Right at the outset of the Monday night meeting, Committee Member Tom Means announced he wanted to veer from the staff proposal. The evening's major issue was designing a so-called fair-rate-of-return standard, a formula for determining how much profit landlords are entitled to make from rent-controlled apartments. It's a controversial topic, and the committee spent most of its last session listening to hours of heated public comments.
Means took aim at the staff's recommendation to tie this profit margin to the all-encompassing Consumer Price Index (CPI) for the region, which lumps together a wide range of market prices. He argued that it didn't make sense to connect housing profits to an index that tracks a long list of unrelated costs like energy, food and transportation.
"To use the (regular) CPI is not a great way to look at the market for landlords," he said. "We can do better and choose a different index that better reflects the market conditions."
What emerged was a technical discussion that felt like a university seminar, with Means dominating. Drawing from his background in economics, he proposed using a completely different price index specific to the rental housing market in the Bay Area, which he assured members would be a vast improvement over the CPI. In recent years, this rental-housing index has increased at nearly twice the rate of the regular CPI for the area, although Means pointed out that this rental index has also been comparatively lower than the CPI in past years.
Alternatively, he proposed a second idea to basically add about 30 percent on top of the regular CPI to "reduce risk for fluctuations." Committee member Vanessa Honey liked this idea, pointing out this extra amount would offset the expense landlords bear from higher utility costs and other expenses such as the "$18-per-hour minimum wage" taking effect soon. (In fact, starting in January, the city's minimum wage will rise to $15 per hour.)
"The CPI is going to be too restrictive; We have to leave some money for landlords to pay their mortgages," Honey said. "Otherwise they'll lose their property and it won't be attractive for new buyers."
As the committee spit-balled ideas, the city-hired experts from the law firm Goldfarb & Lipman began raising some red flags. They warned that some committee members' idea for a fair-rate-of-return standard might not seem so fair in a court of law. Basically, the committee was treading into risky territory, said attorney Eric Phillips.
"The CPI meets the legal standard for a fair rate of return — there is not a precedent for having an increase greater than that," he said." From a legal perspective, this could invite challenges from (outside) groups."
The warnings didn't stop there. Phillips also pointed out the committee could be perceived as "double-counting" certain expenses for landlords. A wide range of expenses, including utilities, can already be used by landlords through the petition process to justify higher rent increases, he said. If the Rental Housing Committee pointed to those same expenses as the reason for raising the CPI threshold even higher, then it would be like counting them twice, he cautioned.
But Means disagreed with that warning, and he assured his colleagues that all his ideas were "on solid legal ground."
To be clear, the new complex guidelines being discussed on Monday only affect property owners who go through the city's petition process. Under normal circumstances, landlords in Mountain View can raise rents on eligible apartments at most by the same percentage as the annual CPI increase. For the upcoming year, that will be about 3.4 percent.
Landlords can seek permission to raise rents higher if they can prove the city's rent limit is eating into their revenues too much. To do this, they would have to provide an itemized list of their expenses to show they were making less than past years.
City staff proposed setting the base amount that landlords are entitled to earn on their properties at basically the same CPI level used to determine annual rent increases.
Indeed, Committee Member Evan Ortiz repeatedly reminded his colleagues that many aspects of Mountain View's fair-return standard as proposed by staff would already be more generous to landlords than those in pretty much every other city with rent-control laws. The proposed staff policies allowed landlords to budget a 6 percent management fee and use their 2015 revenues as the base to compare future profits. He scolded his colleagues for wanting to go further with concessions for landlords.
"This is incongruent with the spirit of Measure V," he said, referring to the successful rent control measure on the November ballot. "If this compounds year over year based off something that is already increasing, then this would blow a hole in the (rent control) measure."
As it came to a vote, committee members were starkly divided on the issue. The committee initially voted on setting the fair rate of return at 130 percent of the CPI, but this motion was defeated in a 2-3 vote with Grunewald, Ortiz and Emily Ramos opposed.
Grunewald later signaled he was amenable to using the alternative rental-market CPI proposed by Means. That proposal was approved in a 3-2 vote with Ramos and Ortiz opposed. Following the meeting, tenant advocates blasted the RHC's actions as a giveaway to landlords.
"The majority of RHC members seem to be focused on maximizing landlords' profits, which is a far cry from the 'fair rate of return' that the law demands," Juliet Brodie wrote in an email to the Voice. "We wish the RHC would spend as much time on the other values in the CSFRA."
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