The Los Angeles City Council has approved major changes to the Rent Stabilization Ordinance (RSO) rent increase formula — the most significant downward shift in more than 45 years. These adjustments tighten revenue growth for rent-stabilized properties across the city and will directly affect valuations, NOI, and long-term strategy.

The new formula is expected to take effect on February 1, 2026, pending final language from the City Attorney.

Key Changes at a Glance

• CPI reduced from 100% to 90%.
• The maximum annual increase was lowered from 8% to 4%.
• Minimum annual increase reduced from 3% to 1%.
• Gas and electric adders eliminated for master-metered buildings.
• +10% occupant adjustment removed.

These adjustments lower annual rent-growth capacity for all RSO properties built before October 1978.

Why This Matters for Owners

Operating costs continue to rise, but allowable rent increases will now grow more slowly. As a result:

• Margins tighten, especially for aging assets with rising utility and maintenance costs.
• NOI is reduced, particularly for master-metered buildings losing utility adders.
• Predictability decreases, with a narrower cap and floor influencing long-term projections.
• Redevelopment feasibility may shift, as the City is studying whether entire replacement buildings should be subject to RSO.

Overall, these changes may impact valuation, refinancing options, holding or selling timing, and capital-improvement planning across Los Angeles.

How Owners Can Stay Ahead

To prepare for the 2026 rollout, owners should consider:

• Reassess NOI & Expense Projections: Update pro formas using the reduced rent-increase limits to understand long-term cash flow impact.
• Review Your Current Valuation: Lower rent-growth assumptions may influence cap rate expectations and buyer demand.
• Evaluate Refinance Timing: Some owners may benefit from addressing debt before NOI compression affects lender underwriting.
• Adjust Hold/Sell Strategy: Older RSO buildings — particularly master-metered assets — may require shifts in business plans, operations, or CapEx priorities.
• Monitor Redevelopment Policies: The City’s study on applying RSO to entire replacement buildings could reshape redevelopment feasibility moving forward.

Get Clarity Before 2026

Understanding how these changes affect your building is essential for making confident decisions.

Lucrum Real Estate Group is actively analyzing the impact across Los Angeles submarkets and helping owners prepare for the new regulatory environment.

Request a valuation & advisory call at Lucrumre.com.

FAQs About the New RSO Rent Formula Changes

When do the new rules take effect?
The changes are expected to take effect on February 1, 2026, pending final ordinance language.

Will the City revisit the formula again before 2026?
Major updates are unlikely given the narrow 10–2 vote, but future political shifts could influence revisions.

Do these changes apply to all RSO properties?
Yes. They apply citywide to all rent-stabilized buildings built before October 1978.

Are master-metered buildings most affected?
Yes. Removing gas and electric adders eliminates a key cost offset for owners who absorb tenant utilities.

Does this change impact current rents?
No. It affects future allowable annual increases only, not existing rent amounts.

How will redevelopment be affected?
The City is studying whether entire replacement buildings should fall under RSO — a potential shift that could impact redevelopment feasibility and land-value assumptions.

Souce: AGGLA