As San Francisco works to prevent tenant displacement, a big loophole in its Rent Ordinance remains: the ability of new owners (and speculators) to obtain a 7% Operating & Maintenance (O&M) rent increase solely by virtue of buying the property.
Why does San Francisco’s otherwise stringent rent law allow real estate speculators to pass on the cost of increased debt service to tenants? Tenant groups have pushed for an anti-speculation tax, and now must ensure this gift to speculators ends.
The Board of Supervisors has the power to close this loophole.
No Policy Rationale
There is no policy justification for increasing tenants’ rents based on a new owner’s increased debt service, as the purchase price is based on and reflects the rent-controlled rents. (In one recent O&M Rent Board case, the lender even required the new owner to file a petition with the Rent Board for approval of the O&M rent increase as a condition of the loan). The end result is buyers pay more to purchase the property and tenants pay higher rents that are forever built into their base rents.
In other words, San Francisco’s current law creates incentives for landlords to get expensive financing since they can get tenant rent increases to refinance or pay off the loan. In cities battling tenant displacement on multiple fronts, this makes no sense.
That’s why other rent control jurisdictions like Berkeley and Santa Monica exclude debt service “mortgage principal and interest payments” as an operating expense as a factor in allowing individual rent adjustments. Oakland eliminated debt service as a factor in 2014. Even San Jose (!) recently strengthened its rent ordinance to eliminate “Debt-pass through to renters” among other changes.
This is not a misprint. San Jose has a stronger O&M passthrough law than San Francisco. That should operate as a “case closed” for supervisors deciding whether to act.
Almost all of the O&M petitions filed with the Rent Board are based on increased debt service and property taxes as a result of a new purchase. The number of O&M petitions has increased from 20 petitions in FY2010-11 involving 113 units to 45 petitions in FY14-15 involving 510 units, and another 45 petitions involving 558 units filed between 7/1/15 and 2/29/16.
Even assuming a modest monthly rent of $1,500.00, a 7% rent increase is $105.00/mo. or $1,260.00/year for as long as the tenant remains in the unit. (Or $52,500/mo. or $630,000/year for 500 units) While low-income tenants can obtain hardship relief, the cumulative amounts of the increases are substantial.
Rent Ordinance Section 37.8(e)(4)(A) currently states: “In making such findings, the Administrative Law Judge shall take into consideration the following factors:
(A) Increases or decreases in operating and maintenance expenses, including, but not limited to, real estate taxes, sewer service charges, janitorial service, refuse removal, elevator service, security system, and debt service; provided however, when a unit is purchased after the effective date of this ordinance, and this purchase occurs within two (2) years of the date of the previous purchase, consideration shall not be given to that portion of increased debt service which has resulted from a selling price which exceeds the seller’s purchase price by more than the percentage increase in the “Consumer Price Index for All Urban Consumers for the San Francisco-Oakland Metropolitan Area, U.S. Department of Labor” between the date of previous purchase and the date of the current sale, plus the cost of capital improvements or rehabilitation work made or performed by the seller.”
While the Ordinance currently limits consideration of debt service increases to the CPI if the purchase occurs within two years of the previous purchase, owners simply wait two years to sell the property to avoid the restriction. While one could extend the two-year period to ten or fifteen years, eliminating debt service altogether, including the two-year limitation, is cleaner and makes more policy sense.
San Francisco’s current O&M law is an anachronism. It has no place in today’s city, and is among the factors putting vulnerable tenants at risk.
Let’s hope the Board of Supervisors urgently acts to close the O&M loophole.
Randy Shaw is Editor of Beyond Chron and Director of the Tenderloin Housing Clinic.Filed under: San Francisco News