Despite Legislative Fix, Rent Increase Loopholes Persist

Large landlords are still succeeding in raising rent through limited maintenance cost pass-throughs meant to protect mom and pop owners. 

Backed by the Board of Supervisors, tenant advocates are pushing for a rent control loophole to be fully closed — one meant for individual landlords but which only corporate landlords are taking advantage of.

Previously, property owners could legally substantially raise rents in rent-controlled  housing through “operational and maintenance pass-throughs,” known as O&M’s, to offset debt and property taxes. In closing the loophole in June 2018, the Board of Supervisors included a provision meant to protect mom and pop landlords who may have bought the property before the legislation was introduced with the expectation that they could impose O&M increases to recoup costs.

But none of the 31 petitions encompassing more than 400 tenants that have successfully increased rent using this “reasonable reliance” argument are owned by small landlords, according to data presented by Rent Board Commissioner Reese Isbell in September. There are another 57 pending petitions for O&M increases impacting 585 units, though Rent Board Executive Director Robert Collins says it’s not yet known if they’ll invoke the same argument.

“It’s not something, at the Rent Board, that the tenants are winning,” says Isbell, who is an alternate voting member for tenants. “‘Reasonable reliance’ was written around the concept of mom and pop reasonably relying on this income to make ends meet. Since then it’s been all these larger corporations saying we need this money and using the reliance concept of higher rate of return versus actually really needing it.”

Veritas Investments accounts for 12 settled cases in which it invoked “reasonable reliance,” says Isbell. By the Housing Rights Committee of San Francisco’s count, 24 of both settled and pending cases in 2019 alone involve Veritas or GreenTree, its property management operator. More than 8,000 people live in its more than 200 rent-controlled buildings, the company says.

In response to public pressure from tenant advocates, Veritas launched a waiver program this past month agreeing to forgo increases related to O&Ms, capital improvements, and voter-approved bond pass-throughs for tenants facing certain hardships. They promised to immediately grant the waiver and verify it later through the Rent Board.

“As the largest operator in San Francisco, we understand our responsibility to our residents and communities. Veritas is committed to the well-being of our residents and especially to those who are most vulnerable in this tight housing market,” said Veritas CEO Yat-Pang Au in a statement. “We recognize the potential impact these expenses might have on residents and we will continue to find ways to help residents who need additional support and preserve affordability in San Francisco.”

But tenant advocates like the Housing Rights Committee of San Francisco aren’t stopping until all the pass-throughs — limited to seven percent, more than double the current 2.6 percent annual allowable increase for rent-controlled units — are dropped.

“The simplest solution is to drop the rent hikes but they’re avoiding that,” says Brad Hirn, lead community organizer with the Housing Rights Committee. “Veritas does not need these rent increases to make a fair rate of return.”

Veritas disagrees, arguing that the nearly century-old buildings it owns require significant construction work, much of it mandated by local or state law to meet standards on seismic retrofits, heating systems, roofing, electrical upgrades, and other repairs. 

“As you may know, it takes a tremendous amount of effort and investment to restore these buildings,” says Veritas spokesperson Juliana Bunim. “Managing something as meaningful and important as someone’s home is — and should be — a sensitive matter.”

Still, the Board of Supervisors is stepping in again, and unanimously approved a resolution on Tuesday that calls for the Rent Board to clarify its guidelines on “reasonable reliance.” The Rent Board will take up the matter at its Oct. 8 meeting but it’s not yet clear exactly what changes, if any, will be voted on.

“My constituents are currently facing hardship, uncertainty and displacement. This is unacceptable,” said Supervisor Vallie Brown, who put forward the resolution with Supervisors Aaron Peskin and Sandra Lee Fewer. “Too many people are struggling in today’s rental market. We want to ensure that tenants in San Francisco can count on more than corporate benevolence to keep a roof over their heads.”

Brown also called for a hearing on the matter, complete with a report from the Budget and Legislative Analyst, that is expected in the next few weeks. Hirn says that with all the wheels in motion, there should be a moratorium on O&Ms until the activity is settled.

For Veritas tenant Patrick Shannon, the potential changes come at a crucial time. Since Veritas took over his North Beach building in 2017, the rent for he and his wife, Katherine, has increased from $1,600 to about $2,100. Further O&M increases for his home of 16 years came before the Rent Board last week but remain pending and would be retroactive. (Veritas said the household underpaid their rent even with previous owners but Shannon said those problems started when he was told to sign up for an automatic payment system through his bank.)

“They’re going to hit us really hard with that,” Shannon says of the pending increase. “We have to weigh how much fighting I can continue to be involved in and not hurt Kathy with the stress and worry.”

Through the pinch of the increases, Shannon participated in a march held by tenant advocates last Tuesday and signed his name on a letter delivered to Au on Friday. But that’s starting to have limits for the retired 69-year-old and 68-year-old Katherine, who are worried about how to afford anywhere else.

“We’ve lived our life here in San Francisco. We’re San Francisco people,” says Shannon. “We lose something if we move away — I think San Francisco loses something, too.”

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