Proposition H - Pass-Through of Costs to Residential Tenants
Proposition H - Pass-Through of Costs to Residential Tenants
What it does
Proposition H would amend the city’s rent control ordinance to prohibit residential landlords from passing onto tenants the costs of major capital improvements such as a new roof, exterior paint, a new hot water heater, energy conservation measures, or remediation of lead hazards.
Currently, an owner can raise a tenant’s base rent 10% each year for up to 10 years to cover the costs of such projects, if those costs have been certified by the Rent Board. Under this proposal, only the certified costs of seismic retrofit work could be passed through; they could add no more than 5% to a tenant’s base rent in any 12 month period, and would have to be amortized over 20 years. Pass-throughs of costs for any capital improvements or rehabilitation work certified after April 10, 2000 would have to be refunded. A landlord could not be denied a rent increase for capital improvements, rehabilitation or energy conservation work if that would deprive the landlord of a “fair return” on the property, which is constitutionally required. (Fair return is a complex notion defined through case law. A landlord can apply to the San Francisco Rent Board to request “fair return” rent increase, but this is quite rare.)
Allowable rent increases due to increased operating and maintenance costs would be cut to a maximum of 7%. There is a further provision that states that in the future, when the voters are asked to pass general obligation bonds, the ballot measure must state if there is to be a pass-through.
Why it is on the ballot
Prop. H is an initiative ordinance placed on the ballot by the Housing Rights Committee. In May of this year Supervisor Tom Ammiano attempted to orchestrate a compromise among tenant and landlord advocates. That compromise allowed for a maximum 10% cumulative rent increase for capital improvement pass-throughs, over a five-year period (three years for buildings of five or fewer units). It also provided for future reevaluation of hardship for tenants and resolved the long-debated issue of who should pay for voter-approved bond measures, by splitting the cost 50/50 between tenants and owners. When more extreme tenant advocates vowed to oppose the compromise, making it a political hot potato, it was abandoned. Thus this initiative.
Those who support this measure state:
- Under the existing rules, the cumulative capital improvement increases can create future hardships for tenants. Indeed, in some cases tenants with very low rents in buildings that need a great deal of work could see their rents increase significantly over a decade, and currently there is no provision to readdress any hardship after the original decision by the Rent Board.
- Landlords can use pass-throughs to drive out low paying tenants who cannot afford these increases. Tenants should not be required to pay for “normal” maintenance to buildings. Owners will recover their costs when they sell their buildings.
Those who oppose this measure state:
- Proposition H will discourage owners from making needed repairs, leading to the kind of building deterioration for which New York City and Berkeley became infamous.
- By essentially banning cost recovery from existing tenants, the measure is unconstitutional.
The pass-through debate is one of the interesting consequences of rent control. Those who prioritize landlords maintaining their buildings want it to be easier to pass building improvement costs on to tenants. Tenent advocates counter that pass-throughs, by definition, subvert the purpose of rent control, namely to keep rents as low as possible.
From the property owner’s perspective, the pass-through process is already tedious. Property owners must petition the Rent Board which then reviews all reported expenses and disallows items they consider superfluous, such as costly chandeliers, marble entryways or overly expensive carpeting. They can also disallow items where the property owner paid more than industry norms. Hardship exemptions are available to low income tenants and others if the increase would raise their rent to more than 1/3 of income (the HUD guideline).
Proponents of Prop. H claim that the number of capital improvement pass-throughs more than doubled between 1998 and 1999. Opponents counter that last year fewer than 2% of San Francisco’s renters received a pass-through.
For a brief period in 1997, there was a negotiated pass-through provision which was applied to bond measures after the fact. Proposition H would disallow such negotiated settlements and require that if there are to be pass-throughs or future bond elections, they must be disclosed in the ballot language.
SPUR recommends a no vote on Prop. H. It is an overzealous answer to a problem that affects a very small portion of renters. If passed, it would provide a disincentive to rental property owners to keep up their buildings, which in the end would hurt all San Franciscans. Rather than adding value, most “capital improvements” are expenditures that restore the livability of a rentcontrolled property. Existing tenants benefit from these projects, and owners should be allowed to recover their costs.
Like some previous San Francisco rent control measures, this one is based on a narrow definition of public interest, and such measures have a history of unintended consequences. For example, a landlord who cannot recover major improvement costs over time has an incentive to sell the building and recover the improvement costs immediately. Increasing the turnover of buildings raises prices for tenants and landlords alike. More importantly, preserving existing housing (by supporting adequate maintenance) is an important housing policy goal.
Prop. H continues the already unproductive ideological warfare between tenant and landlord advocates. Interestingly, both sides have stated that if Prop. H fails in November, they will again support the previous compromise— which goes a long way to address the concerns for tenants who could be hurt by a large passthrough, while allowing owners to maintain their buildings in a responsible manner.
SPUR recommends a "No" vote on Proposition H.