The Property Management Shop
by Marc Wilson
Q. I have been watching the rental market's downward slide for the past five months and I know several of my tenants are paying well above market rent. Should I contact these tenants and offer to reduce the rent to market value? How should I document this agreement? Could I ever raise the rent back to the original contractual amount later?A. Some property owners in non-rent controlled areas, or with San Francisco properties built after 1979, are taking a proactive stance and contacting tenants about lowering the rent. If you have a non-rent controlled 40-unit property with tenants paying year 2000, top of the market, dot-com rents, then you simply are waiting for your property to become 100% vacant. Anyone with this scenario is foolish not to lower rents. You can always raise the rent later. What is the use of watching all your tenants vacate only to re-rent the same apartments at lower rates.
In San Francisco, there are other considerations, such as rent control.
The average 12-unit building probably has one or two units paying
above market rents now. I personally prefer to deal with tenants
only if and when they initiate contact at the end of their rental
term. Your high rent tenants are obligated to pay their rent through
the term of their lease and I suggest you hold them to the agreement.
They will not vacate at the end of their term because they are mad
at you for accepting a high rent for a year; they simply will vacate
if and when they find a comparable apartment for less rent.
Also, your high rent tenants might not know their rent is above
market. Perhaps their rent is not significantly above the market
to justify the costs and hassles associated with locating another
apartment. On the other hand, if the tenant’s rent is $2,100
and, at the end of their term, they realize they can rent a comparable
apartment for $1,600 then they will vacate. If you know you will
re-rent the same apartment to another tenant for $1,600, then take
the easier road and negotiate a rent reduction with the existing
tenant.
The obvious question at this juncture focuses on whether you can lower the rent now and reserve the right to raise the rent to the previously negotiated contractual rent at a later date? There is no clear answer to this question. The rules and regulations do not cover the possibility of lowering the rent now while maintaining the right to increase the previously agreed-upon rate later.
You could create an addendum to the existing rental agreement that stipulates the reduction is temporary and that the property manager reserves the right to raise the rent at a later time. Personally, I am sure that when the tenant complains, the Rent Board will not uphold this type of agreement for increasing the rent to the original contracted level. On the other hand, nothing ventured, nothing gained.
If your original tenant indicates the wish to move unless you provide a rent decrease, I suggest you either call the bluff or give them a decrease to fair market value. When you reduce the rent, ask them to sign an addendum similar to the one described above and then let the chips fall where they may. Later, when you raise the rent and they complain to the Rent Board, the latter will issue a ruling and you will either prevail or not. If your tenant’s rent gets pegged at the lower rate, you have not lost anything because, theoretically, you would have rented it to another party at that level anyway. Keep in mind that negotiations with the existing tenant will take your time and energy. I think the easier route is to tell the tenant you will not reduce the rent, let the tenant vacate, and rent the unit at market value.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for 15 years. Please send your questions concerning property management and/or apartment building sales to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can also be reached at 415-229-1275. © Copyright 2001