Title
Adoption of an Uncodified Urgency Ordinance Imposing a Temporary Moratorium on Submitting Capital Improvement Plan Applications for Properties that have 25 or More Rental Units and Directing the Rent Program Administrator to Reject All Capital Improvement Plan Applications Filed On or After April 27, 2023; and
Introduction of an Uncodified Ordinance to Impose a Temporary Moratorium on Submitting Capital Improvement Plan Applications for Properties that have 25 or More Rental Units and Directing the Rent Program Administrator to Reject All Capital Improvement Plan Applications Filed On or After April 27, 2023.
The Ordinances are exempt from review under the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines Sections 15378 (not a project) and 15061(b)(3) (no significant environmental impact). (City Attorney)
Body
To: Honorable Mayor and Members of the City Council
From: Yibin Shen, City Attorney
EXECUTIVE SUMMARY
Currently the City’s Rent Control Ordinance’s Capital Improvement Plan Policy, requires the Rent Program Administrator to accept and approve Capital Improvement Plan (CIP) applications, regardless of the number of rental units affected by the application, so long as the application meets all objective legal requirements, including that the application covers authorized construction work (e.g., substantial re-roofing or foundation work) under the Policy. If the Rent Program Administrator approves such a Plan, a landlord may impose on the tenants a “pass through” of the amortized cost of the capital improvements, which can be thought of as a rent increase, in addition to any other allowed rent increases, including banked rent increases and annual general adjustments. Imposition of a CIP Pass Through is treated as a Rent Increase for purposes of AMC Section 6-58.50 (limiting Rent Increases to once every 12 months), except that a CIP Pass Through is not subject to compounding through Annual General Adjustments, thus providing greater protection to tenants.
Unlike rent increases based on the annual general adjustments, which are limited to 70% of the percentage change in the Consumers Price Index, and a maximum 8% cap on rent increases if such increase included “banked” rent increases, there is no cap, under local law, on any approved CIP pass through. While state law (SB1482) likely imposes a 10% overall cap on annual rent increases, the applicability of state law to CIP increases is untested. This existing CIP Policy has led to significant concerns from tenants, especially tenants from a Southshore property with approximately 450 units where the landlord seeks to pass through over $24Min CIP work, resulting in potentially significant “rent increases” for affected tenants.
In light of the above, and to give time for City Council to consider further revisions to the City’s CIP Policy later this year without tenants potentially facing additional disruptive CIP applications from properties with a significant number of rental units, staff recommends that City Council adopt the proposed ordinances, including one on an urgency basis, to impose a moratorium on submitting CIP applications concerning any property having 25 or more rental units. As drafted and for the reasons described at the end of the Discussion section, the moratorium ordinances would not apply to the pending Southshore application.
The moratorium is recommended, however, because property owners with properties housing 25 or more units, as compared to owners with fewer rental units, generally have more units rented at or above fair market rates and hence, are in a better position to temporarily financially absorb any capital improvement costs they expend. In addition, many of those tenants in these larger complexes are older, are low or moderate income households, or on fixed incomes, and having to pay a pass through cost, along with allowable rent increases, may lead to displacement. This proposed moratorium does not affect any landlord’s ability to increase rent based on annual general adjustments and banked increases. Moreover, as an option, if necessary and warranted, such landlords may further seek a rent increase through the “fair return” process.
For the reasons stated above, staff is recommending City Council adopt the attached Ordinance on an urgency basis. Moreover, staff is also recommending that a separate, but substantively the same, Ordinance be introduced (with a second reading in June) in the unlikely event the grounds for the urgency Ordinance were successfully challenged.
BACKGROUND
Government Code, section 36937 allows a city, including a charter city, to adopt an urgency ordinance to take effect immediately upon its adoption for the preservation of the public peace, health or safety upon a finding of facts constituting the urgency thereof. Section 3.12 of the Alameda City Charter also allows the City of Alameda (City) to adopt an urgency ordinance to take effect immediately upon its adoption for the preservation of the public peace, health, or safety upon a finding of facts constituting the urgency thereof.
The City has adopted an Ordinance entitled the City of Alameda Rent Control, Limitations on Evictions, and Relocation Payments to Certain Displaced Tenants Ordinance (“the Rent Control Ordinance”). The City has also adopted Resolution No. 15138 that adopted a Policy concerning Capital Improvement Plans for rental units within the city (“the CIP Policy”). As provided by the Rent Control Ordinance, the Rent Program Administrator has issued a Regulation (Regulation 23-01) to implement the CIP Policy.
Under the CIP Policy and Regulation 23-01, landlords may apply for a Capital Improvement Plan; which, if approved by the Rent Program Administrator, permits a landlord to impose on tenants, a pass through of the amortized costs of certain capital improvements constructed, or to be constructed, on the property in the form of a rent increase. This cost is in addition to any other allowed rent increases, including banked rent increases and annual general adjustments. The Rent Program Administrator, regardless of the number of rental units on the property, must approve a Capital Improvement Plan, assuming the application for such Plan satisfies the requirements of the Rent Control Ordinance, the CIP Policy, and the Regulations. Unlike annual rent increases that are limited to 70% of the percentage change in the Consumers Price Index and an overall maximum cap of 8% on rent increases if banked rent increases are included, there is no cap, under local law, on the CIP pass through amount/percentage. While state law (SB1482) likely imposes a 10% overall cap on annual rent increases, the applicability of state law to CIP increases is untested. The CIP Policy also requires landlords to file in advance of work commencing whenever tenants must be displaced as a result of improvements to their rental units, and to provide either temporary or permanent relocation payments, depending on the length of the work.
Even though the CIP Policy has been in place since 2016, there has been only a handful of qualifying applications for Capital Improvement Plans, all of which, until recently, involved four or fewer rental units. Three of the five qualifying applications were from landlords who sought to terminate tenancies because the improvements could not be completed while the tenants remained in the unit, and thus were not seeking a CIP pass through.
CIP Applications Received, 2016 to present
|
|
Qualifying |
Denied or Withdrawn |
Total |
|
|
Pass Through Only |
Permanent Relocation |
|
|
|
1-24 units |
1 |
3 |
7 |
11 |
|
25+ units |
1 (currently pending application) |
0 |
1 |
2 |
|
Total |
2 |
3 |
8 |
13 |
During the City’s declaration of a local emergency due to the COVID-19 pandemic, the City Council imposed moratoriums on rent increases, including any rent increases/pass throughs for an approved Capital Improvement Plan, and on terminations of tenancy based on certain “no fault” grounds, including Capital Improvement Plans. However, in April 2022, City Council lifted the moratorium on rent increases and in November 2022 rescinded the declaration of the local emergency due to the COVID-19 pandemic, thereby no longer prohibiting a landlord from imposing rent increases on tenants, including banked rent increases, and a pass through of the amortized cost of certain capital improvements under an approved Capital Improvement Plan. Landlords were also permitted to notice a termination of tenancy based on an approved Capital Improvement Plan as of December 2022.
On several occasions since the adoption of the CIP Policy in 2016, City Council has considered various amendments to the CIP Policy but has not made any amendments to the CIP Policy. When City Council last considered amendments to the CIP Policy (in 2022) it directed City staff to meet with affected stakeholders concerning the CIP Policy and return the item to City Council for further consideration and City staff intends to do so later this year.
Within the city there are 66 (out of about 2,800) fully regulated rental properties housing 25 or more rental units, roughly 2.5% of all rental properties. Those 66 properties, however, house about 3,800 (out of about 11,000) fully regulated rental units (about 35%).
Many of the tenants within those rental units are older residents, are on fixed incomes, and/or are still experiencing the financial hardship caused by the COVID-19 pandemic, thereby rendering those tenants as an extremely vulnerable population who, as a result of rent increases, including banked rent increases, and potential pass throughs, may not be able to pay rent and could be displaced from their homes.
Moreover, the present shortage of rental units in the city and the prevailing rent levels for such rental units have a detrimental effect on the health, safety and welfare of a substantial number of Alameda tenants, particular older residents, persons in low and moderate income households, and persons on fixed incomes, making it is necessary that these tenants be provided with protection from actual or constructive eviction.
In accordance with the current CIP Policy and Regulations, the Rent Program Administrator is reviewing an application for a Capital Improvement Plan for a property housing 450 Rental Units, which application has the potential to increase by several hundred dollars the overall monthly amount a tenant would pay for the tenant’s rental unit. Many of those tenants in that property have stated that this increase in the overall amount of money they would pay for the use and occupancy of their rental unit would create a severe and significant financial hardship for them.
As an example, under existing local law, the tenants living in a one-bedroom unit at this property could see monthly “rent” payments increase by as much as $309, from $2,497 to $2,806, or 12.4%, through a combination of the Annual General Adjustment, allowable use of rent increases banked during the moratorium, and the preliminary CIP pass through calculation. Those amounts are likely to be slightly higher for rent increases after September 1, 2023, once a new Annual General Adjustment goes into effect.
Until City Council has the opportunity to review the CIP Policy further (which is expected later this year), other than the pending CIP Southshore application, staff recommends imposing a temporary moratorium on Capital Improvement Plans from properties within the city that have a significant number of rental units (i.e., those with 25 or more units) so that tenants will not be faced with the cost of paying a pass through, with no limitations or caps, in addition to allowable rent increases, including banked rent increases.
DISCUSSION
The purpose of the City’s Rent Ordinance is to stabilize rents in the city, prevent the displacement of tenants from their homes due to significant rent increases, and to ensure that landlords receive a fair return on their property. The principal salutary purpose of the CIP Policy, namely to encourage maintenance and upkeep of the city’s existing affordable residential housing supply, especially for landlords of limited means, is less applicable to landlords owning and operating rental complexes with a large number of rental units in that these landlords receive significant income commensurate with the large number of rental units.
Moreover, the State of California and the Bay Area are facing a serious and prolonged housing and homelessness crisis. The State Legislature has declared that “the lack of housing, including emergency shelters, is a critical problem that threatens the economic, environmental, and social quality of life in California. California has a housing supply and affordability crisis of historic proportions. The consequences of failing to effectively and aggressively confront this crisis are hurting millions of Californians, robbing future generations of the chance to call California home, stifling economic opportunities for workers and businesses, worsening poverty and homelessness, and undermining the state’s environmental and climate objectives.” In addition, the State Legislature has called upon all local governments to take all necessary actions to alleviate the ongoing housing shortage and prevent homelessness.
Notwithstanding that the City has taken significant steps in response to the State’s call for action, including adoption of its Rent Control Ordinance, the City faces a similar housing shortage.
Tenants have expressed concern that if the City permits landlords to impose pass throughs following receipt of approval of a Capital Improvement Plan, there will be an immediate and unacceptable disruption to the peace, health, and safety of the city, as vulnerable residents could be immediately and permanently displaced that would not only endanger the health and safety of those tenants, but would also create severe harm to the city as a whole and exacerbate the serious local, regional and state wide homelessness crisis.
Although this threat to tenants exists regardless of the number of rental units on a property, staff is concerned that prohibiting all landlords from being able to pass through their amortized cost of capital improvements will work an unnecessary hardship on landlords who own a small number of rental units. Accordingly, staff is recommending that the temporary moratorium on submitting Capital Improvement Plans be limited to only those properties with 25 or more rental units. Staff makes that recommendation for a number of reasons. For example, within the city there are 66 properties that have 25 or more rental units but those properties house about 3800 fully regulated rental units, about 35% of all the fully regulated rental units in the city. Rent Program data indicates that rents at these large rental complexes are more likely to be at or above fair market. At fully regulated properties with fewer than 25 units, 55% of units are below the Fair Market Rent (as determined in the current Alameda Rent Program Temporary Relocation Payment Schedule), while only 26% are below the Fair Market Rent at properties with 25 or more rental units.
Accordingly, if a property owner of these larger complexes were to proceed with a capital improvement project during the moratorium, it is reasonable that such owners, compared to a property owner with only a small number of rental units, could better absorb the cost temporarily until the City Council has the opportunity to evaluate the CIP Policy further and determine whether any changes should be made to it.
Staff has also surveyed other jurisdictions with CIP programs to determine where they draw the line on larger rental properties. In terms of treating properties differently for CIP purposes depending on the number of units involved, staff is are aware that San Francisco draws the line at six units and Mountain View draws one line at 6 units and another line at 20 units. Based on the data presented above, staff does not recommend having the threshold at six units as that could have the unintended effect of covering landlords with a small number of units who are likely to have lesser means to handle a necessary capital improvement project. Staff’s recommendation of 25, based on the data presented, is within the order of magnitude of Mountain View’s limit. (Mountain View permits landlords with 20 or more rental units to recover only 50% of their capital improvement costs.)
In addition, in the interim-and even though there is no other pending application for a Capital Improvement Plan involving a project with 25 or more units-should a property owner proceed with capital improvements during the moratorium, the owner may independently seek a rent increase under the Rent Control Ordinance’s fair return process; any rent increases under that process is constitutionally guaranteed and not subject to local control.
As indicated, staff's recommended moratorium would not apply to the pending application of Southshore. Southshore's application was submitted many months ago, and work was completed in contemplation of existing local law that permits CIP pass throughs. Moreover, under Regulation 2023-01, the pass through may only be imposed in conjunction with an allowable rent increase, i.e., annual general adjustments and any banked rent increases, meaning that many tenants will not be subject to the pass through for several months.
For the reasons stated above, staff is recommending City Council adopt the attached Ordinance on an urgency basis. Moreover, staff is also recommending that a separate, but substantively the same, Ordinance be introduced (with a second reading in June) in the unlikely event the grounds for the urgency Ordinance were successfully challenged.
ALTERNATIVES
• Adopt the attached Ordinance on an urgency basis and introduce a substantively same Ordinance (also attached) on a non-urgency basis
• Adopt the attached ordinances with a higher or lower unit limit than 25 or more units as directed by City Council.
• Do not adopt/introduce either Ordinance.
FINANCIAL IMPACT
Property owners affected by this Ordinance have been notified that City Council will be considering the Ordinance. Nevertheless, if the Ordinance is adopted/introduced, Rent Program staff will undertake outreach and education and there will be some additional cost to the Rent Program to undertake this effort. These costs will be folded into the overall cost to administer the Rent Program.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This Ordinance is consistent with the purpose and intent of the City’s Rent Control Ordinance.
ENVIRONMENTAL REVIEW
Adoption of the Ordinance is exempt from review under the California Environmental Quality Act (CEQA) under CEQA Guidelines Section 15378 (not a project) and/or Section 15061 (b) (3) (no significant environmental impact).
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Adopt an uncodified urgency ordinance to impose a temporary moratorium on submitting Capital Improvement Plan applications for properties that have 25 or more rental units, and directing the Rent Program Administrator to reject all capital improvement plan applications filed on or after April 27, 2023; and
Introduce an uncodified ordinance to impose a temporary moratorium on submitting Capital Improvement Plan applications for properties that have 25 or more rental units, and directing the Rent Program Administrator to reject all capital improvement plan applications filed on or after April 27, 2023.
Respectfully submitted
Bill Chapin, Rent Program Administrator
Michael Roush, Special Counsel
Financial Impact section reviewed,
Margaret O’Brien, Finance Director