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Get in the Driver's Seat
by Elizabeth Miller
In today’s economy and ever-changing San Francisco rental market, both tenants and landlords are feeling the pinch. Tenants may have lost their employment, savings and investments in the last months, but what some in this city forget is that the landlord may also have lost employment, savings and investments in the current economic downturn. The many costs of owning rental properties in this city have not gone down and for owners (now more than ever) raising rents is a matter of survival. Many owners have tenants who for one reason or another are paying below market rent. More often than not a tenant has been in the building for years and, even with the imposition of the legal yearly allowable increase, the rental rate is severely under the amount that could be obtained if the same unit was vacated and put on the market today, even in this tenuous market. Owners in San Francisco have other vehicles to raise rents; why not use them?
Besides the annual allowable amount that should be increased each year, there are several types of passthoughs that may legally be used to raise rents through the Rent Ordinance of San Francisco. Capital improvement, operating and maintenance, PG&E, bond measure and water bond passthroughs are
available and should be used to raise rents consistently.
Under San Francisco’s Rent Ordinance, building owners may pass through some or all of the capital improvement costs incurred on their properties for the last five years to their tenants. The landlord or an agent working on behalf of the landlord must submit a petition to the San Francisco Residential Rent Stabilization and Arbitration Board following the rules set forth by the Rent Ordinance. The Rent Ordinance itself seems long and daunting to many building owners and an appearance in front of the Rent Board, for others, is something to be avoided at all costs. But capital improvement passthoughs are a legal way to recoup a portion of the owner’s costs in San Francisco beyond the yearly small percentage given out every March. Capital improvement passthroughs can increase the monthly amount due, above and beyond the base rent paid by tenants. If an owner has improved the property by something as necessary as replacing the roof, partial or full costs may be passed through to those who have benefited from the improvement. These costs are mandatory for the upkeep of the building, but landlords should not shoulder the burden of payment alone.
The operating and maintenance petition is often the most misunderstood and underutilized petition to legally raise rent under the San Francisco Residential Rent Stabilization and Arbitration Board ordinance. While capital improvements, bond measures, annual increases and water bond passthroughs are easily applied at the time the annual increase notice is given, an operating and maintenance increase can be a difficult petition to obtain and is often overlooked. There are several reasons for an owner to contemplate filing an Operating and Maintenance petition, or to incur the cost of hiring a professional to prepare the petition on their behalf. The O&M is the only petition filed that results in an increase applied to base rent; meaning that besides the annual allowable increase, an O&M increase is the only other increase that lasts to the end of the tenancy and may be increased upon on future annual increases. Besides the obvious benefits of an increase to base rent, when obtained it also grants the single highest percentage to base rent: at its maximum, up to 7%.
On a base rent of $400 an O&M increase results in a $28 per month increase, which seems small and unworthy; however, that small monetary compensation is huge in comparison to the 2.2% annual increase allowed this year. When petitioning the San Francisco Rent Board for an O&M increase for several units, the amount earned can be substantial; it is money in the bank when the proper paperwork is filed and documentation making a comparison of two complete years of operating and maintenance costs is complete.
The PG&E passthrough is also a comparison of two complete years of costs paid by the owner on a property. Currently the comparison is between the last full calendar year (2008) and the base year of 2007. At first glance, the PG&E passthrough looks almost impossibly complicated; each tenant must be evaluated upon their move-in date as to their own base year, each base year used is processed as a separate petition, the costs must be computed by the number of rooms in each unit, and if the building has a fee-based laundry used by all or some of the tenants and not separately metered, the laundry’s energy costs must be deducted from the calculations. However, once the calculations are done in the first year, the concurrent years should first have an established base year for long-term tenants and second should not be as difficult, as there is data from the year or years before. Each year must be calculated along with the annual rent increase, passing through rising energy costs for 365 days only to those who benefit from the energy used.
Homeowners benefiting from their own energy use must pay their own increase in energy costs every year as incorporated into their PG&E bill; logically, when a tenant moved in decades ago, their energy costs have risen and their tenancy agreement has all or some of the utility costs incorporated into the base rent, then why shouldn’t the annual increase include PG&E? Energy costs are rising at more than just the 60% cost of inflation on which the annual allowed increase is based; and when incorporated into the rent, the tenant is not paying the actual increase in the cost of living for energy as the private homeowner does. Why should the building owner bear the brunt of higher costs with lower income?
Bond measure and water bond passthroughs, like the PG&E passthrough, are calculated at the same time as the annual rent increase, passing through allowed bond and water bond costs for 365 days only to those who benefit from use of the property or from owner-paid water bills. Unlike the PG&E passthrough, these increases are not subject to a Rent Board hearing. Simple calculations based on worksheets provided by the Rent Board yearly will yield these smaller passthroughs. Bond measure calculations are based on the net taxable value of a property as listed on the yearly property tax; the amount of the passthrough is dictated by the length of time the property has been owned by the current owner. Bond passthroughs are bankable and available from the 1998-1999 tax year to the present. Water bond calculations are based on the determined dollars listed on the left-hand side of the property water bill and are calculated per regulations as detailed on the Rent Board worksheets. While both the bond measure and water bond passthroughs may be small for each unit, they are monies due to landlords. While it seems sometimes to be more work than they are worth, they can and should be taken.
The San Francisco Rent Board has been labeled as anti-landlord by some owners for the many rules of the ordinance and anti-tenant by some residents because that same ordinance allows owners to pass through costs such as a new roof or the above-mentioned inflationary costs. Owners have been given the option to recoup a partial amount of inflationary improvement, maintenance and utility costs—and they should use it. Whether the property has a small or large number of units, landlords should take advantage of these opportunities. Today’s economy and rental market has made everyone, tenants and landlords alike, take stock in finding income where they can. The passthroughs listed above are a vehicle for increasing property income and are an option in a landlord’s quest for survival.
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. Elizabeth Miller has been in the rental housing industry for 11 years and is currently the petition specialist with Property Management Systems. She can be reached for a consultation on Rent Board issues at 415-661-3860.Copyright © 2009 by Black Point Press. All rights reserved.