mexico City — it would be about 89 times stronger than Northridge, which was 6.7. That Mexico City earthquake killed 10,000 people and caused more than 400 buildings to collapse.

The reality is that West Hollywood’s rent stabilized buildings are all at least 39 years old, and many include features that engineering experts now know are particularly vulnerable to collapse in an earthquake.

If a rent-stabilized building is destroyed, due to state law, whatever is built in its place will not be rent-stabilized. A little more than 40% of West Hollywood’s households (40.5%) are lower income, and 16.9% are moderate income. Most of our neighbors cannot afford market rent. While it doesn’t guarantee a building’s survival, retrofitting is known to strengthen structural deficiencies and improve performance of these buildings during an earthquake, which is key to West Hollywood residents being able to come back home.

West Hollywood is mandating that any necessary retrofitting be completed within five years of notification for soft-story building owners and 20 years for more costly retrofits. The question our City Council will grapple with Monday is who pays for the retrofitting?

Although both of us are Rent Stabilization commissioners, we were advised to conflict ourselves out of deliberations on this question because we are tenants in rent-stabilized buildings listed as probably needing retrofits. (The conflict rule includes an exception if 25% of residential units are similarly situated. Monday’s staff report shows an estimated 28.56% of units are similarly situated. However, staff was not able to provide a precise figure before the commission’s deliberations and we followed the city attorney’s advice to recuse ourselves so as not to call into question the integrity of the process and distract from the exemplary efforts of city staff to engage both tenants and landlords in the process.)

Our fellow commissioners recommended the cost be split between landlords and tenants. Under this proposal, for 10 years, landlords would be allowed to “pass through” a total of no more than 50% of the cost to tenants with an unspecified monthly cap. The recommendation urged including a hardship waiver for low-income tenants, who would not have to share in costs. It was unclear who would pick up the cost — landlords or the city.

The staff proposal before the City Council on Monday sets the cap at $38 per month, and limits the waiver to very low income individuals who are also 62 or older or disabled.

While we respect our fellow commissioners and staff we have a number of concerns with this proposal, and urge the City Council to consider an alternative approach.

Costs Should Only Be Shared with Tenants if Landlords Cannot Afford Them

One of West Hollywood’s primary reasons for becoming a city was to maintain rent-stabilized, affordable housing. In recent years, rents have been skyrocketing. In 2016, new tenants in rent-stabilized units were paying an average of $1,590 for studios to $3,753 for three-bedrooms. Landlords who have mostly newer tenants may be able to easily absorb retrofitting costs while earning a more than reasonable profit.

In the case of landlords who would be making a healthy profit even if they absorb retrofitting costs, we see no reason to burden their tenants with any of the retrofitting costs. In those cases, subsidizing retrofitting is also not a good use of city funds. The city should find a fair, non-cumbersome way of determining if landlords can easily cover the costs of retrofitting on their own.

Landlords Cannot Be Forced to Cover More Costs Than They Can Afford

As was noted, the pass-through that is being proposed would require landlords to pay at least 50% of retrofitting costs. That percent could be significantly higher because tenants’ monthly share is capped. Landlords may also have to absorb additional costs if tenants’ parking or storage is unavailable due to retrofitting, or if the city doesn’t cover hardship waivers.

City law generally limits annual rent increases to 75% of the Consumer Price Index (CPI — one measure of inflation). So, in buildings where most or all tenants are long-term, some landlords may be making a modest return.

Meanwhile, court decisions have found rent stabilization laws must allow landlords to receive a just and reasonable return. If landlords would not otherwise receive a reasonable return, they must be allowed to raise rents.

We believe that during community meetings, the impression was given that the pass-through would prevent rent increases. Importantly, that is not the case in any instance where landlords may not otherwise be able to receive a just and reasonable return. This is most likely in buildings with mostly long-term tenants paying low rents. Many of those tenants may be low- or very-low income.

Tenants Should Not Be Forced to Cover More Costs Than They Can Afford

Some tenants will not be able to reasonably afford a pass-through or rent increase for seismic retrofitting. For this reason, it is vital that not just low-income tenants, but all tenants who are already rent-burdened be exempted from paying costs they cannot afford. (The exemption should not be limited to only people who are very low-income and 62+ or disabled, as proposed to council.) Rent-stabilized tenants are already facing a 3% rent increase this year. Some rents — especially for our newer city residents — are so high that even tenants with more income cannot afford the added costs.

Alternatively, a case can be made that tenants should not have to cover any of the retrofitting costs. We have 15,234 rent-stabilized apartments in the city. More than 10,000 rent-stabilized units turned over in the past five years. Meanwhile, five years from now is the deadline for retrofitting. Realistically, many tenants who pick up some retrofitting costs will not benefit from the retrofit.

The City Should Be a Significant Partner In Covering Costs of Retrofitting

This brings us to who would pay for retrofitting costs that the landlord and tenant cannot afford. We believe the city should be a significant financial partner in retrofitting. West Hollywood has roughly $100 million in reserves, a booming nightlife industry, and the ability to generate revenue in a number of ways — such as increasing transient occupancy tax (TOT). Perhaps it could also tap into some federal or state sources of funding.

Of the three parties involved — current tenants, landlords, and the city — arguably the city has the strongest interest in retrofitting. West Hollywood is committed to having a lasting resource of rent-stabilized housing. Our largest source of affordable housing is our rent-stabilized housing stock, and — unless state law changes — there is no way to increase that stock at an affordable rate. While landlords and tenants will benefit from retrofitting, too, landlords likely have insurance and most current tenants will likely be gone before a major earthquake strikes.

Our Suggested Approach

In a case where a landlord can absorb the costs while exceeding a fair and reasonable return, he or she should be required to do so. In other cases, a presumptive 50/50 pass-through, for 10 years and with a monthly cap could work as a default. However, the hardship waiver should include both low-income, low-wealth individuals and anyone who is rent-burdened. In addition, to the extent a landlord or tenant demonstrates they cannot pay some or all of the retrofitting costs they would otherwise absorb, the city should cover those costs. In the case of a landlord, that should apply only if certain conditions are met. For example, the city could explore opportunities of loans that can be forgiven if there are commitments made to not remove the building from the rental market for a specified number of years.

The city should also assist property owners on “habitability” — help finding replacement parking and storage during construction and increase their efforts in coordinating multiple projects taking place in close proximity to each other to mitigate impacts on overall neighborhood. It is far better positioned to do so than hundreds of individual landlords and can better coordinate multiple projects to mitigate the overall impacts on a neighborhood.

We realize our proposed approach is more complicated than the one on the table, and that many details would need to be worked out. We also understand using city funds for this will need to be handled delicately and information will need to be publicly accessible so that it is not an illegal gift of public funds. However, we believe having a more comprehensive approach that involves greater investment by the city is more fair to the parties directly involved and commits the entire community in sharing the cost of protecting our rent stabilized, more affordable housing stock we all value.

  1. Karen,

    I am a long time tenant in West Hollywood who happens to be from New Orleans, born and raised. I was in New Orleans as Katrina approached the city. Fortunately I and my immediate family were able to evacuate ahead of the storm.

    However, my brother’s house was partially destroyed, my niece’s house was partially destroyed, and my cousin, Father Red, a priest who did not want to leave his church, died in the storm, his body never recovered.

    Also, the population of the city that was displaced and will never return, is poor and black. The soul of the city, which is now bring gentrified thru developers.

    The same conditions that made New Orleans vulnerable, before, during and since Katrina are the exact same issues which are affecting West Hollywood, and which are what is missing from your post.

    Corruption and Greed.

    While I appreciate your efforts and those of Josh Kurpies, and with all due respect, the way the City functions now and has been since my slumlord, mega-landlord purchased the property where I live is totally inline with the government of New Orleans.

    It’s all about money.

  2. This is all great if you have honest Apartment Owners. As we all know, most Apartment Owners are anything but honest. Voluntary disclosure of financial assets and costs of operation plus profits will only result in shady businesspeople gaming the system to their advantage. As mentioned, there are other ways to asses a land owner’s financial health other than rental income. Property values are at play here. The dumpy little building I live in with needed re-plumbing and re-wiring is currently market valued at $5 million (the owner paid only 1.5 million for the property). Surely, our land lord can take out an equity loan against the properties value to cover the cost of improvements. The less the city is required to asses the health of the given businesses, the better. Repeal The Ellis Act and this entire problem becomes much easier to solve…

  3. The landlords ‘cost’ and thus its ‘profit’ are based on many factors. One such factor is the date the building was purchased and thus property taxes. Another factor would be how much the owner put down as equity or how much was financed. It is unfair to develop a solution to pass-through retrofit costs that changes by with each building. Owners who have opted to pay off their building and have a low cost basis should not be penalized because the owner/landlord next door purchased the building at a later date with a high cost on the loan or the taxes. Any solution should be equitable for all tenants and all landlords in a simple plan.
    The beginning of this article was absolutely fantastic and really grabbed me when put in context as a call to urgency. But the solutions seemed all over the place without focus. There is a simple solution, – to any tenant who might speak up tonite against a pass-thru cost.. what if theres an earthquake and your building is
    not retrofitted..? is it worth dying in an unsafe building? .. Tenants should demand their building gets retro-fitted and enjoy the fruits of the rent control that allows them to pay the same base rent – below market – while the landlord has to absorb extra property taxes every single year from here to eternity based on the appraised and assessed value including the improvements. The landlord cannot recoup those ongoing expenses. So, it wont pay to lay out tens or hundreds of thousands to retrofit the building without offsetting pass-throughs. Some buildings have a greater number of older tenants at lower rents than other buildings.
    There should and must be a subsidy for low income tenants from the City to offset the costs. Those costs can be direct to tenant or direct to landlord issued as credits to the landlords in-lieu of a direct payment. A credit of the registration fee over time or other offsets will allow the landlord to properly finance the retrofit and create a win-win for tenant, landlord and city. Its a shared responsibility. Let make it a win-win for all.
    Finally I have great respect for the authors of this article but you both serve on the Rent Stabilization and Housing Commission and that is a televised platform to make your thoughts known. It feels to me that you cannot fairly judge the balance between landlords and tenants when positions formerly rooted in this format of an op-ed. In my heart of hearts you should not have to recuse yourselves and your voices are important and should be heard when these issues come before you on the commission. In fact, you both can ask for any issue to be agendized and make recommendations to council. It’s important as commissioners that the public, both tenants and landlords have faith in our local government institutions. But if stepping out jointly as commissioners to pen an op-ed.. all I can add is — — Imagine if one author was a landlord and the other author a tenant and your joint op-ed offered common sense solutions. That would be a recommendation that the council should carefully consider.

  4. Cross-commenting by Op-Ed writers should be discouraged by Wehoville.

    The writers have had there opportunity to state their detailed opinion in very long form. They should allow the discussion to continue in the comments section without interference.

    The writers, who are City Commissioners, may see this issue brought back before their Commission. This Op-Ed and their further comments on this site my jeopardize a fair hearing in the future.

  5. Landlords and the city should pay for this.

    Absurd to think that it’s the tenants’ responsibility. We pay our rent. The landlord owns the building, and like anybody who owns ANY piece of property – it is their job to maintain it. You don’t want to pay these costs as a landlord? Don’t be a landlord!

    This is like asking my landlord to pay for my gas so I can get to work and pay his rent. INSANE!

    Also, let’s not forget about all the noise, traffic and mess it’s going to be living in and around these building during construction. Isn’t that enough remittance while the landlords sleep peacefully in their mansions in Brentwood? Puh-leeze.

    Get it together, WeHo!

    1. Thank you for sharing your thoughts and participating in this dialogue.
      We agree that landlords who can pay for the cost of the retrofit should.
      However, in cases where either the landlord cannot afford the entire cost, or maybe can afford the cost, but the cost reaches the point that it tips the scale for the landlord causing them to decide to go out of the rental business by either demolishing it themselves, or selling to an investor that plans to do the same. If that is the path chosen, once demolished, the city loses those rent stabilized units to market rate units that have unregulated future rents. While we have programs in place to ensure all new development includes a specific number of units that are designated as “affordable units” (income-qualifying) or the developer pays into an affordable housing trust fund, this often means the new building, with the new market rate rents, actually results in a net loss of housing that had been affordable to the existing tenants. This is very much a real concern and one the City hopes to avoid – this ultimately is the impetus behind any cost-sharing proposal. As we tried to clearly explain above, this is why Karen and I feel the City should take a greater role in any cost-sharing plan.

      1. I hope that our city council will give this a bit more time so that we can take another hard look at possible solutions. Also, the upcoming Prop 10 vote to repeal Costa Hawkins is something to add to the mix.

        I don’t think that the waiver is inclusive enough right now and should not require that a low-income tenant also be either a senior citizen or disabled. A low-income tenant is already rent burdened, whether they are disabled or a senior citizen or not. And during the 10-year period, how many tenants will eventually either become seniors or disabled?

        But since we do have a high percentage of low-income residents, if we allow all low-income tenants to avoid the pass through, the result is not going to be satisfactory to the Mom and Pop single building owners, either. They will be more likely to sell.

        Some small building owners with only 5-7 apt units who stand to receive $38 a month from 4-5 tenants will likely decide that’s not enough to keep them from selling when faced with a $40,000 or more mandatory retrofit. This will permanently remove rent-stabilized units from our housing pool.

        This is too crucial of an issue that affects too many residents and small building owners not to step back and take another look at possible solutions. We are a city of creative, intelligent people — and I hope council members will allow a panel comprised of city employees, commissioners, and also small building owners and tenants to put their heads together and think outside of the box to come up with a better plan.

  6. Life is not fair. REAL ESTATE is more unfair than almost anything else. Usually purchasers in the long run prosper so significantly, after a 30 year mortgage, with property value appreciation, it feels like being paid to live in one’s home, while renters have been and always will be paying rent with nothing to show in return (no equity).

    Earthquake retrofitting is one “hit for property owners” in a still profitable long term investment.

    To even think a renter who has been paying rent, has and never will have equity for a lifetime of rent paid (a virtually no guarantee of certain ability to rent for as long as they may choose) with ZERO RETURN, ZERO EQUITY INTEREST to be responsible and pay for clearly EQUITY IMPROVEMENTS TO THE APARTMENT PROPERTY OWNERS EQUITY OWNERSHIP and increased property value once retro fitting is complete. RENTERS COULD LOSE THEIR APARTMENT if the Apartment Owner decides to cash in on the new retro fit improvements … Especially if they got their tenants to pay for their higher property value.

    1. It’s business. Whenever a business owner’s costs go, in most cases it’s passed along to the consumer. Economics 101

  7. This opinion piece is so cumbersome and convoluted that it started to sound like gibberish. It’s no wonder it took two people to write it.

    But it did peak my interest enough to plan on listening closely to Monday’s Council deliberation.

  8. That all works if everybody was honest with their financial position. In the case of the above-suggested requirements the landlords would bring in people like me (Certified Public Accountants) and lawyers and we would restructure the ownership through trusts, and other ownership vehicles, to make the landlords look a lot less rich on paper.

    1. The suggestion isn’t to base it on landlords’ wealth. It would probably be based on the building’s revenue and actual expenses.

      One possible method would be to start with something like, if a landlord is receiving (or could recieve if they rented all units out except that on-site manager’s unit) $xx in total rent, they are presumed to be able to cover the costs. That could be varied based on the costs (or the more they make from the building, the more they’re presumed to be able to cover).

      This would definitely have to be carefully thought out and be informed by the expertise of people like you to avoid cheating. Our city already has an NOI procedure (that involves reviewing actual expenses and income) for rent increases that is almost never used. (Meaning there’s no indication that is being abused/ the city should be capable of crafting a process that guards against such schemes.)

      As was noted, there’d also need to be conditions for any assistance to landlords — such as making sure the units remain rent stabilized. Perhaps assistance could also only be given to landlords if they agreed not to jack up rents too much as units vacate (if they did, they’d obviously no longer need assistance).

      1. Karen, would you please write an evaluation of your ideas in legal format so the options can be properly weighed.

        Building owners must demonstrate hardship status but this far the city has been reluctant to follow through and require this on recent cases regarding change of use on landmark properties.

        1. Our suggested alternative is not at the stage of a proposed ordinance yet, so it’s too soon for me to suggest language in a legal format. The details would still need to be worked out before an actual ordinance could be created, and they should be done only after consultations with stakeholders and experts on each piece.

          So, what I’d suggest is that the Council vote “no” on the pass-through ordinance, and then send the question back to the Commission and staff to come back with a alternate detailed proposal. It would be appropriate to have community meetings and/or a working group to get input to inform the particulars — i.e. what the thresholds would be for landlords covering all costs, the threshold for relief to landlords, and the threshold for relief to tenants. Also, it should include an estimate of the cost to the city and how that would be paid for.

Comments are closed.