Perks in Progress
As long as property owners comply with regulations, there are benefits to renting to Section 8 tenants.
Q. I’m only getting Section 8 applicants for my vacant units. I’ve never rented to a Section 8 tenant before. Is there anything I should know before entering a contract?
A. Many of the features of a Section 8 tenancy will be new to you, but keep in mind, a Section 8 tenancy is still a tenancy. Of course, you do need to understand the differences so you can comply with the regulations.
First, it is important for you to know that, while you have some flexibility in selecting your future tenants, you actually cannot discriminate against Section 8 applicants. California’s Fair Employment and Housing Act protects prospective tenants from discrimination against categories like race, religion, gender, etc. A 2018 case reviewed a challenge to a local ordinance expanding these protections to “source of income” (including Section 8 housing choice vouchers). The Court of Appeal in CCSF v. Post upheld San Francisco’s authority to expand these protections, and while many were confused by the decision (that acknowledged the State law’s field preemption, but let a city define the field), California soon followed suit and protected Section 8 tenants from housing discrimination at the state level.
These rules exist for a reason: not every landlord is enthusiastic about entering a contract with both their prospective tenant and the third-party government agency administering the tenant’s rent subsidy. Of course, you seem eager to explore this new group of applicants, and you have good reason. Vacancy rates are up. Rents are down. Fortunately, California voters defeated Proposition 21 (the latest of many challenges to “vacancy decontrol”), but San Francisco continues to impose a disincentive for landlords to set the price cap of their asset at the nadir of the rental housing market.
And yet the current market is a great reason to consider Section 8 tenants. Rent control establishes a “base rent” at the initial monthly price. The base rent increases at only 60% of our regional CPI until all “original occupants” vacate. (On day one, tenants pay market rate, but many landlords lament the diminishing cash flow over time.) However, Section 8 rental rates are regulated by HUD (not San Francisco), and they track regional, fair-market payment standards over time, not historic market prices fixed at the outset.
This protected revenue stream does come at a cost; Section 8 tenancies require heightened habitability standards. If a landlord fails an annual housing quality standard inspection by SFHA, no rent is owed until the defects are cured. (This could be something as trivial as a single broken stove burner or a single malfunctioning power outlet.) However, this higher standard may be a blessing in disguise. While exempt from rent control, other local tenant protections apply. And while landlords are often surprised with liability to unhappy tenants (who may not have been forthcoming about issues with their housing), the public housing agencies’ frequent inspections ensure that your housing accommodations remain safe and sanitary, to keep your tenants happy, to protect you from liability, and to maintain market rate rental income. If your only applicants are Section 8 tenants, your choice is simple. But even if you have a field of candidates, the benefits of Section 8 tenancies during a pandemic will likely outweigh their increased administrative obligations.
Q. I understand that I am not obligated to offer a rent reduction, but can tenants successfully argue that their current rent is now above market value through the Rent Board or another forum?
A. There is a common misperception about what the Rent Board can and cannot do with regard to rents. In general, the Rent Board’s jurisdiction extends only to ascertain which rent adjustments are permitted and which ones are not. The Rent Board may not offer opinions and cast judgments on what constitutes fair or appropriate market rents as to new or current tenants.
This means that if a current tenant is paying what may be considered above fair market rent, any dispute about what ought to be paid moving forward in a depressed marketplace must be settled privately between the property owner and the tenant. The property owner may certainly refuse to lower the rent, and the tenant is free to vacate the apartment once any fixed lease term has expired. As has been written about previously, any rent reduction granted because of market conditions becomes permanent, even once market conditions improve.
The only real instance where the Rent Board may opine on fair market rent is when a property owner is seeking to adjust rent because of “extraordinary circumstances,” meaning initial base rent was set very low because of fraud, mental incompetency, or some recognized relationship between the owner and tenant that caused this initial pricing to be well under market value. For example, if you set rent especially lower for a close friend or relative, or if the price point was adjusted because the tenant is also your employee, then perhaps rent might be able to be increased in the future to the fair market level that existed when the tenant first moved into your housing. In this situation, the Rent Board Administrative Law Judge will consider evidence of initial fair market rent by viewing what comparable apartments rented for during that time period. Yet absent such a special circumstances dispute, the Rent Board stays out of the fray when it comes to determining what is and what is not market rent.
There is a law on the books which may make an owner liable in civil court for imposing a rent increase that is arguably in excess of market rent and designed to force the tenant out of the apartment. This component of tenant harassment makes it unlawful to increase rent “with an intent to defraud, intimidate, or coerce the tenant into vacating the unit” in bad faith. Evidence of bad faith may include, but is not limited, to the following: (i) the rent increase was substantially in excess of market rates for comparable units; (ii) the rent increase was within six months after an attempt to recover possession of the unit; and (iii) such other facts as a court or the Rent Board may deem relevant.
Here the issue centers more on existing tenants who are paying rents now considered in excess of the market given the unprecedented drop in rental prices during this past year. As stated above, neither the Rent Board nor any other forum can compel you to adjust pricing to reflect market conditions. The choice is yours to make, and please remember to keep in mind that any such rent decrease based upon the market becomes instantly permanent regardless of what happens in the future.
The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Dave Wasserman is with Wasserman-Stern Law Offices and can be reached at 415-567-9600. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100.