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SF Apartment : February 2013

SFAA News — February 2013

The “King” of Trade Shows
Come roll the dice with SFAA and network with the high rollers of our industry at the San Francisco Apartment Association’s annual boutique tradeshow Monday, March 18, from 4:30 p.m. to 7:30 p.m. at Fort Mason, Building A.
SFAA’s “Viva Las Vegas” Trade Show will cover all facets of the multifamily housing industry. Professionals who provide San Francisco’s property owners with top products and services will be on hand and happy to speak to all attendees. Free classes will be offered—and look out for “the King” himself. For more details on speakers and sponsorships, turn to page 24 and check out

“Original Occupant” Issue Goes to Court
SFAA is grateful to Fried & Williams, LLP for bringing an important issue to the California Court of Appeal, First District: Do the children of tenants inherit their parents’ rent control status when the parents no longer occupy the rental unit and the now-adult children stay behind? 

Currently, the San Francisco Rent Board Senior Staff, the majority of the Rent Board Commissioners and the housing judge of the San Francisco Superior Court take the position that children are deemed to be “original occupants,” as that term is used in the Costa-Hawkins Rental Housing Act. Consequently, when mom and dad move on, the child left behind (who is now over the age of majority) may enjoy the same rent-protected rate as the parents, even though the child was a minor (or perhaps not even yet born) when the tenancy commenced.

The industry believes that the State Legislature did not have this benefit in mind when Costa-Hawkins was passed. Unfortunately, however, Costa-Hawkins does not clearly speak to this issue, and there is no recorded legislative history to guide the state’s rent boards and trial courts. Predictably, in the face of uncertainty, our rent board and the Superior Court’s housing judge have interpreted the law to grant this right of inheritance, akin to what is permitted in places like Rome and Paris (yet prohibited in New York City). Thankfully, the topic will now go to the Court of Appeal (and perhaps beyond) for clarification.

Annual Allowable Increase Remains 1.9%
Effective March 1, 2013, through February 28, 2014, the allowable annual increase amount is 1.9%. This is the same percentage as last year. To calculate the dollar amount of the 1.9% annual rent increase, multiply the tenant’s base rent by .019. For example, if the tenant’s base rent is $1,250, the annual increase would be calculated as follows: $1,250 x .019 = $23.75. The tenant’s new base rent would be $1,273.75.

In accordance with the San Francisco Rent Board’s Rules and Regulations Section 1.12, this amount is based on 60% of the percentage increase in the Consumer Price Index for All Urban Consumers in the San Francisco-Oakland-San Jose region for the 12-month period ending October 31, which was 3.2% as posted in November 2012 by the Bureau of Labor Statistics. Also, effective March 1, 2013, through February 28, 2014, the interest rate for security deposits is 4%.

Split Roll Vote Looms Large
According to polls, voters appear to be warming up to the idea of reforming Proposition 13, as long as protections for homeowners stay intact. And the apparent sea change in public attitudes, combined with the two-thirds majorities Democrats now hold in both chambers of the Legislature, has emboldened some politicians to take aim at the iconic 1978 measure.

Prop. 13 rolled back property taxes and capped yearly increases at 2% until a property is sold, but critics say one of its unintended consequences was shifting more of the state’s property tax burden from businesses to homeowners. In 55 of 58 counties, residential homeowners are paying more property taxes than businesses, while businesses had taken up much of the burden before Proposition 13, according to a study compiled by the California Tax Reform Association.

In a recent poll by the Public Policy Institute of California, 58% of registered voters said they favored a “split roll” property tax, in which commercial properties would be reassessed annually or semiannually according to their market value, while taxes on residential properties would continue to be capped at 2% annual increases.

Assemblyman Tom Ammiano, D-San Francisco, plans to introduce a bill aimed at forcing businesses to pay higher property taxes. He plans to introduce legislation early this year to close a loophole that allows corporations to sidestep reassessments on properties they purchase. Ownership of a property isn’t considered transferred unless 50% or more is sold. Critics say corporations find ingenious ways to avoid triggering reassessments.

Ammiano said he hopes the legislature will act on his bill before the end of spring. It would not require voter approval because it would only be a statutory change.
In addition to Ammiano’s bill, two constitutional amendments heading to the Legislature would allow voters to approve local parcel taxes for schools and libraries on a 55% vote, rather than the 66.7% now required. Sens. Lois Wolk, D-Davis, and Mark Leno, D-San Francisco, will try to lower the Proposition 13 threshold for parcel taxes, a move that would need voter approval. (The threshold for passing local school bonds is already 55%.)

Nearly $2 Billion for SF Affordable Housing
A new study makes the argument that, contrary to conventional wisdom, San Francisco produces an impressive amount of affordable housing. Between fiscal year 2002-2003 and fiscal year 2010-2011, nearly $2 billion was allocated to affordable housing, including $356 million from state sources, $829 from federal sources and $725 in city sources, according to a report by the Poverty and Race Research Action Council and the National Housing Law Project.

All efforts, initiatives and policies combined, San Francisco has 500 residential hotels with 19,120 rooms and more than 200,000 “price-controlled” housing units that comprise 53% of its entire housing stock.

Rents, Asking Prices Up
Asking prices for homes for sale around the Bay Area rose substantially in December compared with the same time last year, according to San Francisco real estate website Trulia, ranging from a 16.3% spike in tech-fueled Santa Clara County to a 7.6% increase in Napa County. The nine-county Bay Area saw an average increase of 13%. By comparison, asking prices nationwide rose 5.1% in December compared with December 2011, Trulia said. Analyzing asking prices of homes currently for sale provides a leading indicator of what sales numbers are likely to look like in a few months’ time, according to Trulia.

Asking rents also rose, with Alameda County seeing the biggest spike (13.2%) and already pricey San Francisco the least (2.9%), according to Trulia data. The average increase for eight Bay Area counties (Napa did not have enough data) was 7.8%. Nationwide, rents grew 5.2%.

High REIT Returns
Real-estate stocks capped off 2012 with robust returns that outpaced the broader stock market. The Dow Jones Equity All REIT Index, which tracks 136 real estate investment trusts, delivered a total return of nearly 20% for 2012, more than double the 7.5% gains in 2011 and the fourth consecutive year that REITs outperformed the Standard & Poor’s 500 stock index, which gained 16% in 2012. The Dow Jones Industrial Average also lagged behind REITs, posting a total return just over 10%.

The stocks of homebuilders posted even stronger gains as revenue climbed on rising home sales. The Dow Jones U.S. Construction Index ended 83% higher in 2012. Hovnanian Enterprises Inc., which experienced one of the strongest turnarounds among the big builders, saw its stock climb 383% last year, while PulteGroup Inc., the second-biggest builder, rose 188%.

Although few REIT stocks matched the performance of homebuilders, the stocks still outperformed many other industries. Investors were drawn to REITs, in part, because strong economic fundamentals allowed landlords to raise rents, increasing revenue and profit. REITs also benefited from perceptions that they are a safer bet than other financial stocks at a time of global and domestic financial unease.

But apartment companies, among the top performers over the past two years, posted among the smallest REIT returns in 2012, at 7%. Although rising demand has allowed apartment landlords to raise rents, leading to strong profits, some analysts believe conditions will change in 2013 as a wave of new apartment units are scheduled to hit the market. In addition, falling mortgage rates are starting to pull more renters into the home-buying market.

Ruling Makes Recovering Attorney Fees Easier
The California Supreme Court has issued a ruling making it easier for a commercial property owner to recover attorney fees after successfully defending a lawsuit over accessibility. In the case of Jankey v. Lee, the plaintiff brought a lawsuit under the federal Americans with Disability Act and under the California Disabled Persons Act.The plaintiff contended that a small sill at the front door prevents wheelchair access. The defendant, the operator of a small market in San Francisco, successfully defended by proving that it was not feasible to install a ramp. The defendant then sought his attorney fees (some $140,000) under Civil Code Section 55.

Under the ADA, a prevailing defendant must show that the lawsuit was “frivolous” in order to get attorney fees. Under Civil Code Section 55, the prevailing party is entitled to an award of reasonable attorney fees without having to prove that the lawsuit was frivolous. Some federal courts had held that the ADA preempts the California statute and that no attorney fees could be awarded.

The Supreme Court disagreed and held that, to the extent the defendant had to defend a claim made under Section 55, he could recover his fees without having to prove frivolity. Even if some of the attorney fees would be attributable to both the ADA and the Section 55 claims, the prevailing defendant could recover.