BPOA Article Library
Housing Policy • November 20, 2012
REGULATION 1282 – SHAM FAIR TREATMENT
Quietly last summer, without informing BPOA or asking our opinion, the Rent Board in its wisdom wrote, considered and then passed a new regulation that gives an extra rent increase to units in buildings that have had no vacancy increases since Costa-Hawkins became effective in 1999.
The new regulation says that owners of properties that have had no vacancy increases and have no exempt units other than one owner-occupied unit may petition the Board for a special increase of 6% of the lawful rent ceiling. The increase may be taken in two steps, 3% on or after January 1, 2013 and an additional 3% a year later.
What does this mean in practical terms? A typical situation faced by owners who have had no vacancies in a property since 1998 is that controlled rents are far, far below market. A two-bedroom that would rent, if vacant, for something like $1,800 a month, may have, for example, a controlled rent of $750. Or a one-bedroom that would rent for $1,200 a month may have a controlled rent of $500.
Using these examples, the two bedroom apartment would receive an extra increase of $45 and the one-bedroom would go up an extra $30. The new rents, $795 for the two-bedroom and $530 for the one-bedroom, will still be far below market.
Note that none of this will apply if there are Section 8 units at the property, or if units are exempt from rent control for any other reason other than one owner-occupied unit. A unit that is exempt under the new construction rule, for example, would make the property ineligible for this increase.
Is there any downside? The procedure – a petition and a hearing – is not without cost or risk. The regulation gives tenants the right to object to these increases if i) there are exempt units at the property, ii) the owner is charging more than the lawful rent ceiling, iii) the unit is "substantially deteriorated, does not currently provide adequate housing services, or fails to comply substantially with applicable state rental housing laws or local housing, building, health and safety codes", iv) the unit "has suffered a significant decrease in space or services since the tenant moved in", or v) if the landlord is in material breach of the rental agreement. Lots of room for argument there. A difficult tenant could easily make the process more trouble than the increase is worth.
How many units will this apply to? We don't know for sure, but the Board has estimated that the regulation might apply to a total of 400 units. If your building was identified by the Board as a candidate for this increase, you may have received a letter from the Board in early October describing the increase and inviting you to file a petition.
Why did the Rent Board do this? The explanatory material accompanying the new Regulation says that the regulation was passed because the annual adjustment computation – limited to 65% of inflation - denies property owners a fair return on investment. This is a significant admission. The Board has never previously admitted that partial indexing would deny property owners a fair return.
The explanation also says that property owners already have the opportunity to petition the Board for a fair return, but that the new regulation is needed because the existing fair return process is cumbersome. This is not true. It's not that the existing fair return process is cumbersome, it’s that the existing regulations don't allow a fair return. Regulation 1264, Maintenance of Net Operating Income (Fair Return), uses the 65% of inflation standard, not a full inflation standard. A partial inflation adjustment is not compatible with a fair return. No property owner has received a fair return increase by petition to the Board in the past two decades. The fair return regulation is a sham.
Whether Regulation 1282 is a sham is a matter of judgment. If it is not, it is pretty darn close. A six percent increase over two years for apartments which are 50% or more below market is an insult. It is at best a mere token considering the huge gap between rent controlled and market rents. The new regulation narrows that gap a bit – possibly enough to counter a constitutional argument that the Regulations don't allow a fair return on investment. That in the end may be the real reason the Board passed this regulation – to preempt a constitutional challenge based on fair return.
[Michael St. John is the principal consultant at St. John & Associates, a property management consulting firm specializing in rent control. He can be reached at 707-937-3711, by mail at 2115 West Street, Berkeley, CA 94702, or by email at email@example.com.]