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) and Maritime Residential Tenancies for Rental Units in the City of Alameda. (City Attorney 20761840) [Not heard on June 21, 2022]
Body
To: Honorable Mayor and Members of the Alameda City Council
EXECUTIVE SUMMARY
On April 21, 2021, City Council considered an ordinance to revise the City’s Capital Improvement Plan (CIP) Policy (adopted in 2016) to permit, subject to certain limitations, landlords to “pass through” to tenants the amortized costs of certain capital improvements. The limitations included a permanent cap of 5% (of a tenant’s monthly rent) as to the amount of any pass through. City Council did not introduce the ordinance but directed staff to review the matter further. Staff now recommends that the attached Ordinance be introduced which has the same provisions that were presented to City Council on April 19, 2021 with the following revisions: (1) new definitions, e.g., floating homes, rental units; (2) reducing the threshold amounts for capital improvements to $7,500 overall and $750/unit; (3) capping at 8% the percentage increase of a tenant’s Maximum Allowable Rent when calculating allowable Annual General Adjustment (AGA) and a pass through amount; (4) providing for a tenant hardship concerning a pass through; (5) adding capital improvements at marinas as a category of allowable capital improvements and (6) adding provisions concerning the application of the Rent Control Ordinance to floating homes and vessels/boats for which there are maritime residential tenancies.
BACKGROUND
When the Alameda City Council first adopted a rent control ordinance in 2016, it also adopted a policy concerning capital improvements. That policy allows a landlord to recover its costs for capital improvements (as defined in the policy) in addition to rent increases permitted under the ordinance. The purpose of the policy is to encourage landlords to maintain the city’s housing stock yet not unreasonably impact tenants. Under limited circumstances, the policy permits a tenant to be relocated temporarily while the capital improvement work is completed. Under even more limited circumstances, the policy permits a tenancy to be terminated as a result of capital improvement work. Under either of these circumstances, a landlord is required to pay the tenant relocation payments.
For a variety of reasons, landlords have submitted very few capital improvement plan (CIP) applications. In the last six years, the Rent Program has received only ten applications. Of those, only three were approved and, of those three, only one resulted in a permanent relocation. Landlords inform City of Alameda (City) staff that the reason very few applications have been submitted is that the criteria for the applications are too stringent: the cost of the capital improvements must be greater than 8 times the monthly rent times the number of units. For example, if a landlord has a two-unit building with an average rent of $2,000/month, the landlord must demonstrate that the cost of the capital improvements would be at least $32,000 (8 x 2 x $2000 = $32,000). Landlords and their property managers tell staff that many, if not most, of the type of capital improvements that are identified in the policy, e.g., a new roof on a four-plex, do not reach that threshold, unless several different capital improvements were undertaken at one time
Although the current CIP Policy allows landlords to increase rent, tenants have objected to revising the Policy that would permit a “pass through” (rather than a rent increase) because of concerns that (a) “pass throughs”, when combined with allowable rent increases, could inadvertently force tenants from their homes; (b) landlords’ business plans and the rents they charge should take into account the need to create a “reserve account” for capital improvements; and (c) landlords will make unnecessary capital improvements for increased rents as a tool of displacement. As to the latter, the incentive for such an abuse of process may exist given that a landlord would be permitted to increase rent for a new tenant under principles of vacancy decontrol. Tenants have indicated the CIP process should be permitted only for improvements related to habitability and that any costs associated with capital improvements be recovered only through a fair return on property petition. In such a petition, in order to get a rent increase, a landlord must prove that the recovery of the cost of improvements (amortized) plus other operating expenses necessitates a rent increase under the maintenance of net operating income (MNOI) principles.
In September 2019, in response to these (and other) concerns, when City Council adopted a revised rent control ordinance, it directed city staff to meet with landlords and tenants concerning the CIP policy, and return to City Council with any recommended changes.
City staff did so and in January 2021 City staff presented to the City Council an ordinance to revise the policy. In part, the ordinance would: (1) allow a landlord to “pass through” the amortized cost of certain capital improvements with a threshold of $25,000 (for the improvements overall) and $2,500 for each unit; (2) cap the pass through at 5% of the tenant’s current rent; (3) limit the situations where a tenant could be displaced either temporarily or permanently; (4) inform tenants of what the amount of the pass through would be before the work started and that amount would be fixed, regardless of the actual cost; and (5) provide an opportunity for a tenant to inform the landlord that the landlord must either withdraw the application, make a permanent relocation payment to the tenant or not impose the pass through on that tenant. The ordinance, however, would have permitted the pass through to be imposed despite the rent increase freeze that was then in effect because the pass through would not be considered a rent increase.
At its January 19, 2021 meeting, City Council (on a split vote) introduced the ordinance as presented by staff but included that no pass through could be implemented until 12 months after City Council rescinded the declaration of local emergency caused by the COVID-19 pandemic. On February 2, 2021, however, rather than adopting the ordinance, Council requested the ordinance be revised to cap permanently the amount of any pass through amounts to no more than 5% of the tenant’s rent and to prohibit a pass through for any capital improvements where the landlord has received a rent increase for such improvements through a MNOI process.
On April 21, 2021, City staff returned the ordinance to City Council with these revisions. Opposition to the ordinance from both landlords and tenants remained. Landlords continued to oppose the ordinance on grounds that the threshold amounts--$25,000 and $2,500-remained too high. Tenants continued to oppose the ordinance for the same reasons as before. City staff explained that the threshold amounts were being recommended so that only those improvements that were unquestionably outside of routine maintenance and repair were subject to the ordinance and that approving only improvements for habitability would not encourage landlords to make certain improvements, such as water or energy conservation improvements that benefit tenants (who typically pay for both) as well as landlords.
After considerable discussion, City Council opted not to introduce the revised ordinance but directed staff to discuss the matter further with tenant and landlord advocacy groups and return the item to City Council for further consideration in the Spring of 2022. City Council also directed staff to review the capital improvement provisions of other cities to see if those provisions would be useful in revising Alameda’s CIP ordinance.
At the City Council’s special meeting on April 28, 2022, in context of extending the City’s various rent control ordinances to floating homes and maritime residential tenancies, City Council requested that capital improvements to marinas be included in the category of capital improvements under the Capital Improvement Plan Ordinance. In light of that direction, staff is recommending that other provisions concerning floating homes and vessels/boat that have maritime residential tenancies be incorporated into the City’s Rent Control Ordinance.
Discussions with the Tenant Advocacy Group
As mentioned above, previously tenant advocacy groups identified a number of issues that they had with the proposed Ordinance. These issues are identified below along with staff’s short answers to those issues. A more detailed response to each of these questions is set forth in Exhibit 1.
1. Would there be a cap on the pass through amount? Yes, but the cumulative pass through amount as to any tenant could not exceed 5% of the tenant’s Maximum Allowable Rent at the time the application is filed.
2. Even if there were a cap, what would prevent a landlord from seeking additional pass throughs? As stated above, the pass through amount, on a cumulative basis, is capped at 5% of a tenant’s Maximum Allowable Rent. In addition, if a landlord has received a pass through for a particular capital improvement, the landlord may not recover any additional pass through for the same improvement until 15 years has lapsed, absent unusual circumstances, e.g., fire, earthquake, etc.
3. What limitations are there concerning temporary or permanent relocation arising out of capital improvement work? Tenants will be informed about any proposed capital improvement work and, if the landlord indicates that a tenant must be temporarily relocated during the work, the tenant may contest that. A landlord may permanently terminate a tenancy arising out of capital improvement work only in the unusual situation where, after the tenant informs the landlord that the tenant is unwilling or unable to pay the pass through amount, the landlord decides to proceed with the work.
4. Will tenants have any say about whether the work is capital improvement work, as opposed to routine maintenance and repairs, and the amount of the pass through? Yes, before any Capital Improvement Plan is approved, a tenant may contest whether the work is capital improvement work, as well as to contest whether the capital improvement has run its useful life and the amount of the pass through.
5. Won’t any pass through simply add to a tenant’s financial burden? The Ordinance provides a pass through could not be imposed for one year after the City Council declares the local emergency over. Staff is also recommending that there be a cap of 8% of a tenant’s Maximum Allowable Rent when the permitted AGA is added to any pass through amount and, as to pass throughs, the ordinance (and Regulation) provide a tenant financial hardship process based on a financial “means” test, e.g. Social Security Supplemental Security Income (SSI).
6. Why can’t the list of capital improvements be limited to habitability issues? Many of the capital improvements on the list, such as plumbing and electrical, clearly relate to habitability, but some, such as water or energy conservation improvements, do not. Properties that a building official finds as “non-habitable” are the exception and would like not qualify for a pass through because of a landlord’s unreasonable delay in addressing these issues. Moreover, the Ordinance is intended to help improve the City’s housing stock and water and energy conservation improvements benefit tenants as they typically pay for those services.
7. Why not require a landlord to recover the amortized cost of capital improvements only through a fair return on property process? If only a fair return on property process were available to landlords to recover the cost of capital improvements, the list of such improvements would need to expand to include such items as windows, doors and appliances. Moreover, the fair return on property process necessarily involves a more complex administrative hearing process that will increase the cost of administering the Rent Program, 50% of which tenants currently pay.
Notwithstanding that the Ordinance presented in April 2021 would cap the pass through, on a cumulative basis, to 5% of a tenant’s Maximum Allowable Rent, tenants point out that because (a) the City Council has rescinded the moratorium on allowable rent increases, thereby permitting landlords to raise rents, as of June 2022, by 2.7%, and (b) the Allowable General Adjustment come September 2022 will be 3.5%, a landlord could, if City Council rescinds the declaration of local emergency and the landlord secures a 5% pass through, impose a rent increase of 2.7% in June 2022, a 3.5% rent increase in June 2023, and a 5% pass through that, cumulatively and over a 12 month period, would increase a tenant’s current “rent” by 11.2%. Tenants submit that, for many tenants, that amount of an increase may not be sustainable and could lead to displacement.
Under the current Rent Control Ordinance, generally a tenant’s Maximum Allowable Rent may not be increased by more than 5% even if the AGA, based on the percentage change in the CPI, were greater than 5%. Although a landlord’s use of any “banked” rent increases is currently prohibited, once the Council rescinds that prohibition, a landlord may use up to 3% of any banked increase in any one year, although banking may not be used two years in a row and only three times over the life of any one tenancy. With banking, however, a landlord could increase rent by as much as 8% assuming the AGA were as high as 5%. (As noted, the AGA for September 2022 will be 3.5%.)
In light of that, tenants have requested that a similar 5% cap be placed on all costs that a tenant pays for housing. That is, if an AGA is 3% and there has been an approved pass through amount of 5%, tenants request that the overall percentage that a tenant would be required to pay would only be 5% of the tenant’s maximum allowable rent, rather than 8%. (In that scenario, either the 3% rent increase would be banked or 3% of the pass through would be deferred to a subsequent year.)
As indicated on the attached chart listing nine cities (eight in the Bay Area) that provide for the recovery of improvement costs (Exhibit 2), many cities provide for a maximum percentage increase when the cost of capital improvements are part of the mix. For example, Hayward provides for a 10% maximum including the AGA; East Palo Alto limits the rent increase for capital improvements to 10% plus the AGA; Oakland limits the increase for capital improvements to 3 X the AGA.
Accordingly, consistent with what other cities have done, and consistent with what City Council has already approved as a “cap” in context of AGA plus banking, staff recommends that the Ordinance continue to provide that the 5% cumulative cap for capital improvements remain, that the AGA remain capped at 5%, but the proposed Ordinance be revised to provide that the cumulative percentage that a tenant pays for rent and a pass through not exceed 8%. If the combination of AGA and pass through were in excess of 8%, a landlord would need either to bank all or a portion of the AGA (since the AGA cannon exceed 5%) or defer a portion of the pass through to a subsequent year.
Tenants have also requested that there be a “hardship” exception for certain tenants whose household incomes are limited, e.g., all adults in the household are low income recipients of means tested public assistance, such as Social Security Supplemental Security Income (SSI) or (1) the monthly rent is greater than 33% of the tenant’s monthly gross household income; (2) a tenant’s assets do not exceed a certain amount, and (3) the tenant’s monthly gross income is less than a certain amount depending on the number of persons in the household. (The Rent Program in San Francisco and other jurisdictions have provided for this type of tenant hardship for many years without a legal challenge.)
Based on the documentation submitted by the tenant(s), and established criteria as set forth in a Rent Program Regulation, Program staff would make the initial determination whether the hardship should be granted, subject to either the landlord’s or the tenant’s appeal to a hearing officer. If the hardship provisions were adopted and a tenant granted a hardship, landlords would not receive the pass through until the tenant was no longer eligible for the hardship or, more likely, the pass through would be absorbed with a rent increase following vacancy decontrol. In addition, if the hardship provisions were adopted, it will likely result in additional costs to administer the Rent Program. Nevertheless, in light of ongoing financial impacts to tenants arising out of the pandemic, staff is recommending that tenant hardship provisions be included concerning any capital improvement pass throughs.
Discussions with the Landlords’ Advocacy Group.
As mentioned above, the landlords primary concern with the existing CIP Policy and the proposed Ordinance is that the threshold amounts are too high. They request that there should be no threshold amount. If the improvement to be undertaken fits within the categories set forth in the Ordinance, then that should be sufficient. Staff continues to recommend that there should be a threshold amount but in recognition that landlords with a smaller number of units might not incur the level of costs that a landlord with multiple units might incur, staff recommends that the overall amount should be at least $7,500 and each unit should benefit by at least $750.
Under the existing Policy as well as in the proposed Ordinance, routine maintenance and repairs are not considered capital improvements. Staff is concerned that if the threshold amount is eliminated or reduced below $7,500, landlords could request pass throughs for “improvements” that actually are routine maintenance or repair. By requiring a substantial investment in the capital work, it is more likely than not the work will truly be a capital improvement. Even if, however, the $7500/$750 thresholds are met, the Rent Program staff retains the authority in the first instance to determine if the proposed work is a capital improvement as defined in the Ordinance. Either a landlord or a tenant may appeal that determination.
Landlords also requested that a new category of improvements be added to the list to address “electrification” of appliances. The City is entering Phase II of its electrification plan, as a means of meeting goals in Alameda’s Climate Action Plan (or CAP). In this second phase, staff is developing regulations that would require, under certain circumstances, electrification of existing buildings. The regulations are designed to take in to account “cost-effective” options for electrification, including the use of rebates and incentives. Nevertheless, such a regulation could impose some costs on landlords when, for example, they apply for permits to remodel a kitchen (e.g., replacement of gas-powered with electric appliances). Although not yet adopted, it is anticipated that some form of electrification will be required at some point in the near future, if not voluntarily installed by a landlord for cost and/or environmental reasons. Accordingly, staff Is not recommending at this time that “electrification” as described above be included as a capital improvement. Once regulations are in place, City Council may wish to revisit this issue.
Review of Capital Improvement Plan Ordinances/Policies in Other Jurisdictions.
As stated earlier, attached is a chart listing nine cities (eight in the Bay Area) that provide for the recovery of capital improvement costs. (Exhibit 2). There is great variety in the approaches these cities take. Most, for example, permit the landlord to recover 100% of the costs, but others, such as Mountain View, provide for a sliding scale of cost recovery (90% for 1 to 5 units, 75% for 6 to 20 units, 50% for more than 20 units).
The types of improvements for which costs may be recovered vary widely as well. All appear to allow for improvements for “health and safety” or Code compliance reasons. Others expressly allow recovery for improvements relative to seismic improvements or for energy efficiency. San Jose provides for the recovery of improvements that include ADA accessibility, fire prevention and security. Oakland broadly defines capital improvements.
As discussed above, most all provide for a cap on any rent increase or pass through amounts but, again, the percentage varies widely. Some cities, such as East Palo Alto (10%) or Culver City (3%), have a maximum percentage but on a yearly basis. Others, such as Mountain View (5%), San Francisco (10%) or Richmond (15%), place a cap on the overall percentage.
City Council asked staff to review in particular Mountain View’s rent control ordinance. The Mountain View rent control program, unlike Alameda’s, was adopted by a charter amendment via the initiative process. In part, the charter creates a Rental Housing Committee, separate from the City Council that oversees the program and issues regulations to implement the program. As to a landlord’s authority to recover capital improvement costs, the Mountain View program has two methods. One method permits recovery of the costs through the MNOI process. The other method-adopted in March 2021-largely track what is in the current Alameda Capital Improvement Plan policy as well as in the proposed Ordinance with one notable exception
First, while there is a 5% cap for any one pass through, nothing in the Mountain View regulation precludes a landlord from filing subsequent applications (which, if granted, would also have a 5% cap). As revised, the Alameda ordinance proposes to cap all pass throughs at 5%, regardless of the number of applications granted and to cap any combination of AGA increases and pass throughs at 8%. The second exception is that the amortized cost of the capital improvements is “shared” between the landlord and the tenant, depending on the number of units the landlord owns. For example, if a landlord owns five or fewer units, the landlord may recover only 90% of the amortized cost. If a landlord owns six to 20 units, the landlord may recover only 75% of the cost. For more than 20 units, the recovery is limited to 50%. The proposed Ordinance would permit-as now-the landlord to recover 100% of the cost. City staff is advised that since March 2021, Mountain View has received no applications concerning capital improvements under either of the two methods.
Revisions to the Rent Ordinance Arising Out of the Application of the Ordinance to Floating Homes and Vessels/Boats that Have Marina Residential Tenancies
Recently, City Council adopted Ordinances (one urgent, one not urgent) that results in the Rent Ordinance applying, for the most part, to floating homes and vessels/boats that have maritime residential tenancies. Excluded from those Ordinances, however, were the temporary relocation payment and capital improvement plan provisions of the Rent Ordinance. Also, those Ordinances prohibited all rent increases for those floating homes and vessels/boats. In light that these tenancies exist at marinas, in order to treat these landlords the same as other landlords in the City, City Council directed staff to include capital improvements to marinas which have these types of tenancies as a category of capital improvements for which a landlord could receive a pass through and to permit marina landlords to increase rents as any other landlord of a regulated rental unit, i.e. by the Annual General adjustment as of June 1, 2022. The draft ordinance (a) includes marina improvements as a capital improvement category, (b) makes clear that marina landlords may also increase rents by the AGA, and (c) eliminates the exclusion of temporary relocation payments and capital improvements for maritime residential tenancies.
Summary
To summarize the above discussion, attached are the following:
1. Those portions of the rent control ordinance that would be revised. The most substantive portion is in Section 6.58.77. These revisions are the generally the same that were presented to City Council on April 19, 2021 with the following changes: (1) new definitions, e.g., floating homes, rental units; (2) reducing the threshold amounts for capital improvements to $7,500 overall and $750/unit; (3) capping at 8% the percentage increase of a tenant’s Maximum Allowable Rent when calculating allowable AGA and pass through amount; (4) providing for a tenant hardship concerning a pass through; and (5) adding capital improvements at marinas as a category of allowable capital improvements and (6) permitting marina landlords to increase rents by the AGA.
2. A draft Regulation (Exhibit 3) to implement the capital improvement plan provision of the Ordinance. The Community Development Director has issued numerous regulations to implement the Rent Control Ordinance. Although the draft Regulation has some of the same provisions as does the Ordinance, it clarifies and explains how the Ordinance will work in practice and, in particular, sets forth the procedures concerning tenants’ applying for a financial hardship as to the pass through. City staff felt it would be helpful to provide the Regulation with this agenda report, notwithstanding that the City Council is not being asked to adopt it, because it will answer questions or concerns about how the Ordinance will work practically. Staff has provided this draft Regulation to the landlord and tenant stakeholder groups. A separate Regulation will be prepared concerning floating homes and vessels/boats for which there is maritime residential tenancy if Council adopts the attached Ordinance and provides direction concerning these two items.
ALTERNATIVES
City Council may do one or more of the following alternatives:
• Introduce the Ordinance revising the Capital Improvement Plan and maritime residential tenancy provisions as recommended by staff;
• Introduce the Ordinance revising the Capital Improvement Plan and maritime residential tenancy provisions as recommended by staff but deleting the tenant hardship provisions and/or including electrification as a category of capital improvements
• Decline to introduce the Ordinance revising the Capital Improvement Plan and/or maritime residential tenancy provisions and provide further direction to staff regarding any further revisions to the proposed Ordinance;
• Decline to move forward and leave the existing Capital Improvement Plan Policy and the uncodified ordinances concerning maritime residential tenancies in place; or
• Direct staff to prepare an ordinance that provides for the recovery of 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.
FINANCIAL IMPACT
By including provisions for a tenant hardship concerning paying pass throughs, there could be additional costs to administer the Rent Program. The additional cost would depend on the extent of hearing officer involvement needed for making determinations about tenant financial hardships. Given the numerous opportunities for landlords or tenants to appeal determinations of the Program Administrator, there could also be additional costs to administer the Program. If additional professional services budget is needed for hearing officers, it will be subject to future City Council appropriations approval.
MUNICIPAL CODE/POLICY DOCUMENT REFERENCE
The 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 impacts or climate action opportunities associated with this report.
RECOMMENDATION
Introduce the Ordinance revising provisions concerning Capital Improvement Plans and maritime residential tenancies for rental units in the City of Alameda.
Respectfully Submitted
Michael Roush, Special Counsel
Financial Impact section reviewed by
Margaret O’Brien, Finance Director
Exhibits:
1. Responses to Tenant Stakeholders
2. Chart Listing Cities That Provide for the Recovery of Capital Improvements
3. Draft Rent Program Regulation to Implement Capital Improvement Plans