Title
Introduction of Ordinance Amending the Alameda Municipal Code by Amending Article XV (Rent Control, Limitations on Evictions and Relocation Payments to Certain Displaced Tenants) to Adopt and Incorporate Provisions Concerning Capital Improvement Plans (CIP) for Rental Units in the City of Alameda. (Community Development 265) [Not heard on April 20, 2021]
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
On January 19, 2021, City Council introduced an ordinance to revise provisions of the City’s Capital Improvement Plans to permit, subject to certain limitations, landlords to “pass-through” to tenants the amortized cost of certain capital improvements. See Exhibit 1. Council also included that any pass-throughs could not be imposed until 12 months after Council rescinded the declaration of the local emergency due to the COVID-19 pandemic. On February 2, 2021, City Council, rather than holding the ordinance on a second reading, requested staff to revise the ordinance in order to cap permanently the amount of any pass-through to no more than 5% of a tenant’s rent and to prohibit a pass-through for any capital improvements where the landlord has received a rent increase for such improvements under the fair return on property process. Staff has made those revisions and discussed those revisions with landlord and tenant stakeholder groups. Staff is presenting the Ordinance, as revised, for Council’s consideration.
BACKGROUND
In April 2016, shortly after the City Council first adopted the City’s comprehensive rent stabilization ordinance and established the City’s first rent program, the City Council adopted a resolution (Resolution 15138) concerning a Capital Improvement Plan Policy. Under that Policy, if a landlord repaired or replaced certain “capital improvements” (as defined in the Policy), a landlord could impose a rent increase (in addition to any other authorized rent increases) to recover the cost of such improvements. The intent of the Policy was to improve the quality of the City’s rental housing stock, ensuring that landlords would receive a fair return on property, but not unreasonably displace tenants from their rental units either as a direct or indirect result of a landlord’s repairing or replacing Capital Improvements. To that end, routine maintenance and repairs were expressly not considered capital improvements. The Policy referenced procedures (and Municipal Code section references) in the ordinance that the Council adopted in March 2016.
Over time, City Council made a number of changes to the March 2016 ordinance and the rent program and in September 2019, revised and restated significantly the rent control ordinance. At that time, Council requested that staff re-visit the Capital Improvement Plan Policy, which had not been revised since its inception in 2016. Re-evaluation was warranted because, since the CIP Policy’s adoption in 2016, staff had received only a handful of applications for a Capital Improvement Plan and only two had been approved, suggesting that the Policy was not having one of its intended effects, i.e., to improve the City’s rental housing stock.
In August 2020, staff shared with landlord and tenant groups the proposed revisions to the Capital Improvement Plan policies. Based on comments received from those stakeholders, in January 2021, staff presented the City Council with proposed revisions to the Capital Improvement Plan Policy.
As presented to City Council in January 2021, the revisions to the Capital Improvement Plan program-which would now be embodied in an ordinance rather than in a resolution-would allow landlords to “pass-through” to tenants the amortized cost of major improvements (generally the same Capital Improvements that were in the existing Policy), assuming the cost of the improvements to be amortized was not less than $25,000 and the cost of the Improvements allocated to each rental unit was not less than $2500. As before, routine maintenance and repairs would not be within the ambit of that list.
Moreover, under the proposed Ordinance, the pass-through amount would be no greater than 5% of a tenant’s current rent and any annual general adjustments to rent (as provided in the September 2019 ordinance) would be calculated without regard to the pass-through amount. Further, any pass-through would be eliminated for new tenancies (vacancy decontrol) or at the end of the amortization period (generally 15 years).
The Ordinance provided tenants would be displaced temporarily from their rental units only if the work associated with the capital improvement work could not be accomplished with the tenant safely remaining in the unit; landlords would be required to make temporary relocation payments during that temporary displacement, payments that is not insignificant, e.g., $225/day for a hotel; $65 per day, per person for meals, etc., (although the tenant would still be obligated to pay rent during the first 60 days of displacement; a “rent differential” payment applies thereafter).
In addition, in the proposed Ordinance a tenant would know before the Program Administrator approved a Capital Improvement Plan what the amount of the pass-through would be and that pass-through amount would be “fixed”, i.e., the amount could not be increased even if the work ended up costing more than estimated. A tenant could also inform the landlord that the landlord must make a choice not to impose the pass-through to the tenant, make permanent relocation payments to the tenant, or withdraw the application.
The ordinance, as presented on January 19, would not affect the current eviction moratorium but, as proposed, would have permitted the pass-through to be imposed during the rent increase moratorium because the pass-through is not characterized as a rent increase.
The City Council voted to introduce the ordinance as proposed by City staff, adding that no approved pass-throughs could be imposed until 12 months after the local emergency due to the COVID-19 pandemic has been rescinded, similar to the way in which the City Council will permit “frozen” rent increases to be imposed following the rescission of the local emergency.
The Ordinance was placed on the City Council’s February 2, 2021 agenda for a second reading. The City Council expressed concern that the Ordinance, as introduced, would permit a series of Capital Improvement pass-throughs, each one of which would have a cap of 5% of a tenant’s rent but collectively could result in the total amount of pass-throughs exceeding 5%. The City Council did not hold the Ordinance for a second reading on February 2. Instead, the City Council, directed staff to revise the Ordinance further such that any and all pass-throughs (as to a particular tenant) could not exceed 5% of that tenant’s rent.
The City Council also wanted to make clear that if a landlord had received an upward adjustment of rent based on a fair return petition that included Capital Improvements as a component of that petition, the landlord could not also receive a pass-through for those Improvements through the Capital Improvement Plan process.
Moreover, as the Ordinance was introduced, nothing would prohibit a landlord from repairing or replacing Capital Improvements notwithstanding that the “useful life” for such Improvement(s) had not lapsed.
To address these issues, staff has further revised the Ordinance as discussed below.
DISCUSSION
As requested by the City Council, the revised Ordinance:
1. Caps the cumulative amount of the pass-through to no more than 5% of a tenant’s rent, which cap is permanent (as to that tenant) [Section 6-58.77 C 1 and D 1]
2. Prohibits any pass-through of the cost of Capital improvements if the landlord has received an upward adjustment of rent for that Capital Improvement through the fair return petition process (Section 6-58. C 2]
3. Permits the amortization period for a Capital Improvement to be amortized over a period of greater than 15 years in order to keep the pass-through amount at no more than 5% of a tenant’s rent in order to provide for the full cost recovery of the Capital Improvement. [Section 6-58.77 D 2]
4. Prohibits pass-throughs for Capital Improvements if an existing Capital Improvements to be repaired or replaced has not been fully amortized (15 years) unless a fire, flood or natural disaster would result in the need to repair or replace a Capital Improvement earlier, and then, only in the unlikely event the landlord did not receive insurance proceeds for such repairs or replacement. [Section 6-58.77 B]
5. No pass-through may be imposed until 12 months after the City Council rescinds the declaration of local emergency due to the COVID-19 pandemic; if a tenant subject to the pass-through were to vacate, the pass-through terminates. [Section 3 of the Ordinance.]
Responses from Landlord and Tenant Stakeholder Groups
As also requested by City Council, staff has provided these revisions to landlord and tenant stakeholder groups and asked for their comments. As of the time of this agenda report, staff has not received any comments from the landlord stakeholders other than restating their prior position that the threshold dollar amounts necessary to apply for Capital Improvement Plan ($25,000 for all improvements; $2500/unit) are too high.
The tenant stakeholders continue to oppose Capital Improvement Plan provisions that permit a “pass-through”. They would prefer (1) that a landlord recover the cost of capital improvements only as part of a fair return on property process and (2) that only the cost of capital improvements that address habitability issues be recovered. They recommended staff contact the City of Mountain View which adopted rent control at about the same time as Alameda to see what its experience has been with cost recovery of capital improvements.
In the January 19, 2021 agenda report, staff set forth its reasons against limiting a landlord’s recovery of the cost of capital improvements to the fair return petition process, including (1) the list of improvements that are typically recovered through the fair return petition process include many types of improvements, such as stoves, refrigerators, and doors that staff views as maintenance items, not capital improvements, (2) increases in rent resulting from the fair return petition process are added to the “base rent” and the base rent to which Annual General Adjustments are applied, resulting, over time, in higher rents to tenants, and (3) hearing officers, rather than Rent Program staff, determine fair return petitions which will increase the cost of the Rent Program, a cost is borne by landlords and tenants alike.
In an effort to respond more specifically to the tenant stakeholders’ concerns, staff has created a “CIP Explanation” document (Exhibit 2) that explains (1) how the cost of capital improvements would be handled through the maintenance of net operating income process, (2) how the proposed CIP Ordinance provisions, with a 5% pass-through cap, would interface with the current rent control ordinance and (3) how the proposed CIP Ordinance provisions would interface with the rent increases that have been frozen. The Explanation points out that all things being equal, a tenant would likely pay more per month if capital improvement costs were recovered through the maintenance net operating income (MNOI) process than through the pass-through process being recommended.
In addition, staff’s concern with limiting eligible capital improvements to only those improvements that are necessary for purposes of habitability is one of definition. Is replacing a 25 year old roof that is not leaking, or replacing the electrical and plumbing systems in a 30 year old building a capital improvement necessary for habitability purposes? Moreover, even assuming those two examples would be considered habitability related, limiting capital improvements for habitability would act as a disincentive for a landlord to make energy efficient improvements, such as solar, or make improvements for disability access purposes.
The tenant stakeholders have also expressed a concern that a corporate property owner would have the financial wherewithal to undertake the capital improvements described in the Ordinance more frequently than every 15 years and thereby, impose pass-throughs frequently. Staff has addressed that concern in the revised Ordinance to prohibit pass-throughs for any capital improvements that have not been fully amortized (15 years) and to cap the percentage increase for capital improvements to a cumulative amount not to exceed 5%.
Finally, staff has also reviewed the City of Mountain View’s capital improvement program and discussed the program with Mountain View staff. The Mountain View rent control program, unlike Alameda’s, was adopted by a charter amendment via the initiative process. In part the amendment created a Rental Housing Committee, separate from the City Council. The Rental Housing Committee adopts regulations to implement the provisions of the charter amendment.
Until March 2021, landlords in Mountain View could recover capital improvement costs only through the fair return/ MNOI process. In simple terms, the amortized cost of a range of improvements (much broader than those in either the current Policy or proposed in the Ordinance) is an expense that, along with other expenses, is deducted from a landlord’s income to yield a net operating income (NOI). If that NOI is less than the NOI in the base year, the landlord is entitled to a rent increase in order to “maintain” the net operating income. Mountain View advises that it processed between 15 and 20 applications in the first two years of the program but none in the last 18 months. (The Mountain View staff thought this drop off in the number of applications was due in large part because of a significant number of new tenancies that allows landlords to increase rents to market (vacancy decontrol) and thereby eliminating the need for landlords to obtain rent increases through the fair return petition process, which due to the amount of material required to be submitted can be daunting.)
In March 2021, the Rental Housing Committee adopted regulations that provide an alternative method for a landlord to recover the amortized cost of capital improvements. Those regulations, in many respects, track what is in the current Alameda Policy as well as in the proposed Ordinance with a couple of notable exceptions. First, while there is a 5% cap for any one pass-through, nothing precludes a landlord from filing a subsequent application and receiving an additional pass-through, again capped at 5%. As proposed, the Alameda ordinance would cap all pass-throughs, regardless of the number of applications, at 5%. Second, the amortized cost of the capital improvements is “shared” between the landlord and the tenant, depending on the number of units a landlord owns. For example, for landlords who (collectively) own five or fewer rental units, the landlord may recover 90% of the cost; for landlords with six to 20 rental units, the landlord may recover 75% of the cost; for landlords with more than 20 units, the landlord may recover only 50% of the cost. The proposed Alameda ordinance provides all landlords may recover 100% of the cost.
Because Mountain View’s new program has just been implemented, it is too early to tell whether many landlords will pursue this new avenue to recover their capital improvement costs or whether the shared cost will work as a disincentive to landlords, especially those with a large number of units. In order to provide an incentive to landlords to improve the City’s housing stock, staff continues to recommend that landlords be able to recover 100% of their capital improvement costs.
ALTERNATIVES
• Introduce the Ordinance revising the Capital Improvement Plan provisions.
• Provide direction to staff regarding any further revisions to the proposed Ordinance.
• Decline to move forward with the proposed Ordinance and direct staff to prepare an Ordinance that provides for the recovery of the cost of capital improvements only in the context of a fair return on property process and/or limits the type of capital improvements to only those necessary for habitability purposes.
• Decline to revise the existing Capital Improvement Plan Policy.
FINANCIAL IMPACT
There is no particular financial impact to the Rent Program fund by revising the Capital Improvement Plan provisions as the cost of administering the Rent Program, including these revisions, is included in the previously appropriated budget for this Program.
MUNICIPAL CODE/POLICY DOCUMENT/CROSS REFERENCE
This Ordinance will further the purpose of the Rent Control Ordinance, provides a method for landlords to recover the costs of certain capital improvements, and protects tenants from unreasonable displacement from their homes.
ENVIRONMENTAL REVIEW
Introduction (and eventual adoption) of this Ordinance is exempt under the California Environmental Quality Act (CEQA) under CEQA Guidelines section 15378 (b) (2) [not a project] and section 15061 [no significant impact].
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with this report.
RECOMMENDATION
Introduce an Ordinance revising provisions concerning Capital Improvement Plans for rental units in the City of Alameda.
CITY MANAGER RECOMMENDATION
This Ordinance is being brought back with revised provision for the Capital Improvement Plans for rental units based on City Council direction on February 2.
Respectfully submitted,
Lisa Maxwell, Interim Community Development Director
Michael Roush, Special Counsel
Financial Impact section reviewed by
Annie To, Finance Director
Exhibits:
1. January 19, 2021 Agenda Report
2. Explanation of CIP
cc: Eric Levitt, City Manager