Feature
by Elizabeth Miller
The Operating and Maintenance petition is often the most misunderstood and underutilized petition to legally raise rent under the San Francisco Rent Ordinance. While capital improvement, bond measure and utility passthroughs are easily applied at the time the annual increase notice is given, an O&M increase can be a difficult petition to obtain and is often overlooked.
There are several reasons for owners to contemplate filing an O&M personally, or to incur the cost of hiring professionals to prepare the petition on their behalf. The O&M is the only petition filed that results in an increase applied to base rent, meaning that besides the annual allowable increase, an O&M increase is the only other increase that lasts to the end of the tenancy and may be increased upon future annual increases. Besides the obvious benefits of an increase to base rent, it also grants the single highest percentage of base rent—at its maximum, yielding 7% of each tenant’s base rent. For example, on a base rent of $400 an O&M increase results in a $28 per month increase, which seems small and unworthy; however, that small monetary compensation is huge in comparison to the 1.5% (or $6) annual increase allowed this year. When petitioning the San Francisco Rent Board for an O&M increase for several units, the amount earned can be substantial; it is money in the bank when the proper paperwork is filed, correct documentation is provided and the correct procedures are followed.
An owner or agent must follow the steps required by the San Francisco Rent Board: all relevant documentation and proof of payment must be acquired for two consecutive years; the current form provided by the San Francisco Rent Board must be completed in its entirety, following the form’s instructions carefully; the petition must be filed with the San Francisco Rent Board, including all the required signed copies and envelopes with the correct postage as listed on the Rent Board form; the tenants included in the petition must be noticed properly for the O&M increase, as well as the annual increase, on the appropriate anniversary date for each tenancy; the owner and, if applicable, the owner’s agent must appear before an administrative law judge at a scheduled Rent Board hearing, where preparation is key. The owner or agent must be prepared for questions concerning the documentation submitted and be ready to answer questions about building ownership, tenant histories, invoices and proof of payment. The owner will receive the decision issued from the San Francisco Rent Board and comply with said decision, collecting funds deferred to decision by tenants or refunding overpayments made prior to decision.
The San Francisco Rent Ordinance defines a successful O&M petition thusly: “A rent increase may be considered justified if it is found that the aggregate cost of operating and maintenance expenses (including, but not limited to, real-estate taxes, business registration and license fees, insurance, routine maintenance and repairs, water, sewer service charge, janitorial service, refuse removal, elevator service, security system and debt service) has increased over a 12-month period preceding the date of filing the petition (“Year 2”), compared to the operating and maintenance expenses incurred in the 12 months prior to Year 2 (“Year 1”), in a percentage amount of the tenant’s rent above the percentage amount equal to the allowable annual rent increase.”
As defined by the Rent Ordinance, an O&M petition is a comparison between two consecutive years of O&M expenses (calendar or fiscal) where there has been a substantial increase in expenses from one year to the next. It is the dollar-by-dollar comparison of all of the regular bills and repairs (not capital improvements or costs incurred by unit turnovers) to maintain the property (excluding PG&E, which has its own petition). An O&M increase, for the most part, cannot be obtained via the normal day-to-day increase of costs; for example, when the San Francisco Public Utilities Commission raises water and sewer rates from one year to the next, this amount (while sometimes financially burdensome) would more than likely not be substantial enough on its own to meet the threshold for an O&M increase. The increase in O&M costs must be dramatic from one year to the next and usually occurs during the sale/purchase of a building.
Under normal circumstances, when a building is sold costs rise dramatically through one or all of the “big three”: loan/debt service, property taxes and insurance. As an example, the previous owner of a building may have purchased the property more than 20 to 30 years ago and may no longer have a loan on the property or carry a substantially low loan; the new purchaser will more than likely have a new loan and possibly a second, carrying loan/debt service costs significantly higher than those of the previous owner. This expenditure alone represents a huge rise in monthly costs from one year to the next. While this is an example of how costs can rise on only one of the “big three,” the norm is that after a sale, all major expenses go up. While there might be large costs incurred through deferred maintenance repairs in one year, an O&M increase is usually based on the “big three.”
So far, an O&M increase sounds basic: compare the costs over two years, complete required paperwork, file, apply the increase on the annual increase notice on the anniversary date, appear at the required hearing and comply with the decision. However, what makes this petition difficult is the ability to gather all of the required information from the previous owner. The Rent Board requires that a copy of all bills, including regular repairs, as well as a proof of payment appropriate to those bills must be presented upon submission. The success of an O&M petition is contingent upon the complete records of the previous owner and their availability. Sometimes collecting these records can be challenging.
Two contingencies should be requested upon closing escrow: first, require that all documentation necessary to fulfill the requirements of an O&M petition be provided by the sale owner or agent by the closing date of escrow; and second, demand an authorized release form signed by the sale owner allowing all companies or vendors to provide documentation of billing as well as payment for services to the buying owner or owner’s agent. This release will enable the new owner or owner’s agent to acquire what is needed upon the purchase, effectively planning for the future increase a full year before filing.
For new owners who purchased property within the last five years but lack documentation and a release, an O&M petition becomes more difficult to file, but is not impossible. An O&M increase can be achieved under these circumstances by acquiring the above-mentioned release from the sale owner subsequent to sale and requesting the needed documentation from the companies and/or vendors for services rendered. While acquiring the documentation through this method is time consuming, it can be done. Without the release, an O&M increase can be achieved through repeated and documented requests for the required documentation, showing due diligence on the part of the owner and/or the owner’s agent to obtain the missing documentation, and then submitting all records when filing the petition.
It is easy to understand why an O&M petition is misunderstood and underutilized by owners in San Francisco. The above-mentioned requirements can be intimidating. The owner must fulfill these requirements to obtain the largest single increase allowed to base rent on a rent controlled apartment in San Francisco. The first step is to collect documentation. When the documentation is obtained, the proper petition form must be properly filled out and submitted to the Rent Board.
Next, an owner and/or agent must prepare for and attend a scheduled hearing and, finally, comply with the resulting decision. Each of these steps on their own can seem daunting for a new owner of a property, and in combination can seem overwhelming; however, knowing of the O&M petition’s existence and preparing for the data collection in advance is more than half of the battle. Even though owners are required to provide heavy documentation, an increase in the base rent by 7% is unequaled by the other forms of legal rent increases. Whether owners prepare and file the petitions themselves, or commission a professional to do the same, an O&M petition is another method of increasing rental revenue legally—and should be done.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Elizabeth Miller is the petition specialist with Property Management Systems and can be reached at 415-661-3860. Copyright © 2007 by SF Apartment Magazine. All rights reserved.