SF Apartment : July 2017

FEATURE

Rebate Your Retrofit

by Robert Collins

In 1989, the Bay Area experienced the Loma Prieta earthquake, a magnitude 6.9 quake that resulted in 63 deaths, 3,757 injuries, and significant damage or destruction to numerous buildings. With the hindsight of this earthquake, and with the full knowledge that another earthquake will occur, San Francisco passed the Soft Story Seismic Retrofit Ordinance in 2013. The resulting Mandatory Soft Story Program (MSSP) requires owners to comply with Chapter 34B of the Building Code, which mandates the seismic strengthening of about 5,000 older, wood-framed, multi-family buildings that received permits for construction before January 1, 1978; have five or more residential units; and have a first story that contains large open areas for parking or commercial space. These buildings are generally highly vulnerable to damage in an earthquake.

While soft-story buildings are found in every neighborhood in San Francisco, the Department of Building Inspection reports that there are more such buildings in the Marina, Mission, Western Addition, North Beach and Richmond neighborhoods.

Some major benefits of the MSSP are increased safety for tenants and long-term protection for properties. As a city, we all benefit in one way or another from safe buildings, and that’s why the Rent Ordinance allows property owners to pass through 100% of the cost of seismic retrofit work to the tenants by using the Rent Board’s capital improvement petition process. Below is information to make the capital improvement petition process at the Rent Board as easy as possible.

By The Numbers

Let’s say you have a building with six residential units and no commercial units, and you spent $100,000 on a seismic retrofit, doing only work that was required by the MSSP. You would be entitled to pass through 100% of the cost of the work to the tenants (with the applicable imputed interest rate, currently 2.2%) over an amortization period of 20 years, resulting in a monthly passthrough of $85.83 per unit. Larger buildings would have smaller monthly passthroughs per unit because the costs are divided by the number of units in the building.

There is an annual limit on the amount of the capital improvement cost that can be passed through to a tenant. For seismic work required by law, the passthrough cannot exceed 10 percent of the tenant’s base rent in any given year. Thus, sometimes a passthrough must be phased in over several years. For example, if your tenant’s rent is $750.00 per month and the certified passthrough amount is $85.83 per month, the initial passthrough would be limited to $75.00 per month. Twelve months later, the remainder of the passthrough ($10.83) could be imposed.

Keep Clear Records

To date, just over 300 capital improvement petitions have been filed with the Rent Board based on work required to conform the building to the MSSP. Landlords are taking advantage of this opportunity by doing other work to the building alongside the mandated seismic retrofit, including foundation work or adding accessory dwelling units through the ADU program. Property owners are wise to get the most from their investments by capitalizing on the convenience of combining construction projects. However, this can add complexity to the petitions, so owners should take extra care in separating costs, receipts and bids for the different kind of work that is being performed. For more ideas on how you can increase the value of your property during a seismic retrofit, see page 32.

Because the Rent Ordinance contains more favorable terms for passthroughs based on mandatory seismic retrofit work than for other types of capital improvement work, the cost for the work under the MSSP needs to be clearly separated from the cost of other capital improvements. A separate petition is required for certification of costs attributable to capital improvement work that was not required under the MSSP. Keeping the invoices, contracts and payments for the MSSP capital improvement separate from non-seismic non-mandatory work and obtaining competitive bids for each type of work will help you avoid unnecessary delays at the Rent Board.

Due to the large increase in soft-story seismic retrofit cases filed at the Rent Board, it is currently taking an average of six to seven months to get a hearing and decision on each retrofit case. The law allows you to give your tenants written notice of the rent increase for the capital improvement passthrough immediately after the petition is filed to minimize the impact of any delay in having your petition decided. Although the tenants are not required to pay the passthrough until a decision is issued by the Rent Board, the passthrough will be retroactive to the effective date in the notice of rent increase, and the decision will order the tenant to pay all the retroactive amounts owed within 15 days of the decision or at the time of the next rental payment, whichever is later.

The majority of MSSP work throughout the city is still in front of us. Tier 3 buildings have a permit application deadline of September 15, 2017 and a completion date of September 15, 2019. This tier also contains over 3,000 buildings, the largest number of the properties subject to the MSSP. If your building falls into this category, you might want to get the work done sooner rather than later to avoid competing for contractors and other possible delays.

Temporary Reduction of Services

In 2014, the Rent Ordinance was amended to allow a landlord to temporarily take away specified housing services from a tenancy, including parking and storage, without a “just cause” reason, to perform the mandatory soft-story seismic retrofit work. However, it is important to know that tenants who temporarily lose parking, storage or other enumerated housing services during the retrofit project are entitled to either compensation or a substitute housing service as provided in San Francisco Administrative Code Chapter 65A.

Chapter 65A requires a landlord to provide their tenants in each affected unit with a 30-day written notice to temporarily sever the specified housing service, and then sets forth the calculation and distribution of landlord compensation payments to tenants of affected units. Alternatively, under Chapter 65A, a landlord can provide a comparable housing service that is reasonably near the affected unit as an alternative to paying compensation.

Both landlords and tenants are permitted to file a petition with the Rent Board to determine the amount of compensation or sufficiency of the substitute housing service under Chapter 65A. But please remember that Chapter 65A only authorizes the severance of a service on a temporary basis, and the remedies only apply while the Chapter 34B work is being done.

Communication Is Key

Communication may be the key to success while doing this work. Clear communication with contractors and engineers will ensure that everyone is on the same page and that everyone understands the overall scope of the work that will be performed. Understanding that the seismic work required by law must be petitioned separately from other non-seismic capital improvement work is fundamental. It will allow you to keep the costs of foundation work and the addition of any ADUs separate for many purposes, including for the petition down the road. While you can’t pass through the cost of adding an ADU to the existing tenants like you can the foundation work, in many instances, the added rent from a new unit may make it a good investment overall. Keeping costs separate also makes the petition process itself faster and simpler.

Likewise, good communication with your tenants as to what to expect during this process tends to produce cooperative tenants. If you need to temporarily take away certain housing services to do the work, such as parking or storage, communicate this early on, and try to work out the details of compensation or substitute services ahead of time. The last thing you want is to have to resolve conflicts while doing the work. Lastly, consult with your attorney before removing any services if you suspect that there will be disagreement or if there are other issues involved, such as a disability issue. 

For more information on the passthrough process, visit the San Francisco Rent Board’s website, www.sfrb.org , or call the counseling line, (415) 252-4602 Monday through Friday, 9:00 a.m. – 12:00 p.m. and 1:00 p.m. – 4:00 p.m. You can also visit the Rent Board office at 25 Van Ness Avenue, #320, Monday through Friday, except holidays, 8:00 a.m. – 5:00 p.m.

Robert Collins is the Executive Director of the San Francisco Rent Board.