Economic Study of the RSO and the Los Angeles Housing Market Findings and Policy Recommendations

1. Economic Study of the RSO and the Los Angeles Housing MarketFindings andPolicy Recommendations Affordable Housing Commission and Rent Adjustment Commission September 3, 2009 Economic Roundtable

2. Outline • Purpose of Study • Strengths/Limitations and Scope of RSO • Rent Burden and Overcrowding • Renters’ RSO Knowledge • Evictions • Tenant-Landlord Relations • Property Maintenance • Fees to Pay for Implementing Recommendations • Financial Outcomes for RSO Owners

3. LA’s housing market needs to work for everyone – renters and owners.The purpose of this study is: • Recommend how to fairly balance the interests of tenants and landlords under the RSO • Recommend how to improve conditions in LA’s housing market

4. Strengths/Limitations and Scope of RSO Economic Roundtable

5. RSO Strengths Renter-Occupied Housing Units Built Before 1980 as a % of all Renter-Occupied Housing Units (2006) • Protects tenants against arbitrary evictions • Protects long-term tenants against rapid rent increases during periods of housing inflation • Covers a large segment of households in LA • 2/3 of all renter households • 40% of total households in the City

6. Did you make a profit last year? Calculated Using Unit Weights (p<.001) 100% Don’t know 90% 80% 70% No, 60% had a loss 50% 40% No, broke even 30% 20% Yes 10% 0% 1-4 5-10 11-39 40+ ALL units units units units OWNERS Number of Years that RSO Units have been Occupied by the Same Tenant Calculated Using Unit Weight RSO Limitations • RSO cannot address the acute scarcity of affordable housing • Half of RSO renters remain in units <5 years and may receive little rent savings from the ordinance • Many small owners have limited ability to deal with administrative burdens • Indications that the program may create financial disincentives for owners to invest in maintenance and capital improvements

7. Policy Recommendation Scope of RSO • Expand • Expanding the ordinance to include rental units built after 1978 is precluded by state law. • Reduce (exclude small owners) • Segment that is least profitable and weakest grasp of financial issues • 32% (201,914) of all 638,051 RSO units are held by small owners • Share of units held by small owners is even larger in the poorest areas of the City • Eliminating these units from RSO coverage would result in rent increases and loss of secure tenure for large share of renters. • Retain • Retain current scope of RSO coverage • Streamline RSO administrative requirements for owners of 4 or less units • increase capital improvement passthrough allowance • provide technical assistance workshops and other training focused on small owners to provide information about the capital improvement passthrough program, applying for just and reasonable rent increases, and RSO procedures, including eviction of disruptive tenants.(Training for first-time buyers called for in Policy 1.2.8, Rent Stabilization Training Program, of 2006-2014 Housing Element)

8. Rent Burden and Overcrowding Economic Roundtable

9. Median Monthly Income of Renter Households Median Rent as a % of Median Income Income in constant dollars has declined since 1989 The median LA renter is paying over 30% of income for rent Median Gross Monthly Rent The median monthly rent in LA has increased since 2000 Less Income, Harder to Pay Rent Income and Rent of Renter Households City of Los Angeles, 1970-2007, 2007 Dollars • 60% of LA households live in rental housing… • In 2007, the median LA renter paid 34 percent of their income for rent Rent as % of Income Income and Rent in 2007 $

10. Rent Burden Rent Burdened Households in the City of LA • Rent burden increased from 2000 to 2007 • By 2007… • 29% severely rent burdened • 29% rent burdened • Renter survey captured more rent burden than Census • Vulnerable populations: • seniors • persons w/ disabilities • low-income households Less than 30%of income for housing Rent Burden (30%-49%) Severe Rent Burden (50% or More) Source: U.S. Census

11. Overcrowding Overcrowded Rental Units Severe Overcrowding Decreased from 2000 to 2007 • 24% in 2000 • 9% in 2007 • In 2007, there were… • Less rental units per person in the City • However, there were… • - More bedrooms per person in the City(Decrease in ratio of renter population to bedrooms) Not Crowded Overcrowded (1.01 to 1.50 persons/room) Severely Overcrowded Low-income renters & a majority larger households (5+ persons) are still overcrowded. (1.51+ persons/room) Source: U.S. Census

12. 100% Don’t know 90% 80% Not important at all 70% Somewhat unimportant 60% 50% Somewhat important 40% 30% Very important 20% 10% Renters: (indwt weight) (Universe: respondents in City of LA) 0% Owners: (landwt) (Universe: RSO owners) Owners Renters Is Affordable Housing Important? A majority of both renters and owners agree that affordable housing is important…

13. 100% Not 90% important at all 80% 70% Somewhat unimportant 60% 50% 40% Somewhat important 30% 20% Very 10% important 0% What LA should do to provide enough affordable housing for renters? Owners Owners Owners Owners Owners Owners Owners Renters Renters Renters Renters Renters Renters Renters Inclusionary Subsidize Build for Build for Home Save Let zoning affordable families seniors ownership existing private units program units market solve Renters: (indwt weight) (Universe: respondents in City of LA) Owners: (landwt) (Universe: RSO owners)

14. Policy Recommendations RSO is only partial answer to LA’s housing problems. • Prioritize affordable housing for high-need populations • Prioritize affordable housing for seniors and persons w/ disabilities • Produce larger rental units designed for families • Produce affordable units for low-income households • Include homeless residents in the universe of need • Increase affordable housing thru gamut of strategies • Inclusionary zoning • Housing choice vouchers • Regulatory relief • Creative use of “non-traditional” land • Inventory of developable parcels • Expedite recycling of blighted property • Protect affordable units • Affordable housing land bank • Internal cross-subsidy • Development fees • Link property Owners w/ affordable housing developers

15. Renters’RSO Knowledge Economic Roundtable

16. Renters’ Awareness of Units’ RSO Status Accuracy of RSO Status For renters living in RSO units: • 63% were correct about the RSO status • 20% didn’t know RSO status • 18% were wrong about RSO status 1/3 of all renters surveyed either didn’t know or were wrong about the RSO status of their unit

17. Knowledge Gap Q19: Did you know that rent control law limits the amount of rent increases? Awareness of RSO is greater among higher income households

18. Excessive or unauthorized? % by which Current Rents differ from Projected Rents for RSO Units - City of Los Angeles Rent Increase: Unauthorized? Within Allowable Increase 44% Below Allowable Increase Above Allowable Increase 30% 27% • Who’s potentially receiving excessive or unauthorized rent increases? • Low-income renters • Renters with low starting rents

19. Policy Recommendations RSO Knowledge - Communication • Increase Communication with Renters and Owners • Mail a succinct and plain spoken letter to all RSO units each year • inform occupants that they are covered by the RSO • outline protections provided by the RSO • identify tenant responsibilities • explain how additional information can be obtained, including information in different languages. • Augment the annual mailing to all RSO owners to provide summaries of major provisions of the RSO including rent ceiling and restrictions on evictions, and also to inform owners about the capital improvements passthrough program and the just and reasonable rent increase application process. This outreach and education initiative supports the goals of the RSO Tenant/Landlord Outreach and Education Program called for in the 2006-2014 Housing Element. • Include the toll-free hotline (866-557-RENT), and links to on-line resources • Include information for accessing Housing Department’s “Landlord-Tenant Handbook: For Rental Units Subject to the Rent Stabilization Ordinance” through the Internet or ordering a print version through the mail. • Include information in Spanish and instructions on how to request information in other languages. • Customize the annual letter to tenants to include the address and hours of the nearest Housing Department public counter.

20. Policy Recommendations Tracking Rent • Create Rent Registry to Track Rent • Expand the yearly registration renewal application to include the amount of rent for each unit and whether each unit has been vacated and decontrolled in the past year. • Provide an option for owners to submit this information electronically.

21. Evictions Economic Roundtable

22. Limits Rent No Yes Increase? Limits Reasons for No Yes Evictions? 0% 20% 40% 60% 80% 100% Awareness that RSO Limits Rent Increases & Reasons for Eviction • 72% aware the RSO limits rent increases • 52% aware the RSO limits reasons for evictions Source: Economic Roundtable. 2007-08 City of LA Renter Survey, RSO Study. Knowledge about... (Individual weight) Universe: All respondents with a geographic identifier who answered "yes" to q18 (unit under rent control).

23. Eviction Cases – LA County & LA City Unlawful Detainer Cases Filed in the Los Angeles Superior Court, Landlord Declarations of Intent to Evict Filed with the City, 1998-2007 50,000 Unlawful Detainer Cases Filed, rest of LA County Unlawful Detainer Cases Filed, City of LA LAHD Declarations of Intent to Evict (Units Affected) 40,000 30,000 20,000 10,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 • Landlord Declarations of Intent to Evict (LAHD) increased and peaked in 2005. • Decline in number of cases in more recent years • Largest number of cases filed in LA City and rest of County was in the 1990s

24. Owner/Family Intent to Occupy Demolition of Apartments Perm. Removal from Rental Use Compliance w/ Govt. Order Resident Manger Occupied Property Downsizing Major Rehabilitation HUD Property to be Sold Drug/Gang Related All other Eviction Types Declarations of Intent to Evict by Type & Year Purchased Evictions by Type and Year Purchase by Present Owner 3,500 3,000 75% 2,500 2,000 1,500 1,000 500 0 1975 or Before 1980 1985 1990 1995 2000 2005 Year Rental Property Was Purchased • Majority (75%) of evictions are: • Owner moving in to occupy a rental unit • Demolition of the rental unit • Permanently removing the unit from rental housing use 54% of all evictions recorded by LAHD are related to condo conversions Source: Los Angeles Housing Department. 2008. Landlord Declarations (Evictions) Administrative Dataset (6). Data are counts of RSO properties with evictions recorded by LAHD.

25. 500 Net balance of permits Newly Built Properties, plus Existing onesConverted into Apartments (+) 400 300 200 100 Annual Permits Issued 0 -100 -200 Apartment Buildings Demolished or Converted into other Uses (-) -300 -400 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -500 Recent Gains and Losses in L.A.’s Supply of Rental Housing Properties Source: City of Los Angeles, Department of Building and Safety, Building Permit Data from the Plan Check and Inspection System (PCIS), 1997-2007.

26. Vacancy Rates for LA City Rental UnitsDWP Data for 761,639 Multi-family Individually Metered Housing Units January 1998 to March 2008; U.S. Census Rental vacancy rates for the past ten years have fallen below the 5 percent threshold established in LAMC 12.95.2(F)(6) for suspending condominium conversions on residential rental properties of two or more units Department of Water and Power and US Census Bureau Vacancy Rates for Rental Units DWP Data for 761,639 Multi-family Individually Metered Housing Units January 1998 to March 2008

27. Policy Recommendations Eviction Assistance • Eviction Information and Assistance for Renters and Owners • In the annual informational letter, inform renters about the safeguards against eviction provided by the RSO and the circumstances in which relocation payments are required. • In the annual informational letter, inform owners that the RSO does not restrict or monitor evictions of tenants for disruptive or destructive behavior, along w/ information about permissible reasons for evictions and types of evictions for which relocation payments are required. • Evaluate the delivery of tenant relocation services by the current provider to determine whether the contracted scope of work is being properly implemented. • Evaluate the level of service provided through the relocation assistance program to determine whether the number of hours of counseling assistance provided for displaced tenants need to be increased to achieve the goal to find replacement housing for these tenants.

28. Policy Recommendations Condo Conversions & Leases Condominium Conversions 1. Suspend approval of condominium conversions throughout the City until vacancy rates rise above 5 percent. 2. Monitor rental vacancy rates at the Community Plan Area level using monthly data from the DWP, and disapprove applications for condominium conversions in CPAs with vacancy rates below 5 percent. • Updating Leases • Inform owners and renters that the RSO does not restrict evictions for nuisance or illegal activities, nor is a declaration of intent to evict required for these evictions if they are not related to illegal drug or gang activity.

29. Tenant-Landlord Relations Economic Roundtable

30. Very poorly Somewhat poorly Somewhat well Very well RSO Non-RSO LA City Outside 50 9 0% 20% 40% 60% 80% 100% How does your owner/manager treat tenants? City of LA RSO Tenants • 46% Very well • 35% Somewhat well • 9% Somewhat poorly • 10% Very poorly • RSO and Non-RSO responses nearly identical • Renters in nearby cities more positive Source: Economic Roundtable. 2007-08 City of LA Renter Survey, question 8, RSO Study. (Individual weight) Universe: All respondents with a geographic identifier

31. Most Important Things to Change in the RSO Program Calculated Using Owner Weights Evict problem tenants More tenant accountability Penalize anti-social behavior Larger annual rent increases Bank rent increases Make SCEP complaint-driven Code of responsibility Don't know Update RSO leases 11% Very difficult 52% Penalize unwarranted complaints Bigger cap. improve. Very easy/ Easy pass through 6% Means test for tenants Difficult 25% Neither easy nor difficult Other 6% 0% 20% 40% 60% 80% Disruptive Tenants Disruptive tenants were a reoccurring theme in both the owner and renter focus groups. Describe the legal requirements for evicting tenants from RSO units for undesirable or disruptive behavior?

32. Policy Recommendations Joint Code of Responsibility In focus groups and surveys, landlords and tenants identified a need for an articulated set of values about civil, reasonable behavior between landlords and tenants. The Joint Code of Responsibility is based on the focus groups and survey responses and provided as an articulation of shared values rather than as a regulatory tool. • Joint Code of Responsibility for Landlords and Tenants: • Financial Responsibility • Information • Maintenance • Communication • Civil Behavior The California Apartment Association provides a similar "Resident Bill of Rights" that articulates a Housing Code of Ethicsfor tenants and landlords

33. Property Maintenance Economic Roundtable

34. How would you describe the condition of your apartment building? • Non-RSO renters rate their apartments as being in better condition than RSO renters • 31% of RSO renters rate their units as very poor, fairly poor or fair, vs. 19% for non-RSO renters • 69% of RSO renters rate their units as fairly good, good or excellent vs. 81% for non-RSO renters Source: Economic Roundtable renter survey, responses from 2,640 renters in the City of Los Angeles, Household weights Calculated Using Household Weights (p<.001)

35. What level of maintenance are you able to provide with RSO income? • 43% of landlords say limited income from RSO units impacts ability to provide maintenance. • YET… • 57% say that they are able to handle all maintenance. Most maintenance Unit weighting Source: City of Los Angeles Rental Property Owners and Managers Survey postponed, major problems handled ASAP All maintenance 20% handled immediately & preventive maintenance practiced 57% Major problems postponed, minor problems handled ASAP 20% All maintenance postponed 3%

36. Experience with SCEP Inspection Program Survey Data - Calculated Using Owner Weights Unnecessary 32% expense Useful service 25% Identifies needed 23% maintenance Potentially useful 12% but inconsistent Other 8% 0% 10% 20% 30% 40% Experience with SCEP Inspection Program • Half of owners said that SCEP is either “very helpful for identifying needed maintenance” or “a useful service.” • Owners of older, smaller properties tend to experience SCEP as a useful source of maintenance assistance. • Owners of newer, larger properties tend to experience SCEP as an unnecessary intrusion into property management. • The most widely expressed concern about SCEP is that inspections produce inconsistent outcomes.

37. Lack of Awareness among Owners • ½ of owners surveyed did not know about the capital improvement passthrough program • Only 1.3 percent of RSO owners applied to pass-through capital costs to their tenants. • 99.9 percent of owners have not sought relief through the just and reasonable rent increase application process despite concerns about rent ceilings.

38. Capital Improvement Program In 1989: Provision was changed to limit pass-through from 100% to only 60% of approved capital improvement cost From 1990 to 2007: $148M of pass-through investments were approved for over 64,000 RSO units From 1985-1989: $279M of pass-through investments were approved for over 140,000 RSO units Source: City of Los Angeles Housing Department, Capital Improvement Pass-through Database

39. Owner’s Assessment of Capital Improvement Passthrough Program 50% of costs is not enough, need to pass through 100% Takes too long for application to be approved The program Application works well Filed No Application Filed Other 0% 20% 40% 60% 80% 100% Capital Improvement Program • Owners’ greatest concern about the program is that a larger share of capital improvement costs need to be passed through to tenants. • 56% of owners who did not apply said that it was because they did not know about the capital improvement program. Source: City of Los Angeles Housing Department, Capital Improvement Pass-through Database

40. Number of Approved Capital Improvement Pass-through Applications by Monthly Payment Amount • The median pass-through is $13 • The average is $19 • Three-quarters are <$25 per month • 5% pay $55 per month

41. Policy Recommendations Capital Improvements Pass-through Program • Continue to use the Capital Improvement Passthrough program as the principal tool for providing additional income to owners for offsetting the cost of capital improvements and primary renovations that allow tenants to occupy their units from 5:00 pm to 8:00 am and do not expose them to hazardous material. • Streamline and simplify the tenant habitability component of the Primary Renovation Program and the process for determining whether tenants will be able to remain in their unit, thereby making the application eligible for the Capital Improvement Passthrough Program. • Simplify the tenant habitability planning process by holding a single review that covers all tenants affected by an application, rather than leaving open the possibility of separate appeals by multiple tenants. • Increase the pass-through amount as follows: • 75% for work that meets current criteria for the pass-through program but does not meet the criteria for primary renovation • 100% for work that addresses systemic structural, plumbing, electrical, or mechanical requirements of RSO properties • 100% for either capital improvements or primary improvements for owners of up to 4 multiple units • Extend the term of payment for the tenant’s share of costs to up to 10 years to keep rent increases below $25 per month for as many tenants as possible (Table 7-1) • Index the $55 monthly rent-increase ceiling for the share of capital improvements that are passed on to tenants to the Los Angeles region’s Consumer Price Index – All Urban Consumers and adjust the ceiling annually beginning with the annual RSO rent adjustment in 2010. • Track the cumulative amount of capital improvement passthroughs approved for each property to ensure that tenants do not receive rent increases that exceed the ceiling amount, which currently is $55.

42. Policy Recommendations Systematic Code Inspection Program (SCEP) • Enforce the recommended Joint Code of Landlord-Tenant Responsibilities by holding tenants accountable for code violations that they cause. • Continue training inspectors in standardized procedures for documenting code violations in order to ensure more consistent outcomes from inspections.

43. Fees to Pay for Implementing Recommendations Economic Roundtable

44. Policy Recommendations Implementing Recommendations • 5 recommendations being made require additional funding for the Housing Department: • Technical assistance workshops and training for small owners • Annual educational letters about the RSO to renters and owners • Higher level of relocation services (if borne out by assessment of relocation services) • Creation of a rent database for all RSO units to enable rent-banking and monitoring of rent increases • $1.48/unit initial setup cost • $3.19/unit ongoing annual cost • Collection and analysis of cost data for gas and electric utilities • Recommendations for Funding Additional RSO Responsibilities • Increase the annual rental unit registration fee by the amount necessary to pay for these additional responsibilities.

45. Financial Outcomes for RSO Owners Economic Roundtable

46. Year of Purchase • 79% of L.A.’s RSO units were purchased after 1978. • Examples of neighborhoods include: • Panorama City 91% • Southeast L.A. 86% • Hollywood 79% • West L.A. 63%

47. Did your rent-controlled units make a profit last year? • The percent of owners who did make a profit last year increases with ownership size. • Similarly, the percent of owners who did NOT make a profit last year decreases as ownership size increases. • Similar outcomes for non-RSO units of same owners – only 28% say RSO units are less profitable than non-RSO units 100% Don’t 90% know 80% No, had 70% a loss 60% 50% No, broke 40% even 30% Yes 20% 10% 0% 1-4 5-10 11-39 40+ LA City units units units units Unit weighting Source: City of Los Angeles Rental Property Owners and Managers Survey

48. RSO-Market Gap for Unit with the Same Tenant for Different Intervals 130% 120% MARKET years 20 110% RATE 100% years 15 90% 80% 10 years 70% years 29 60% 50% 40% 30% 20% 10% 0% 1979-1980 1981-1982 1983-1984 1985-1986 1987-1988 1989-1990 1991-1992 2003-2004 2005-2006 2007-2008 1993-1994 2001-2002 1995-1996 1997-1998 1999-2000 What is the RSO-market gap over different periods of time? • HYPOTHETICAL outcomes for RSO renters vary a great deal over different time intervals assuming that the owner increased the rent by the RSO ceiling amount every year. • The widest gap is 35% in 1989-1990. (29 Year tenant) • In reality, most RSO owners do not increase their rents up to the ceiling in bad years. • This may leave an owner far below the market rate when the market increases rapidly. DATA SOURCES: Market-rate rent – U.S. Bureau of Labor Statistics Consumer Price Index - All Urban Consumers Series Id:    CUURA421SEHA,CUUSA421SEHA Not Seasonally Adjusted Area:         Los Angeles-Riverside-Orange County, CA Item:         Rent of primary residence RSO rent – Los Angeles Housing Department

49. Do Owners Increase Rents by the Annual Amount allowed by the RSO? Owner survey shows… Renter survey shows… • Owners with small holdings report they are much less likely to increase rents than large property owners • “Use-it-or-lose-it” policy adds pressure to increase rents annually 100% No 1-4 20% 90% Rent NEVER Units 25% Depends increased on tenant 80% 5-10 17% Yes 70% Units 22% Rent increased, 60% but NOT every year 11-39 50% Units 40% Rent increased 40+ 63% 30% EVERY year Units 54% 20% All RSO 10% Owners 0% 0% 20% 40% 60% 80% Non-RSO RSO • Tenants in RSO units are more likely to receive a rent increase every year.

50. Exact Method for Calculating Annual Allowable RSO Rent Increase is Set by Law • Method spelled out in LAMC 151.07 A6 • Monthly CPI data used • 12-month average calculated • Change from previous year calculated • Change rounded off to nearest whole percent • Minimum change = 3%, maximum = 8%