A landlord may petition the Rent Board to pass through to tenants the costs of certain renovations to the property, which are considered capital improvements. A capital improvement is one that materially adds to the value of the property, appreciably prolongs its useful life, or adapts it to new uses, and which may be amortized over the useful life of the improvement of the building. Examples of capital improvements include new windows, a roof replacement and exterior painting. Repair and maintenance work, such as replacing a broken window pane, patching a roof or clearing a clogged pipe, or costs that are attributable to legalizing an existing dwelling unit under Planning Code Section 207.3 are not capital improvements.
The cost of capital improvement work that was required to correct a code violation for which a notice of violation was issued and remained unabated for 90 or more days will not be certified for passthrough to the tenants unless the landlord made timely good faith efforts to do the work within that 90-day period, but was unsuccessful due to the nature of the work or circumstances beyond the landlord’s control.
The landlord must file a Capital Improvement Petition with the Rent Board before the landlord serves the tenant with a written notice of rent increase for the capital improvement passthrough. The passthrough does not become part of the tenant’s base rent and should not be included in the base rent when calculating an annual or banked rent increase.
Capital Improvement Petitions must be filed within five years of the completion of the capital improvement work. A petition cannot be filed until the work is entirely completed. All petitions must be submitted on the forms provided by the Rent Board and must include supporting documentation. There are different forms and requirements for properties with 1-5 residential units and for properties with 6 or more residential units. There is also a special capital improvement petition form for seismic work required by law. Each form includes specific instructions for filing a Capital Improvement Petition.
The capital improvement passthrough does not become part of the tenant’s base rent and must be discontinued at the end of the applicable amortization period. If the landlord fails to discontinue the passthrough at the proper time, the landlord is liable to the tenant for the overpayments.
If payment of a capital improvement passthrough would present a financial hardship for a tenant, he or she may seek relief from payment of the increase by filing a Tenant Financial Hardship Application with the Rent Board. A tenant must wait to file the Hardship Application until the tenant has received either a rent increase notice from the landlord or written decision from the Rent Board. Once the tenant has filed the Hardship Application, the tenant does not have to pay the capital improvement passthrough unless the Rent Board issues a final decision denying the Hardship Application. If the Hardship Application is denied, the tenant will have to pay the capital improvement passthrough retroactive to the effective date on the rent increase notice. If the Hardship Application is granted, relief from payment of the capital improvement passthrough may be for an indefinite period or a limited period of time, depending on the nature of the tenant’s financial hardship.
Please refer to the topics below for information on specific requirements for Capital Improvement Petitions.
Construction Estimator Fees
There is no cost to file a Capital Improvement Petition. However, in some cases, the landlord must pay for the Rent Board’s cost of hiring an independent estimator. This is required where the Capital Improvement Petition requests certification of more than $25,000.00 in costs, and the petition does not include copies of either competitive bids or time and materials billings for each item. An estimator may also be necessary in cases where there are competitive bids and/or time and materials billings if the work is extensive, the documentation is unclear and/or where there are numerous tenant objections. The amount of the estimator’s fee depends on the claimed cost of the work that needs to be inspected and estimated.
A copy of the current estimator’s fee schedule is included in the Capital Improvement Petition form.
How to Divide Capital Improvement Costs
In order to pass through to tenants the cost of a capital improvement, the landlord must allocate the cost using a method that takes into account the extent to which each unit benefited from the improvement. Methods that may be appropriate, depending on the circumstances, include allocation based on equal division among all units or based on the square footage of each unit. A reasonable portion of a common area capital improvement cost must also be allocated to areas exclusively occupied or controlled by the landlord, such as a management office.
Where an improvement does not benefit all units, only those units benefited may be charged the capital improvement passthrough. For example, the cost of a new roof would be allocated to all units in the building, but the cost of new carpeting in an individual unit would be allocated to that unit only. Costs attributable to units where the rent cannot be raised (because of a lease restriction, owner occupancy or other reason) may not be allocated to the other units.
A new tenant cannot be charged for a capital improvement completed before the tenancy began since the owner was free to set a new market rent at the time the unit was vacant. In addition, capital improvement costs cannot be passed through to units that are first rented during the construction period or rented within six months of the commencement of work, unless ownership has changed in that period and the change of ownership occurred after the new tenancy commenced.
Interest on Capital Improvement Costs
When calculating a capital improvement passthrough, landlords are entitled to add a reasonable rate of interest to capital improvement costs. Interest is computed by one of two methods. If the money to do the work was borrowed with a fixed rate loan, the actual interest cost up to 10% will be used. If the interest rate on a loan is variable, or if no funds were borrowed to pay for the work, then an imputed interest rate as determined by the Rent Board each year will be used. Please note that credit card charges are subject to the imputed interest rate, since they have variable rates of interest. Also, no interest is allowed for uncompensated labor costs.
When the imputed interest rate is applicable, landlords must use the imputed interest rate in effect on the date the petition is filed. The imputed rate is determined annually and changes on March 1st of each year. The current interest rate is included on the various capital improvement petition forms.
Uncompensated Labor Rates
Landlords may include the cost of uncompensated labor in a Capital Improvement Petition. Uncompensated labor is labor performed for no remuneration of any kind. In order to make a claim for uncompensated labor costs, the petition must include a log of dates on which the work was performed. The log should also include the number of hours worked each day and the nature and location of the work performed.
If the uncompensated worker is licensed in the particular craft for which costs are being claimed, the landlord must provide a copy of the worker’s current license and evidence of the prevailing wage rate for that particular craft. If the uncompensated worker is not licensed, the uncompensated labor shall be valued at prevailing labor rates as established by the California Department of Industrial Relations. The craft classification to be employed shall be that of laborer. The landlord must use the labor rate in effect as of the date the work commenced.
Special Rules for Properties with 1-5 Residential Units
100% of the certified capital improvement costs may be passed through to the tenants of properties with one to five residential units. All residential units on the same property must be counted, even if they are in different buildings. Commercial units do not count for purposes of this rule, although a portion of the cost must be allocated to commercial units that benefit from the capital improvement work.
The amount of the passthrough may not exceed the greater of $30.00 or 5% of a tenant’s petition base rent in any 12-month period. Where certified costs exceed this limit, the landlord must impose the passthrough in phases. For large passthroughs, it may take the landlord several years before the passthrough is fully imposed.
The capital improvement cost must be amortized over 10 years, 15 years or 20 years, depending upon the type of improvement. The amortization schedules for various types of improvements can be found in the Capital Improvement Petition form for Properties with 1-5 Residential Units.
Special Rules for Properties with Six or More Residential Units
The following rules apply to capital improvement petitions for properties with six or more residential units. Commercial units do not count toward the number of units on the property, although a portion of the capital improvement cost must be allocated to commercial units that benefit from the capital improvement work.
If the cost of a project is reasonably expected to exceed $25,000.00 multiplied by the number of units on the parcel or in the building, the landlord shall immediately inform each tenant and the Rent Board in writing of the anticipated costs of the work. The landlord’s notice must occur within 30 days after such determination by the landlord.
In general, only 50% of the certified capital improvement costs may be passed through to the tenants. The amount of the passthrough may not exceed the greater of $30.00 or 10% of a tenant’s petition base rent in any 12-month period. However, a majority of tenants in any unit may elect an alternative passthrough based on 100% of the capital improvement costs. Election of the 100% passthrough alternative may be advantageous for tenants in certain situations, depending on such factors as when the tenant is going to vacate the unit, the certified costs of the capital improvements, the amount of the tenant’s base rent, the tenant’s financial situation and whether the tenant is concerned with capital improvement petitions that may be filed by the landlord in the future. Information concerning allowable rent increases under the 100% alternative passthrough can be obtained at the Rent Board, or tenants can consult private counsel and/or a tenants’ rights organization. A list of resources is available through the referral listing on our website.
Special Rules for Seismic Work & Other Improvements Required By Law
For seismic work that is required by law (and other work required by laws enacted after November 14, 2002), 100% of the capital improvement cost may be passed through to the tenants, regardless of the number of units in the property. Such increases are subject to an annual limitation of $30.00 or 10% of the tenant's petition base rent, whichever is greater. The amortization period for this work is 20 years.
There is a separate capital improvement petition form for seismic work and other improvements required by law.
Special Rules for Energy Conservation Work
For particular energy conservation work approved by the Commission on the Environment, 100% of the certified costs may be passed through to tenants of any property, regardless of the number of units. There is no annual limit on the amount of the passthrough. For more information on qualifying energy conservation improvements and renewable energy improvements, refer to Ordinance Section 37.7.
How to Notify Tenants of a Capital Improvement Increase
To impose a capital improvement passthrough, landlords must first file a Capital Improvement Petition at the Rent Board, and then issue a written notice of increase to the affected tenants. The notice can be served only after the petition is filed, or the landlord can wait until after the Rent Board issues a decision. If the notice is served before the petition is filed, the notice is void and cannot be the basis for a lawful capital improvement passthrough. Rent increases based on capital improvements may be imposed at any time and need not be imposed only on the tenant’s anniversary date. Prior to or at the hearing, the landlord must submit a copy of each rent increase notice served on the tenant(s) after the petition was filed.
State law requires service of a thirty-day notice if the passthrough, either by itself or combined with any other rent increase in the one year period before the effective date, is 10% or less. A ninety-day notice is required if the increase, either by itself or combined with any other rent increase in the one year period before the effective date, is more than 10%. If the rent increase notice is served by mail, the required notice period must be extended by an additional five days.
Tenants are not required to pay the passthrough until a final decision or order is issued by an Administrative Law Judge after a hearing. However, the passthrough, if approved, will be retroactive to the effective date of a valid notice of increase.
Tenant Objections to a Capital Improvement Petition
There are several grounds upon which tenants may object to a Capital Improvement Petition. If a tenant cannot attend the hearing, he or she can submit a written objection before the hearing or send a person to the hearing with written authority to represent the tenant at the hearing.
Permissible objections to a capital improvement petition include the following:
- The work claimed was not performed;
- The work performed was necessary due to the deferred maintenance of the current owner resulting in a code violation;
- The costs are excessive or unreasonable;
- The work performed inside the tenant’s unit was not necessary for health or safety reasons or to reduce excessive maintenance costs; and/or
- The work is more luxurious and costly than necessary, considering the socioeconomic status of the building’s existing tenants, and it was not necessary for reasons of health, safety or excessive maintenance costs.
Even in the absence of a tenant objection, the cost of a capital improvement will not be certified if the work was performed in order to correct a code violation for which a notice of violation remained unabated for 90 days, unless the landlord made timely good faith efforts to complete the work within the 90-day period, but was unsuccessful due to circumstances beyond the landlord’s control.
Habitability problems that either preceded the work or were caused by the work are not necessarily defenses to the passthrough of the costs, but may be grounds for a separate tenant petition for a reduction in rent based on a decrease in housing services.
If payment of the capital improvement passthrough would present a financial hardship for a tenant, he or she may seek relief from payment of the passthrough by filing a Tenant Financial Hardship Application with the Rent Board. A tenant may file a Hardship Application at any time after receipt of a capital improvement rent increase notice or after the Rent Board issues a written decision on the Capital Improvement Petition. Once the tenant has filed the Hardship Application, the tenant does not have to pay the capital improvement passthrough unless the Rent Board issues a final decision denying the Hardship Application. If the Hardship Application is denied, the tenant will have to pay the capital improvement passthrough retroactive to the effective date indicated on the rent increase notice. If the Hardship Application is granted, relief from payment of the capital improvement passthrough may be for an indefinite period or for a limited period of time, depending on the nature of the tenant’s financial hardship.
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