SF Apartment : January 2016

FEATURE

Passing Through

by J.J. Panzer

Have you made an improvement to your property in the past five years? Maybe you painted the outside of your building, replaced your roof or completed a seismic retrofit. If so, San Francisco Rent Board capital improvement petitions allow you to legally increase your tenants’ rents to recoup some or all of the costs of these projects over time.

You can recoup between 50 and 100 percent of your investment over the last five years as documented by your records. For seismic projects mandated by the Soft Story Retrofit Ordinance, you can recoup 100 percent of the costs necessary to complete the project. There are a variety of different passthrough petitions that companies offer, but today we’re going to focus on capital improvement petitions. In this article we’ll talk about how to prepare and submit your petition yourself, as well as the advantages of using a service to prepare your documentation for you. Either way, it typically takes between six and eighteen months to prepare and submit your petition, sit for a hearing and have your petition certified.

DIY Rent Board Petitions
As you prepare to submit your petition to the rent board, begin by gathering all of your paperwork. This documentation should include your proposals, copies of cancelled checks (both the front and the back) and a full detailed rent roll. Next, download all of the rent board’s forms from sfrb.org/forms-center; compile and complete them carefully and submit the petition. After you submit your petition, you may prepare and serve rent increase notices.

Let’s walk through the process using an example. Mrs. Smith, an imaginary property owner, owns a ten-unit building. Let’s say she’s about to replace her roof. Because her building is over five units, she gets a 50 percent passthrough for this project. To ensure that her passthrough is approved more easily, she obtains two bids, one for $55,000 and another for $50,000—so she picks the lower bid. Mrs. Smith signs the contract and delivers a check for the deposit to the contractor. She obtains a copy of the cancelled deposit check (both front and back) to prove that the job was started and that the money was paid. Then, when the project is done, she inspects the job, pays the balance and gets a copy of that second cancelled check (again, both front and back).

Mrs. Smith downloads and fills out the rent board’s forms. In this particular circumstance, her allowable petition amount is $25,000: half of the overall project cost of $50,000. (Remember, owners of buildings with five-plus units can only receive rent increases for half of the cost of the work completed. Owners of buildings with four or fewer units are eligible to receive rent increases for 100 percent of the cost of the work.) Mrs. Smith uses cash, so she applies an imputed interest rate specified in the rent board’s forms. In this example, the allowable passthrough amount is $25,000 and the imputed interest rate is .00947. She multiplies that by 120 months (ten years, the life of the roof) to figure out the total passthrough allowed is $28,410.

To calculate the monthly rent increase per tenant, Mrs. Smith divides the total allowable petition amount, $28,410, by the number of units in the building in order to determine each unit’s share. $28,410 divided by ten units is $2,841 per unit, applied over the course of the ten-year life of the roof. Next, she must determine how many of the tenants are eligible to be included in the petition, based on their move-in date. Tenants are eligible for a capital improvement petition if they have resided in the building for at least six months prior to the commencement of construction (the date of which is determined by the first check written to begin the work).

In this simplified example, let’s say all of the tenants are eligible. The next step is to figure out the annual increase amount by dividing the unit share, $2,841, by the number of months over which the petition is to be amortized. For a roof the amortization period is ten years or 120 months; $2,841 divided by 120 months equals $23.68 per unit per month. Some exceptions and limitations apply. Read your forms carefully and don’t hesitate to call the rent board for help.

Before proceeding down the DIY route keep in mind that this process will probably take at least six to twelve months, depending on the rent board’s backlog of petitions. You must be highly organized in order to complete this process successfully. There’s no guarantee that your petition will be accepted even if you think you have properly filled out your forms and provided all of the necessary documentation. The process can be very confusing and stressful.

Outsourcing Your Petition Preparation
You can also have a property management firm handle your rent board passthrough for you. There are several benefits in choosing to have either your own property manager or a firm that specializes in passthroughs handle your petitions. A firm will deal with all the headaches and tedium on your behalf. SFAA member firms have extensive knowledge managing rent controlled properties in San Francisco, so they know how to work with the rent board to get your petition certified. Remember, the firm you choose to handle your petition doesn’t have to be your own property management company.

Begin the process by gathering your paperwork and sending it to your property management company or chosen petition service firm. If your property management company oversaw the project for you, make sure they have gathered the documentation properly and have it readily available to include in your petition. A quality firm will be happy to review the paperwork and give you their initial evaluation and a projection of how much your rent increases would be for a successfully completed petition. For example, the evaluations we produce at the Real Management Company (RMC) include a letter grade (A through F) that explains how well your documentation meets the rent board’s requirements. If you get anything but an A+ grade, we’ll give you a list of suggestions as to how to improve your documentation.

The petition service you choose should also tell you exactly how much your rent increases would be for an accepted petition, so that you can make an informed decision about whether it makes sense to proceed with the petition or not. If you decide you’d like the management company to go ahead and prepare your petition, you want to make sure the investment is worth it to you. We find that most petitions for projects less than $25,000 are too costly to prepare and don’t offer large enough rent increases for our clients to consider submitting them.

At RMC, we charge $1,500 for any capital improvement petition of under $150,000 in value, $2,500 for any capital improvement petition of over $150,000 in value, and a flat $3,000 fee for any operating and maintenance petition that covers the increase and cost for operating the building from one year to the next. We typically recommend that clients group smaller projects together into a single petition of over $25,000 in order to get a greater return and for the cost of preparing and submitting a petition to make financial sense.

Considering a Turnkey Solution
To make things easier for you, consider a turnkey rent board passthrough service. This kind of service will take you through the process from the very beginning to the very end, with some degree of guarantee that you will have a successful conclusion. This process begins with a detailed report that provides an initial evaluation and projection of rent increases. The firm you choose would then prepare the petition for you, as well as prepare all rent increases and serve them to your tenants, discuss the process with the tenants as needed to ensure a smooth conclusion, and represent you at the rent board’s hearing with the administrative law judge to answer any questions regarding the entire process. At RMC, if you’d like us to go through the entire process, including rent increases and representing you at the rent board, we charge 30 percent of the first year’s revenue from your successfully completed petition.

The firm you choose should offer you a 100 percent money-back guarantee if they can’t deliver an approved passthrough for you after two attempts. Without the guarantee, you could be risking many thousands of dollars and years of time that can’t be recovered otherwise.

In conclusion: be sure to have great records when choosing to recoup some or all of your capital improvement investments via passthrough rent increases, and ascertain whether a DIY petition or hiring an SFAA member firm specializing in rent board passthrough petitions is the best choice for you. If you have additional questions, you are welcome to contact us at [email protected].

J.J. Panzer is the president of the Real Management Company. He can be reached at 415-821-3167 or at [email protected].