The Property Management Shop
by Marc Wilson
Q. I read your article last month concerning realistic asking rents. I don’t have any problem with meeting the market and setting such rents. My concern focuses on how I should react when all the other tenants in my building discover that I am renting units at prices below their current rents? I have already received multiple requests to reduce existing rents. What should I do? Also, I sometimes receive requests from existing tenants who want to move into a vacant unit within the same property. I hate to allow tenants to switch apartments, because then I must deal with the preparation of two units instead of one. What do you do when tenants ask if they can switch apartments?
A. Existing tenants often ask for a rent reduction when they learn of new, lower asking rents for new tenants moving into the property. I have worked with property owners in the past who have refused to lower their asking rents because they fear the aforementioned. They may comment that “I don’t want the other tenants to start asking for rent reductions” or “I don’t want to compromise the current rent structure.” I have never fully understood this strategy. Are these owners trying to influence the market with positive vibrations? Do they think that their lack of interest in lowering the other rents at the property will somehow induce those rents to stay above market? Do they think that they are bigger than the market or otherwise not effected by market dynamics? Do they think that their tenants don’t read the newspaper or are otherwise ignorant of the world around them? This doesn’t sound much like a strategy. It sounds more like denial.
What if you’re the chairman of an automobile company and your marketing reports indicate that your cars aren’t selling anymore? Would you try to hold your ground in regard to your asking prices? Would you try to beat the market? I’ve got news for you—CEOs of major corporations are fired all the time because they are unable or unwilling to face market realities. The boss has to make the tough decisions. Sometimes this same boss needs to have the internal fortitude to terminate 5,000, 10,000 or even 30,000 employees and reduce the price of cars by 20 or 25 percent.
You, too, are the boss—you have to make these tough decisions. You have to set realistic asking rents on your available apartments, regardless of the consequences. This is not to say that you have to summarily acquiesce to each and every request for a rent reduction that comes across your desk. I take requests for rent reductions on a case-by-case basis. If the requesting tenant’s rent is within 7 percent of the market, I deny the request. Most tenants will not endure the cost and hassle of moving for a 7 percent reduction (or less) in their rent. If I have had absolutely any distasteful interaction with the requesting tenant, I deny the request. You see I don’t want difficult tenants at any rent.
If I get the sense that I have even a small chance of losing a good tenant because his/her rent is above market, I will reduce the rent. I usually grant the request pursuant to a rent reduction agreement. This is a document that confirms the reduction is temporary and can be rescinded with a 60- or 90-day notice by the owner with or without cause. I don’t know if this type of agreement will be deemed enforceable years down the line, and I really don’t care. I wouldn’t reduce the rent in the first place if I were not prepared to accept that rent as a permanent base rent. Years from now, and I mean years, the Rent Board will have to make a decision on the enforceability of these documents. The Rent Board will probably rule against the property owners, the property owners will take the Rent Board to court and the court will render a decision. The good news is that only a couple of hundred tenants with these types of agreements will still be living in San Francisco when and if rents return to their year 2000 levels. As you are aware, most tenants live in their apartments for three to four years at the most. At a minimum, these tenants will be embarrassed if they attempt to renege on these agreements, because they are usually well written and the intent is clear. I can mail or fax you a copy of my standard “Temporary Rent Reduction” agreement. Just call me and ask for one.
In regard to revolving tenancies, I usually try to accommodate moves within the same building. If one of my existing tenants wants to move into another apartment at the same property, why not? Chances are they are contemplating moving anyway, and I would be wise to keep a good tenant. Obviously, the tenant will need to sign a new lease, pay the asking rent, issue you a formal notice to vacate their old apartment, etc. Don’t get lazy just because you have an existing relationship with the tenant. Make sure you conduct your affairs in regard to the new rental as if the tenant were new and moving into the building for the first time. All of this assumes that the tenant has lived at the property for more than a year and is no longer subject to a one-year lease. I will also accommodate tenants who want to break their lease and move into another apartment at the same property, but I charge a fee. The charge is usually a flat fee of $500 for tearing up the old lease (the real cost of a typical breach always exceeds $500). You need to charge something for your time and energy and, more important, you want the tenant to incur some cost so that you know he/she is truly motivated to make the move. Otherwise, you could be managing musical chairs at your property without proper compensation, and nobody wants that.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, San Francisco, CA 94109. He can be reached at 415-229-1275. Copyright © 2003 San Francisco Apartment Magazine