San Francisco Apartment Association
SFAA Magazine Archives

February 2003

Feature

Changes in Capital Improvements and Bond Passthroughs

by Lawrence Scancerelli

In November 2000, San Francisco voters passed Proposition H, which limited the capital improvement costs that landlords can pass on to tenants for both costs of seismic retrofitting and costs necessary to insure the landlord a constitutional “fair return” based on a maintenance of net-operating-income standard. It also sought a rollback of capital improvement rent increases retroactive to April 10, 2000.

In a lawsuit filed by owners and supported by SFAA, the San Francisco Superior Court ruled in Quigg vs. CCSF that Prop. H did not have a sufficient mechanism to insure a constitutional fair return and was unconstitutional. The city appealed and threatened to amend the Rent Ordinance to attempt to overcome these constitutional problems. Then landlord and tenant representatives, including SFAA, met with Supervisor Ammiano to try to reach a compromise on the issues. An agreement was reached, including settlement of Quigg vs. CCSF, and the Board of Supervisors passed an amendment to the Rent Ordinance last month. The mayor is expected to sign the law, which should go into affect by late February 2003, although it will be retroactive to petitions filed on or after November 14, 2002.

The amended Rent Ordinance relating to capital improvements and bond passthroughs (Sections 37.2, 37.3, 37.7, 37.8B) includes the following points:

  • Allows landlords to pass through to tenants 50 percent of the future increases in property taxes to repay general obligation bonds;
  • Expands existing amortization schedules for cost passthroughs for specified capital improvements, rehabilitation, energy conservation improvements and renewable energy improvements.
  • Establishes maximum annual passthroughs at 5 percent of a tenant's base rent for properties with five or fewer units and ten percent of a tenant's base rent for properties with six or more units.
  • Limits capital improvements passthroughs for property with six or more units at 50 percent of landlord costs unless the tenant elects 100 percent passthrough of costs with a lifetime rent increase cap of 15 percent of base rent.(Retains 100 percent cost recovery for capital improvement passthroughs for property with five or fewer residential units.)
  • Lengthens the amortization period from 10 to 20 years for certain improvements required by law, including seismic improvements to unreinforced masonry buildings;
  • Provides tenants and the Rent Board with pre-application notice
  • Provides for the Commission on the Environment to conduct hearings and recommend new passthrough provisions encouraging energy conservation improvements and renewable enrgy improvements.
  • Expands the provisions for tenant hardship applications for relief from capital improvement passthroughs by providing that a tenant can file a hardship application at any time instead of only at the time the passthrough is originally approved; and
  • The Amendment is operative 60 days prior to passage by the Board of Supervisors on the second reading of the bill, which would apply to petitions filed on or after November 14, 2002.

The opinions expressed in this article are those of the author and do not necessarily reect the viewpoint of the SFAA or the SF Apartment Magazine. Lawrence M. Scancerelli is with the Law Offices of Lawrence M. Scancerelli 415.398.1644. Copyright © 2003 San Francisco Apartment Magazine