The Board of Supervisors recently amended the Rent Ordinance section that allows property owners to pass through increased operating and maintenance expenses to tenants. With the amendment, owners cannot pass through to tenants increased debt servicing costs or increased real estate taxes due to a change in ownership. Any new operating and maintenance passthroughs related to increased management expenses are also subject to a new standard of review. The amendment is now law, and with a few exceptions, applies to any operating and maintenance passthrough.
Prior to the amendment property owners could pass through increases in operating and maintenance expenses caused by increased real estate taxes or debt servicing. For example, if property taxes increased over a two-year period, those increases could be passed through to the tenant as an increased operating and maintenance expense. The increase could be no greater than seven percent of base rent and could only take effect after the owner successfully petitioned the rent board for the increase – i.e. proved to a neutral administrative law judge that there was an increase in operating and maintenance expenses.
Believing that owners were abusing this passthrough, the Board of Supervisors, led by Sandra Lee Fewer, amended the rent ordinance to not allow property owners to claim increased debt servicing or real estate taxes as an increase in operating or maintenance expenses.
Now, no debt can be passed through to tenants. Thus, an owner who borrows to improve a building is left to foot the entire bill without the option to petition for a modest increase. An owner who inherits a building and wants to improve that building for their tenants, but can only do so with financing, is now limited.
In passing the amendment, the Board superseded several portions Rule and Regulation 6.10, which required that an increase in debt servicing related to existing financing, would only be considered as a justification for a rent increase if the borrowed funds were re-invested in the building for needed repairs and maintenance, or capital improvements. The Rule and Regulation also limited debt or taxes that could have been passed through to the tenant resulting from a change of ownership, by only allowing one increase per unit, excepting extraordinary circumstances.
The second significant impact of the amendment is that increased taxes because of a change in ownership can no longer be passed to a tenant. This is significant for small property owners who buy a property with tenants or those who inherit a property with tenants and have the property value reassessed.
Finally, the Board amended the standard of review for operating and maintenance passthroughs related to management expenses. Now, only expenses that are “reasonable and necessary” for the day-to-day management of the building may be passed to the tenant. Factors considered in determining whether a management expense is reasonable and necessary are the day-to-day management of the building, the level of previous management services required for the building, the reasonable costs of the service in an arms-length-transaction, whether tenants have objected that the cost and quality of the service are not in keeping with the socioeconomic status of the building’s existing tenants, and other “extraordinary circumstances.”
An owner can still pass through increased costs such as sewer service charges, refuse removal, security systems, license fees, insurance, routine maintenance and repairs, and water. The Rent Board will still consider previous rent increases for the unit as compared to rents for comparable units, any other rent increases related to capital improvement passthroughs, energy conservation improvements, and renewable energy improvements, failures to perform ordinary repairs, replacement, and maintenance in compliance with state and local law, and any other relevant factors.