the president's report
Robbing Peter to Pay Paul
by David Wasserman
Every year, I remind the SFAA membership of the local and statewide challenges that we face as an industry. I strenuously encourage everyone to volunteer their time and financial resources to the SFAA so that we can effectively promote the industry’s interests. Many of you respond, and many of you do not. For those who hesitate before committing your resources to the effort, I want to talk about what you may have to look forward to at the state and local levels for this
year and beyond.
As we know, the state and local governments are out of money due to gross overspending and financial mismanagement. This has caused the state legislators and many interest groups to promote a partial repeal of Proposition 13, or, as it is being touted, a “Split Roll” for property tax assessments. Under Prop. 13, property taxes on all types of real property are capped at 1% of assessed value, plus bonded indebtedness. Today, there is a serious effort to roll out a ballot initiative that could change the law to allow annual reassessment of commercial and multifamily properties. Thus, homeowners would be assured continued protection, while rental housing providers could receive steep increases in their property tax bills.
This is not the first threat against Prop. 13. In 1992, 2000, 2001, 2002, 2003 and 2005 there were legislative efforts to essentially exempt properties owned by corporations, partnerships and LLCs from Prop. 13 protection. However, in those years, the state was solvent, whereas now we have entered unchartered fiscal territory.
Tenant activists reading this article should note that any successful amendment to the state constitution permitting this new tax structure will have serious ramifications to below-market rents. For starters, owners of affected buildings will rush to file operating and maintenance petitions seeking allowed increases for the new tax assessments. While City Hall could conceivably seek to limit these increases, any such cap might violate California’s longstanding laws declaring that apartment owners of rent controlled properties are guaranteed a fair return on their investments. So, if Prop 13 goes down, tenants should expect healthy increases in their rents.
Water conservation is another hot issue. On June 28, 2008, the governor proclaimed a statewide drought. Since that time, we suffered through one of the driest and warmest Januarys of all time. Even with a wet February, the city’s voluntary cutback of 10% of current usage will likely become a mandatory cutback of perhaps well over 10%. Owners should promptly install water-saving devices into all tenant bathrooms. Tenants should also be urged to conserve. While recent rate increases cannot be passed onto tenants, the local rent law was amended during the 1991 drought to allow the pass through of water bill penalties, provided that the landlord has installed low-flow plumbing fixtures and certifies that there are no plumbing leaks in the building. This current drought may be severe and long lasting, so please ensure that you have taken all appropriate conservation measures.
Rental housing inspection fees are now popping up throughout the state and on the local level. This year, the San Francisco Department of Public Health’s “Vector Fee” for pest control inspections and remediation was implemented, with a promise that the fee will increase each year. Local governments tend to disguise new taxes as fees, and while the constitutionality of this practice is very questionable, the city will undoubtedly attempt to impose as many “fees” as can be justified in order to generate badly needed revenue. As rental housing providers, we are the natural targets for these fees, given our perceived ability to pay coupled with our small voter constituency.
With regard to new taxes and the June 2009 special election on the horizon, look for gross rents to be taxed, as well as a host of other tax measures that, once part of the landscape, will most likely never be repealed. If a gross rent receipts tax is implemented, you will owe City Hall money even if your building does not currently operate in a profitable manner. Thus, as with every other adverse economic condition that afflicts you, a sum may still be imposed regardless of whether or not you take home a check at the end of the year from the property.
Foreclosures are another hot topic. For the first time in recent memory, a substantial portion of San Francisco’s rental housing properties are now owned by banks or are in the process of being transferred by way of forced sales. The State Legislature may require owners who offer units to rent to disclose to prospective tenants if and when a Notice of Default has been filed against the property to be rented. (Unfortunately, some California landlords gained notoriety by renting units and taking security deposits after the foreclosure began, and consequently absconding with this money after their titles were transferred.) Remember that under the rent laws, tenants of foreclosed properties retain all of their rights, and their leases are not terminated simply because a bank, or new owner, purchased the building at a trustee sale.
Tobacco smoke is also drawing new attention. Several years ago, this magazine published an article that argued secondhand smoke could constitute a recognized health hazard, and, consequently, a nuisance to nonsmoking tenants. While most agree that tenants already allowed to smoke in their units cannot be deprived of this service, there is likewise a growing consensus that landlords must take affirmative steps to prevent tenants who smoke in their units from passing along their secondhand smoke to other building residents. As such, owners are encouraged to ban smoking in common areas and to evict tenants who continuously allow their smoke to permeate into common space or a neighboring unit.
The State Legislature will probably consider some type of law that will allow owners to restrict smoking in their buildings. Opponents have argued that smoking would be used as a ruse by landlords in rent controlled jurisdictions to evict low paying tenants. If such a state law were to pass, the Rent Board would have to adopt a regulatory scheme that would allow owners to prohibit smoking among existing tenants without facing a decrease in service claim.
With the government in financial freefall, there will be both local and statewide pressures to tax and assess those with the perceived ability to pay. As rental property owners, we offer the easiest target for this assault. If we do nothing to combat the onslaught, we indeed become the ultimate scapegoat. I ask all of you to participate in fundraising efforts with earnest zeal. Indeed, you will spend the money either fighting the unfair imposition of fees, taxation and unfair legislation, or on paying for their adverse impact.
Lastly, for planning purposes, please ensure that your SFAA dues are current so that we can fund the California Apartment Association’s efforts to protect our interests in Sacramento. CAA offers invaluable services to our industry at the statehouse, and more commonly the assault against the industry occurs on the state level.
The June special election will require substantial resources at the local level; and please rest assured that if these tax measures fail in June, they will return in the November. Therefore, your persistent support is crucial, and nobody has an excuse to sit this year out. Remember, both SFAA and CAA are only as effective as the support they receive from the membership, and our opposition is extremely well-endowed these days.
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. David Wasserman is the president of SFAA. He can be contacted at Wasserman-Stern Law Offices, 415-567-9600. Copyright © 2009 by Black Point Press. All rights reserved.