Los Gatos Municipal Code Div. 3 Criteria for Evaluating Reasonableness of Supplemental Rent Increases

In determining the reasonableness of a supplemental rent increase, the arbitrator shall consider this article's purpose to permit mobile home park owners a just and reasonable return while protecting tenants from arbitrary, capricious or unreasonable rent increases. The arbitrator shall consider the following factors:

(a) Fair rent return (Net Operating Income Approach set out below).

(b) Changes in the consumer price index.

(c) The rent lawfully charged for comparable mobile home spaces in the Town of Los Gatos.

(d) The history of rent increases in the previous five (5) years.

(e) The completion of any capital improvements, maintenance, or rehabilitation, the cost thereof, including cost of materials, labor, construction interest, permit fees, and other items as the arbitrator deems appropriate. These costs will be limited to an amount equal to the annual depreciation expense as allowed in section 14.85.240. Once the capital improvement has been fully depreciated, such expenses shall be excluded from the calculation of net operating income.

(f) Changes in property taxes or other taxes related to the mobile home park.

(g) Changes in the utility charges for the mobile home park paid by the mobile home park owner and the extent, if any, of reimbursement from the tenants.

(h) Changes in reasonable operating and maintenance expense.

(i) The need for repairs caused by circumstances other than ordinary wear and tear.

(j) The amount and quality of services provided by the mobile home park owner to the affected tenant including the value of service reductions, as determined by division 4 of this article.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

It is expected that the CPI rent increase will provide the owner with a fair and reasonable return. However, in the event that the CPI rent increase does not provide the owner with a fair and reasonable return, the owner may request a supplemental rent increase.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

For the purposes of determining the rent increase necessary to provide the owner with a fair and reasonable return, it shall be presumed that the Net Operating Income, as described below, provided the owner with a fair and reasonable return in the base year.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

(a) Except as provided in subsection (b) of this section, base year means the calendar year 1985.

(b) For spaces which were exempt from the provisions of this article pursuant to a rental agreement as described in section 14.85.025(b) and which are subject to the provisions of this article because of the expiration or other termination of such rental agreement, base year means the last twelve (12) months of the term of the rental agreement.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

The base year Net Operating Income shall be determined by calculating the NOI per space in the base year for each Los Gatos mobile home park and averaging them.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

Evidence to rebut the presumption of fair and reasonable return based upon the Base Year NOI may be presented during hearing on a petition and the arbitrator may adjust the Base Year NOI upon making at least one (1) of the following findings:

(a) The owner's operating expenses in the base year were unusually high or low in comparison to other years. In such instances, adjustments may be made in calculating operating expenses so the base year operating expenses reflect average expenses for the property over a reasonable period of time. The arbitrator shall consider the following factors in making this finding:

(1) Extraordinary amounts were expended for necessary maintenance and repairs.

(2) Maintenance and repair were below accepted standards and caused significant deterioration in the quality of services provided.

(3) Other expenses were unreasonably high or low notwithstanding the application of prudent business practices.

(b) The owner's operating expenses in the base year inadvertently omitted expenses actually paid, or include improper expenses.

(c) The gross income during the base year was disproportionate. In such instances, adjustments may be made in calculating gross income consistent with the purposes of this article. The arbitrator shall consider the following factors in making this finding:

(1) The gross income during the base year was lower than it might have been because some tenants were charged reduced rent.

(2) The gross income during the base year was significantly lower than normal because of the destruction of the premises and/or temporary eviction for construction or repairs.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

(a) The Net Operating Income for the base year shall be determined by:

(1) Determining the annualized gross income by totalling the rents collected during the base year per section 14.85.235.

(2) Determining the operating expenses during the base year per section 14.85.240.

(3) Subtracting the operating expenses from the annualized gross income.

(b) The NOI for years other than the base year shall be determined by:

(1) Determining the annualized gross income by totalling the rents for the twelve-month period ending within ninety (90) days prior to the notice of a rent increase or service reduction ("the relevant year").

(2) Determining the operating expenses during the relevant year.

(3) Determine annualized park NOI by subtracting operating expenses from annualized gross income.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

(a) For the purposes of determining the Net Operating Income, Gross Income shall be the sum of the following:

(1) Gross rents calculated as gross rental income at one hundred (100) percent occupancy of all spaces, adjusted for uncollected rents as provided in subsection (b) of this section;

(2) Income from any laundry facilities and parking fees;

(3) Costs of utilities paid directly to the owner by the mobile home tenants;

(4) All other income or consideration received or receivable in connection with the use or occupancy of the mobile home space including the regulatory fee required by section 14.85.030; and

(5) Proceeds from a sale of a mobile home park asset which exceed the book value of the asset. If an asset is conveyed from the mobile home park to another entity via a non-sales transaction, then, for this subparagraph, the transaction would be considered a sale and the sales price would be set at the fair market value of the asset.

(b) Gross rents shall be adjusted for uncollected rents due to vacancy of mobile home spaces and bad debts to the extent such are beyond the control of the owner. No such adjustment shall be greater than three (3) percent of gross rents unless justification for a higher rate is demonstrated by the owner.

(c) Gross income shall not include rent from mobile homes owned by the park owner which exceeds the average space rent. It shall be deemed that the rent for spaces occupied by mobile homes owned by the park owner or vacant spaces is equal to the average space rent of all other occupied spaces in the park. This rent shall be included in the gross rents as calculated in subpart (a)(1) above.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 1973, § XIV, 5-2-94; Ord. No. 2103, § I, 9-15-02)

(a) For the purposes of determining Net Operating Income, operating expenses shall include the following:

(1) Costs of operation and maintenance.

(2) Utility costs to the extent they are not included in costs of operation and maintenance.

(3) Owner performed labor compensated at reasonable hourly rates.

a. No owner performed labor shall be included as an operating expense unless the owner submits documentation showing the date, time, and nature of the work performed.

b. There shall be a maximum allowed under this provision of five (5) percent of gross income unless the owner shows greater services were performed for the benefit of the tenants.

(4) License, registration fees, and the regulatory fee required by section 14.85.030 as required by law to the extent not otherwise paid by the residents.

(5) Expenses of capital improvements (either improvements to existing capital items or acquisition of additional fixed assets) where all of the following conditions are met:

a. The capital improvement is made at a direct cost of not less than five thousand dollars ($5,000.00).

b. The costs, less any insurance proceeds or other applicable recovery, are averaged on a per space basis for each space actually benefited by the improvement. Infrastructure improvements shall be deemed a benefit to all park tenants unless a mobile home or group of mobile homes receive a higher level of service as a result of the improvement, in which case, costs will be apportioned on a pro rata basis.

c. The expense is limited to one-fifth (⅕) of the cost of the capital improvement or the annual depreciation as calculated by generally accepted accounting principles of the capital improvement whichever is less.

d. The costs do not include any additional costs incurred for property damage or deterioration resulting from unreasonable delay in the undertaking or completion of any repair or improvement.

e. If a capital improvement is removed from service, then the related depreciation shall discontinue accrual to operating expenses. Depreciation for a capital improvement shall also discontinue accrual to operating expenses when the book value of the capital improvement is reduced to the salvage value or zero, whichever is greater.

(6) Operating expenses as calculated by this section are to include repair and maintenance work on all spaces up to and including the utility pedestal. In the event gross rents are reduced by greater than the three (3) percent reduction cap allowed in subsection 14.85.235 (b), then a pro rata portion of the expenses will be reduced unless park owner can demonstrate that park has continually made a good faith effort to rent spaces at no more than market rental rates. All repair and maintenance on any spaces beyond the utility pedestal are not to be included in operating expenses.

(b) Operating expenses shall not include the following:

(1) Mortgage principal or interest payments or other debt service costs and park lease costs.

(2) Any penalties, fees or interest payments or other debt service costs and park lease costs.

(2) Any penalties, fees or interest assessed or awarded for violation of any provision of this article or of any other provision of law.

(3) Legal fees except as specified in subsection (c) of this section.

(4) Political contributions.

(5) Any expenses for which the owner has been reimbursed by any utility rebate or discount, security deposit, insurance settlement, judgment for damages, settlement or any other method or device.

(6) Costs arising from operation and maintenance, improvement, and acquisition of mobile homes owned by the park owner.

(7) Expenses of a capital improvement after the improvement is fully depreciated.

(8) Rehabilitation costs resulting from a work order issued by a public agency unless to correct conditions caused by a natural disaster.

(c) Legal expenses allowed in the calculation of operating expenses shall include: attorneys' fees and costs incurred in connection with successful good faith attempts to recover rents owing, successful good faith unlawful detainer actions not in derogation of applicable law, and legal expenses necessarily incurred in the normal operation of the park to the extent such expenses are not recovered from adverse or other parties. Attorneys' fees incurred in relation to the administrative or judicial proceedings in connection with this article are not allowable as operating expenses.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 1973, § XV, 5-2-94; Ord. No. 2103, § I, 9-15-02)

An owner has a fair and reasonable return when the owner's relevant year NOI is equal to the amount required for the owner to maintain the base year NOI adjusted annually by the consumer price index, plus increases allowed by vacancy as set forth in section 14.85.025(d).

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)

(a) The arbitrator shall set the amount of any supplemental rent increase in an amount not to exceed that required to provide the owner with a fair and reasonable return.

(b) In determining the supplemental rent increase required to provide the owner with a fair and reasonable return, the arbitrator shall determine:

(1) The fair and reasonable return in accordance with section 14.85.245.

(2) The gross income required to produce the fair and reasonable return.

(3) The rent increase needed to produce the required gross income.

(c) Rent increases based upon costs of capital improvements shall apply only to those spaces benefited by the capital improvements in accordance with section 14.85.240(a)(5)b.

(d) Rent increases based upon increased operating expenses shall apply only to those spaces for which such increased operating expenses were incurred.

(Ord. No. 1917, § I, 10-19-92; Ord. No. 2103, § I, 9-15-02)