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Permitted Rental Increases For Passthrough Of Capital Improvement Costs In San Francisco


PERMITTED RENTAL INCREASES FOR PASSTHROUGH OF CAPITAL IMPROVEMENT COSTS IN SAN FRANCISCO

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What Is a Capital Improvement?

            “Capital Improvements” are defined as those costs that add value or extend the life of the property or adapts it to new uses, “and which may be amortized over the useful life of the improvement of the building. Examples include new windows, a roof replacement and exterior painting.”[1] This excludes costs associated with routine repair and maintenance work, as well as those costs associated with legalizing an existing dwelling under the Planning Code. Thus, repair and maintenance work, such as replacing a broken window pane, patching a roof or clearing a clogged pipe are not considered Capital Improvements for purposes of pass through to the Tenants.

            Work related to seismic improvements may also be passed through but requires an additional certification process separate from that related to more generalized capital improvements.

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Can a Landlord Increase Rent To Cover Costs Of Capital Improvements Made On a Building?

            Yes. Although many buildings are subject to San Francisco rent controls, San Francisco Rent Ordinance, section 37.7, permits a landlord, following proper certification, to make certain, limited rental increases to alleviate the costs of these improvements to the building by passing them onto the tenants.

            In order to certify the costs, the following conditions must be met: the landlord has not already increased the rent for these costs, the landlord has not received insurance proceeds as compensation for the work, the improvements have been completed within 5 years of the certification, the building is not subject to RAP loans, and the costs are not associated with an abatement of a code violation that was issued and left unabated for 90 days.

How Much of the Costs Can Be Passed Through?

            The amount of costs that may be passed through to the Tenants is ultimately determined by an Administrative Law Judge that certifies the costs. Generally, however, it will depend on how many units are in the building. If the building has five or less units, up to 100% of the costs may be certified to pass through to the Tenants, but if the building has six or more, generally, only 50% is permitted. These amounts will also be limited to a specific amortization period specified by the Rent Ordinance, meaning that the costs are “passed through” in small increments over a period of years, not to exceed a particular percentage of the Tenant’s base rent at the time of certification as determined by the Board.

What Is the Certification Process So These Costs Can Be Passed Through To the Tenants?

            Before rent can be increased to cover the costs of capital improvements, Section 37.7 of the San Francisco Rent Ordinance requires that those increases first be certified via a hearing with an Administrative Law Judge appointed by the Rent Board. In order to request a hearing, a Landlord must file a petition with the Rent Board and provide the relevant documentation of the costs up for certification. A hearing with an Administrative Law Judge is then set within 45 days of the filing of the application. Following the hearing, the ALJ will make a written finding of fact, copies of which are mailed within 30 days of the hearing. The decision is final unless the Board vacates the decision on appeal.[2] 

            After those costs have been certified, proper notice of the increase must be given to the Tenant before the increase is imposed. The amount of notice depends on the total amount of rental increase being imposed when combined with any other possible increase permitted under the Rent Ordinance.

What If I Am A Tenant Facing These Costs?

            Tenants are entitled to proper notice of any rental increase. Under certain conditions, a Tenant may also be qualified to file a request to limit the amount of pass through increases imposed over the lifetime of the tenancy. In addition, a Tenant may not be able to afford the amount of costs being imposed and may be qualified to file a hardship application.

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Legal Counsel Can Help Exercise Your Rights

            If you are a Landlord needing assistance with the certification process of these pass through costs, or you are a Tenant that has been given notice of a rental increases and you are concerned about whether they have been properly certified and/or you are unable to afford them, please contact Bogaards Davis for a free consultation.

 



[1] SF Rent Board Information Sheet Topic No. 302: “Capital Improvement Petitions –General Information”

[2] Tenants are also permitted to file a hardship application at any time on grounds of financial hardship with respect to any rent increase based on certified costs of capital improvements. Those payments of the rent increase set forth in the hardship application may be stayed until a decision on the Hardship Application is made.