When can San Jose Property Managers and Landlords Increase Rents More than 5%?
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. No problem.
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.
San Jose rent control affects nearly 46,000 apartments
Our goal is to ensure San Jose property managers, landlords, companies, and investors understand San Jose’s rent control nuances to ensure compliance—and, thereby, preserve an investor's value.
So, without further ado, let’s dive right in.
Standard Rental Increases under the city of San Jose, CA rent control policies dictate that property management companies can only increase rent twice in a 12 month period. The maximum annual allowable increase is 5%.
How Has San Jose Rent Control Law Changed?
This is a change from years past.
Previously, the ARO allowed San Jose property managers and landlords to increase rents by up to 8% a year. In April 06, the City Council voted to reduce the cap from 8% to 5%, a policy which took effect June 7, 06 under an “Interim Ordinance.”
The San Jose 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 San Jose City Council voted to allow city property managers and landlords to “bank” unused rent hikes if they decided not to increase rent by up to 5% in any given year.
The banked rent increases could be used at a later date, up to 8% a year. In January 07, the City Council revised the policy to eliminate the banking option. As a result, the maximum annual allowable increase remains at 5% unless the property manager or landlord is 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%. These policies have significantly changed as a result of the Interim Ordinance.
Here’s what you need to know.
EFFECTIVE SEPT, 6th: 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 2006 to petition for a debt-service pass-through waiver; that deadline has now passed.
EFFECTIVE SEPT, 6th: Landlords may no longer petition for a rent increase for capital improvement pass-through costs
Initially, the Interim ARO that took effect on June 7, 2006, merely dropped the allowable award for a petition granted under this cost.
However, effective September 2006, 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.
Rent Increase 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 standard, a landlord is considered to be getting a fair return if their current net income is equal or greater than the net operating income adjusted for inflation. The Interim Ordinance established January 04 as the “base year”.
Fair Return petitions are most common in two situations:
- the rent for the current year is less than the base year with the inflation adjustment.
- the owner was not receiving a fair return in the base year because the base year for the property was unusually low.
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.
More recently, a rent increase moratorium was imposed because of the coronavirus pandemic.
Effective April, 28th 2020 Landlords Cannot Increase Rent for Rent-Stabilized Apartments and Rent-Controlled Mobile Homes Until January 1, 2021
Two types of housing are affected by this moratorium:
- Buildings with three or more units built before September 1979, which are covered by ARO
- Mobile home parks established before September 1979, which are cover by the Mobile Home Rent Ordinance (MHRO).
Some important things to keep in mind about the moratorium:
- Tenants do not need to provide any documentation that their coronavirus has impacted their income to be protected by the moratorium.
- Landlords who were unable to increase their rents in 2020 cannot exceed the maximum permitted rent increases in 2021.
- Landlords and tenants can make temporary agreements that allow the tenant to pay less rent. After December 31st, 2020, landlords are allowed to raise their rents back to their pre-moratorium rates.
San Jose will not be compensating landlords for revenues lost as a result of the moratorium, but the moratorium does have several important landlords benefits:
- If an ARO or MHRO landlord voluntarily reduces their rent during the coronavirus pandemic, they do have the option of reverting rent back to its original contract rate during the moratorium.
- If an ARO landlord pays their ARO fee late, then a late charge will not be incurred through 2020-2021.
- ARO landlords will have their maintenance permit fees waived 2020 - 2021.
- If ARO properties’ recreational common areas are closed during the moratorium, tenants cannot make any service-reduction claims.
Landlords who aren't affected by the moratorium can increase their rents as they usually would as outlined in their rental agreements and any applicable local and state laws. If you choose to do so, make sure to avoid any holidays or special occasions like birthdays or anniversaries. That sort of consideration is one of the gestures that shows tenant appreciation and encourages lease resigning.
If it's unclear to you if your property is affected by the moratorium, you can contact the City of San José Housing Department for assistance at 408-975-4480 or RSP@sanjoseca.gov.
Given that the rent increase moratorium won’t extend far enough to cover the entirety of the coronavirus pandemic, landlords will be able to increase their rent while the pandemic continues. Making such an increase should be done after careful consideration because doing so may jeopardize the tenant’s desire to resign their lease. And, in the midst of record unemployment, it may be more difficult to find a reliable tenant.
As of September 1, 2020 a Statewide Eviction Moratorium Was Put in Place Until January 31, 2021
Known as California AB3088, this law replaced any local eviction moratoriums imposed by the city of San Jose. Given that there is a one-month discrepancy, as of now, between the eviction moratorium and the rent increase moratorium, it’s possible for a landlord to increase the rent significantly enough that a tenant would be unable to afford to pay the rent in full.
In accordance with California AB3088, this failure to pay rent could not serve as grounds for eviction proceedings so long as the tenant provides a declaration of hardship to the landlord while paying 25% of that month’s rent at minimum.
Should You Raise Rent in the Aftermath of a Pandemic?
The coronavirus pandemic accelerated trends that were already underway. While there are many indicators that the real estate market will be strong in 2021, one of the biggest predictions, both nationally and in California, is that many residents will leave urban areas in favor of suburban areas.
There are home improvements that can add value to your rental property, but the ways in which remote work is changing real estate may actually be a reason for you to reevaluate your real estate investment strategy. After all, sometimes you see the signs that it’s time to sell your property investment.
However, you can also tweak your perspective and investment strategy to accommodate holding onto your San Jose properties. BURL stands for buying utility and renting luxury. The idea is that you invest in properties with a higher cap rate, meaning that they pay for themselves and generate a profit sooner rather than later, so you can invest in properties with a lower cap rate, meaning that they’ll take longer to pay for themselves and start generating a profit. Why would you do that? Because luxury properties can appreciate significantly enough to make it all worthwhile!
Thanks to remote property management, it’s easier than ever to invest in the most landlord-friendly states, states with zero property taxes, and to increase cash on cash return (perhaps by investing in gateway cities).
You should keep an eye on the Mynd Knowledge Center because the details of when you’ll next be able to increase your rent in San Jose and evict tenants may change again during and after the coronavirus pandemic. Until then, read our explanation on filing a “Fair Return” petition, and what to expect throughout the hearing process.
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