When can San Jose Property Managers and Landlords Increase Rents More than 5%?Stacy Winship
June 8, 2017
Sure, Mynd is a San Jose property management company. We’ll make sure your San Jose apartments for rent are filled quickly, units are maintained properly, and tenant issues resolved swiftly. But we’re much more than just a property management company. We also provide a wealth of resources and educational opportunities for the San Jose rental property owners with whom we work. We believe ongoing education is key to maximizing our investors’ ROI.
To that end, Mynd has launched a series of articles about San Jose’s Apartment Rent Ordinance. The first topic covered how to determine whether your San Jose apartment is subject to rent control. In this second San Jose-specific article, we look at when San Jose property managers and investors can increase rents beyond the ARO’s standard 5 percent.
Rent control affects nearly 46,000 San Jose apartments. Our goal is to ensure San Jose property management companies, landlords, and investors understand San Jose’s rent control nuances in order ensure compliance—and thereby, preserve an investor’s’ value.
So, without further ado, let’s dive right in.
Standard Rental Increases
Under the city’s rent control policy, San Jose, CA property management companies (or landlords who self-manage) can only increase rent once in a 12-month period. The maximum annual allowable increase is 5 percent.
This is a change from years past. Previously, the ARO allowed San Jose property managers and landlords to increase rents by up to 8 percent a year. In April 2016, the City Council voted to reduce the cap from 8 percent to 5 percent, a policy which took effect June 17, 2016 under an “Interim Ordinance”. The City Council did not go as far as tying the maximum allowable increase to the area’s Consumer Price Index, which many other Bay Area cities have decided to do.
At the time, the City Council voted to allow San Jose property managers and landlords to “bank” unused rent hikes if they decided not to increase rent by up to 5 percent in any given year. The banked rent increases could be used at a later date, up to 8 percent a year. In January 2017, the City Council revised the policy to eliminate the banking option. As a result, the maximum annual allowable increase remains just 5 percent unless granted an exemption.
Increasing Rents Beyond the 5% Cap
There are a few situations in which a San Jose property manager or landlord may be able to increase rents by more than the maximum allowable increase of 5 percent. These policies have significantly changed as a result of the Interim Ordinance. Here’s what you need to know:
- EFFECTIVE SEPT. 1, 2016: Landlords may no longer petition for Debt-Service Pass-Throughs
San Jose landlords used to be able to petition for higher rent increases if the cost of their debt service had increased. The Interim Ordinance eliminated the debt-service pass-through entirely. Landlords only had until September 1, 2016 to petition for a debt-service pass-through waiver; that deadline has now passed.
- EFFECTIVE SEPT. 1, 2016: Landlords may no longer petition for a rent increase for capital improvement pass-through costs [temporary]
Initially, the Interim ARO that took effect on June 17, 2016 merely dropped the allowable award for a petition granted under this cost from 5% to 2%. However, effective September 1, 2016 the ARO eliminated the petition process for landlords seeking a rental increase due to costs incurred as a result of capital improvements, rehabilitation, and higher operations and maintenance costs. It is anticipated that the ARO, once finally ratified and brought to the City Council later this year, will include a capital improvement pass-through process.
- Fair Return Petitions
Currently, San Jose property managers and landlords may only petition for a rent increase in excess of the allowable 5 percent in order to seek a “fair return”. The Interim ARO established a new standard in which to evaluate whether an owner is receiving a fair return. Under the new Maintenance of Net Operating Income (MNOI) standard, a landlord is considered to be getting a fair return if his current net income is equal or greater than the net operating income (NOI) adjusted for inflation. The Interim Ordinance established January 2014 as the “base year”.
Fair Return petitions are most common in two situations: (1) the NOI for the current year is less than the base year NOI with the inflation adjustment; or (2) the owner was not receiving a fair return in the base year because the base year NOI for the property was unusually low. (More on this to come—see below!).
San Jose property managers and landlords must file a petition with the City’s housing commission before increasing rent in excess of 5 percent. A copy of the petition must be sent to the tenant, and the tenant will be granted an opportunity to file his/her own petition in response before the housing commission makes a decision.