In part three of the rent control series, we’ll be taking a look at how San Francisco regulates rents with a view to informing rental policy reform in Australia.
In 1979, rent inflation in San Francisco was closing in on the 13% mark and in response the City passed the Rent Control Ordinance (RCO). Even some 43 years later the majority of rental units (not ‘single family’ rental homes) in San Francisco remain covered by this rent control system. The SF scheme places limits on how much a landlord can increase the rent by, similarly to the Irish scheme.
Rent Increase Limits
If the rental unit is covered by the RCO, rent increases are tied to inflation. The Residential Rent Stabilisation and Arbitration Board calculates the allowable increase by looking first at the rate of inflation for All Urban Consumers in the Bay Area and multiplying that by 0.6. So for example, if general inflation was 6% then the allowable increase would be 6*0.6 = 3.6%. This means that renters do not feel the full brunt of inflation. The maximum allowable increase is 7% but thankfully the figure has not been that high since 1983!
Increases other than base rent
The allowable increase percentage limits how much the landlord can increase the base rent. However, the scheme allows for rent increases for multiple other reasons that enable the landlord to increase the rent over and above the inflation-based figure. We take a brief look at how some of these other increases are justified below.
The scheme allows temporary rent increases where capital improvements have been made. Where capital improvements are the basis for additional rent increases beyond the allowable 7% maximum, the rent increase is limited to 10%.
If your rent was $1000 a month and inflation was 6%, then the base allowable increase would be 3.6% – so $36. Say the landlord has also replaced all the windows in the property at a cost of $3000. The landlord then applies to the Rent Board for approval to pass-through these expenses to the tenant. The Rent Board agrees and says okay and gives permission to the landlord to charge an additional $64 a month so as to cap the total rent increase at $100 (10% of $1000). It would take nearly 4 years to pay off these windows!
Importantly, the landlord must complete the work and then obtain approval of the rent board before pass-through increases can be imposed. This increase only lasts until the capital improvements have been paid for. The pass-through scheme differs slightly according to the type of rental property - relating to how many units are in the building - but at this stage it’s not important to understand the minutiae.
Operating and Maintenance Costs
Landlord's are also allowed to pass on increases in their operating and maintenance costs to the tenant if these costs are greater than the allowable base rent increase. If as above the allowable base rent increase is 3.6% and the landlords maintenance costs have increased by 7% since last year, then the landlord is permitted to increase the rent by 7%. However, if operating costs had increased by 3.5% then the landlord may not pass on that cost since it is below the allowable base rent increase.
Gas and Electricity Costs
Where tenants do not pay for gas and electricity, the landlord can pass on increases in the cost of supply/consumption.
Exemptions to increases
One encouraging aspect of the scheme is the hardship exemption to rent increases beyond the base rent. Hardship exemptions are available where:
- all adults are recipients of means-tested government assistance,
- the rent is more than 33% of gross household income and this income is below 80% of the median income of the area, and
- the household holds assets below a certain amount determined by the mayor's office
or if there are exceptional circumstances which make paying for such an increase a hardship. Medical bills are commonly cited as the kind of exceptional circumstance which would make paying increases a hardship.
Exceptions to the rent control scheme
The most notable exception to the SF rent control scheme is where the unit was first occupied after 1979 – when the scheme was first introduced. If a unit does not come under the scheme, then any increase of any amount can take place provided there is proper written notice.
Some thoughts on pass-throughs
The main issue with pass-through rent increases is that in the case of a capital improvement pass-through, the tenant ends up paying for something that they may not have asked for and does not improve their quality of life in a way that is commensurate with the rent increase. The example offered above describes new windows being installed in the building, which could arguably make the apartment nicer to live in. However, a landlord could also paint the exterior of the building or perhaps replace the roof and despite this providing no practical benefit to the tenant they will still have to pay for it. Tenants do have the ability to object to the landlord's application to the Rent Board and one of the possible bases for objection is that the work is that the work was unnecessary and merely "gold-plates" the property. Tenants can also object on the basis that the work is only required because the landlord had neglected maintenance. So, there is some scope for tenant pushback against the pass-throughs however this relies on tenants, ideally all of them, taking the time to attend the Rent Board hearing and offering formal objections. Ultimately, the tenant pays for a permanent improvement to the property and only experiences a temporary benefit. This only serves to benefit the property portfolio of the landlord.
General Features of San Francisco Rent Control
- Rent increases are tied to inflation such that the allowable base increase is a proportion of general inflation in the area.
- There are many possible ways that landlords can increase rents aside from the allowable base increase, capital improvement pass-throughs unfairly burden the tenant by making them pay for something which increases the value of the landlord's property.
- The exemptions from pass-through increases are strictly means tested.
- We can expect that the proportion of units which are covered by the RCO will decrease over time, as the building subject to this regulation had to have been occupied before 1979.