What San Jose Property Managers, Landlords Need to Know about Fair Return Petitions

Published: Oct 13, 2020

Rel estte investors often express trepidtion when it omes to uying rentl property in Sn Jose, CA. One of their iggest fers is round the ity’s expnsive rent ontrol ordinne, known s the Aprtment Rent Ordinne (), Sn Jose Muniipl Code Chpter 7.3. Investors often worry tht the  will prevent them from relizing  fir return on their investment.These re solutely vlid onerns. As of tody, Sn Jose property mngers nd lndlords n only inrese rent-ontrolled units y  mximum of 5% per yer. It is presumed tht the 5% nnul p will ssure the vst mjority of rentl property owners reeive  fir nd resonle return. But the City Counil relized tht there re some irumstnes where 5% is insuffiient. As suh,  provision ws inluded in the< href="http://www.snjose.gov/DoumentCenter/View/6"> Interim  Ordinne () tht llows for n override of tht mximum through wht’s known s  “Fir Return” petition.This rtile – the ltest in  series of Lndlord Journl rtiles imed t demystifying Sn Jose’s Aprtment Rent Ordinne for Sn Jose property mngers, owners nd investors – explores the proess for otining  “Fir Return” wiver.Defining  “Fir Return”The  hs very expliit lnguge round wht it onsiders to e  “fir return.” The Interim  estlished  new stndrd in whih to evlute whether n owner is reeiving  fir return. Under the new Mintenne of Net Operting Inome () stndrd,  lndlord is onsidered to e getting  fir return if his urrent net inome is equl or greter thn the net operting inome () djusted for infltion. The Interim Ordinne set Jnury 04 s the “se yer.”The djustment for infltion is lulted using the sum of  perentge of the nnul inreses to the Sn Frniso By Are Consumer Prie Index () for the petition period, prorted s needed. The petition period is onsidered the period etween Jnury 04 nd the dte the Sn Jose property mnger or lndlord files  Fir Return petition.Fir Return petitions will e onsidered for two resons: () the  for the urrent yer is less thn the se yer  with the infltion djustment; or () the owner ws not reeiving  fir return in the se yer euse the se yer  for the property ws unusully low.Eligile operting expenses inlude, ut re not limited to, usiness liense fees, rel property txes, utility osts, insurne, resonle repir nd mintenne expenses, mngement fees, ttorney’s fees, nd pitl improvements needed to mintin the sme level of servies s previously provided. Operting expenses do notinlude expenses inurred s  result of deferring mintenne, det servie, penlties or fees ssessed for violting the , depreition of the rentl unit, nd ny expenses for whih the lndlord hs een reimursed ().Gross inome inludes gross rents; inome from lundry filities, grge or prking fees or other servies if not inluded in rent; utility osts pid diretly to the lndlord y the tennts if not inluded in the rent, nd interest from seurity nd lening deposits.Mking  Cse tht Bse Yer  Did not Provide Fir ReturnDon’t get too exited too quikly! The proess of otining  Fir Return wiver is umersome. Sn Jose property mngers nd rentl property owners must sumit  host of douments if they wnt to lim tht the se yer  did not provide  fir return.The housing ommission will only djust the se yer  if  hering offier determines tht:

  • The lndlord’s expenses in the se yer were unusully high or low in omprison to other yers due to unusul irumstnes. The hering offier will onsider  numer of ftors when mking this finding, inluding: () the lndlord mde sustntil pitl improvements tht improved housing servies during the se yer tht were not refleted in the se yer rent levels; () sustntil repirs were mde due to dmge used y uninsured disster or vndlism; nd () mintenne nd repir osts were elow epted stndrds or resulted from the intentionl deferrl of repirs nd mintenne tht resulted in  deline of housing servies.

In ses suh s these, se yer  my e re-lulted using n verge of the unit’s expenses inurred y the property owner over  numer of yers.

  • The lndlord’s gross inome during the se yer ws disproportionte.Resons for this my inlude: () the gross inome in the se yer ws unusully low s  result of the qulity, lotion, ge, menities nd ondition of the housing (); nd () gross inome during the se yer ws signifintly lower thn norml euse ll or prt of the premises ws uninhitle during onstrution or repirs.

The Proess for Otining  Fir Return WiverSn Jose property mngers nd lndlords interested in filing  Fir Return petition must file  well-defined < href="http://www.snjose.gov/DoumentCenter/View/60588">proess.The first step the owner must tke is to notify ll tennts in writing tht he plns to file  rent inrese petition nd the grounds for the petition. The owner must give tennts notie efore filing  petition with the housing ommission.Next, n owner must sumit the tul petition with the ity. The < href="http://www.snjose.gov/DoumentCenter/View/60587">Fir Return Petition form requests generl informtion out the owner, site nd unit. Petitioners must lso outline  “Proposed Individul Rent Inrese Shedule” tht inludes the urrent rent for ny unit inluded in the petition, s well s the rte the owner would like to inrese rents to. The owner must lso sumit  detiled Inome Summry () nd Operting Expense Summry (). This informtion is then reoniled in  Summry of Inome nd Expenses to determine urrent .A pitl expense worksheet must lso e sumitted. This inludes  desription of ll pitl expenses, osts () nd the mortiztion period for eh item. Finnil reords for 04 must lso e sumitted if the lndlord is required when lndlords mke  Fir Return lim relted to the Bse Yer .Within 0 dys, the housing ommission will set  hering dte nd notify oth the Sn Jose property mngement ompny or lndlord nd the residents who would e impted y the ruling. Residents n then file  < href="http://www.snjose.gov/DoumentCenter/View/6387">Tennt Opposition Sttement in ojetion to the Fir Return petition. During the hering, the ity will onsider oth sides of the se efore mking its finl determintion._________________Although it isn’t esy () to otin  Fir Return wiver, the tool is  vlule one provided y the Sn Jose  to ensure tht Sn Jose property mngers, lndlords nd rel estte investors n relize  fir return. Otherwise, there would e little reson for nyone to invest in Sn Jose’s rentl housing stok.To lern more out the Fir Return proess, visit the < href="http://www.snjose.gov/index.spx?nid=356">City of Sn Jose’s housing wesite.

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