Morgan Hill Municipal Code Art. III Rent Increase Standards—Fair Return

The hearing panel shall determine whether rent increases are reasonable under the circumstances taking into consideration that the purpose of this chapter is to permit owners a just and reasonable return on their property while protecting tenants from arbitrary, capricious or unreasonable rent increases. The hearing panel's determination shall be made with reference to the standards set out in this article.

(Ord. 856 N.S. § 1 (part), 1988)

(Ord. No. 1929 N.S., § 2, 4-22-2009)

For the purposes of space rent adjustment proceedings, the following definitions shall be used:

A. "Net operating income" equals gross income less operating expenses.

B. "Gross income" equals:

1. Gross rents, computed as gross rental income at one hundred percent paid occupancy; plus

2. Interest from rental deposits, unless directly paid by the landlord to the tenants (interest shall be computed at the rate of five and one-half percent of all deposits unless such deposits earn greater interest); plus

3. Income from laundry facilities, cleaning fees or services, garage and parking fees; plus

4. All other income or consideration received or receivable for or in connection with the use or occupancy of rental units and housing services, services, garage and parking fees;

5. Minus uncollected rents due to vacancy and bad debts to the extent that the same are beyond the owner's control. Uncollected rents in excess of three percent of gross rents shall be presumed to be unreasonable unless established otherwise. Where uncollected rents must be estimated, the average of the preceding three years experience shall be used, or some other comparable method.

C. 1.

"Operating expenses" shall include the following:

a. Real property taxes;

b. Utility costs;

c. Management expenses (contracted or owner performed), including necessary and reasonable advertising, accounting, insurance and other managerial expenses and allowable legal expenses. Management expenses are presumed to be five percent of gross income, unless established otherwise;

d. Normal repair and maintenance expenses, including painting, normal cleaning, fumigation, landscaping and repair of all standard services, including electrical, plumbing and sanitary sewer;

e. i. Owner-performed labor, which shall be compensated at the following hourly rates upon documentation being provided showing the date, time and nature of the work performed:

(A) General maintenance at the general prevailing hourly wage as set out in the most recent "Report of The Labor Commission, U.S. Department of Labor,"

(B) Skilled labor at two times such rate;

ii. Notwithstanding the above, an owner may receive greater or lesser compensation for self-labor if it can be shown that the amounts set forth above are substantially unfair in a given case. There shall be a maximum allowance under this subsection of five percent of gross income, unless the owner shows greater services for the benefit of tenants;

f. Rehabilitation or repair work done on or in a mobile home park in order to comply with an order issued by the building department, or to repair damage resulting from fire, earthquake or other natural disaster;

g. License and registration fees required by law to the extent the same are not otherwise paid by tenants;

h. Capital expenses with a total cost of less than one hundred dollars per year per benefited space, and the amortized portion of other capital expenses otherwise allowed by regulation.

2. Operating expenses shall not include:

a. Avoidable and unnecessary expenses/increases since the base year;

b. Mortgage principal and interest payments;

c. Any penalties, fees or interest assessed or awarded for violation of this or any other law;

d. Attorneys' fees and legal costs in connection with civil actions against the city;

e. Depreciation;

f. Any expense for which the owner has been reimbursed by any security deposit, insurance settlement, judgment for damages, settlement or any other method;

g. Fees assessed under Section 5.36.380 of this chapter.

D. Base year for purposes of these regulations shall mean calendar year 1981.

E. Consumer Price Index is defined in subsection D of Section 5.36.020 of this chapter.

(Ord. 856 N.S. § 1 (part), 1988)

Except as provided in Section 5.36.280(A) of this article, it shall be presumed that the net operating income produced by a property during the base year provided a just and reasonable return on property. Owners shall be entitled to maintain and increase their net operating income from year to year in accordance with Section 5.36.310 of this article.

(Ord. 856 N.S. § 1 (part), 1988)

It may be determined that the base year net operating income yielded other than a just and reasonable return on property, in which case, the base year net operating income may be adjusted accordingly. In order to make such determination, the hearing panel must make at least one of the following findings:

A. Owner's operating and maintenance expenses in the base year were unusually high or low in comparison to other years. In such instances, adjustments may be made in calculating such expenses so the base year operating expenses reflect average expenses for the property over a reasonable period of time. The hearing panel shall consider the following factors:

1. The owner made substantial capital improvements during 1981, which were not reflected in the rent levels on the base date;

2. Substantial repairs were made due to damage caused by natural disaster or vandalism;

3. Maintenance and repair was below accepted standards so as to cause significant deterioration in the quality of housing services;

4. Other expenses were unreasonably high or low notwithstanding the following of prudent business practice. In making this determination, the fact that property taxes prior to 1981 may have been higher than in the base year shall not be considered.

B. The rent on the base date was disproportionate due to one of the enumerated factors below. In such instances, adjustments may be made in calculating gross rents consistent with the purposes of this chapter:

1. The rent on the base date was established by a lease or other formal rental agreement which provided for substantially higher rent at other periods during the term of the lease;

2. The rent on the base date was substantially higher or lower than at other times of the year by reason of seasonal demand or seasonal variations in rent;

3. The rent on the base date was substantially higher or lower than preceding months by reason of premiums being charged or rebates being given for reasons unique to particular spaces or limited to the period determining the base rent.

C. It shall be presumed that where net operating income is less than fifty percent of gross income in the base year, after making adjustments as permitted by subsections A and B of this section, the owner was receiving less than a just and reasonable return on property. In such a case, for purposes of determining base year net operating income, gross income shall be adjusted upward to twice the amount of adjusted base year operating expenses.

(Ord. 856 N.S. § 1 (part), 1988)

(Ord. No. 1929 N.S., § 2, 4-22-2009)

A. To determine the net operating income during the base year, there shall be deducted from the annualized gross income being realized on January 1, 1982, a sum equal to the actual operating expenses for calendar year 1981, unless the owner demonstrates to the satisfaction of the hearing panel that some other twelve consecutive month period is justified by reasons independent of the purpose of this article. In all cases, January 1, 1982, shall fall within the twelve-month period utilized in this chapter, except as provided in subsection B of this section.

B. In the event that the owner did not own the subject property on January 1, 1982, the operating expenses for 1981 shall be determined in one of the following manners, whichever the hearing panel determines to be more reliable in the particular case:

1. The previous owner's actual operating expenses as defined in subsection C of Section 5.36.260 of this article or, where unavailable;

2. Actual operating expenses for the first calendar year of ownership, discounted to 1981 by the schedule in Section 5.36.300 of this article.

C. In the event that a petition for rent increase involves less than fifty percent of the spaces in a mobile home park, the net operating income for the base year shall be determined only for the spaces affected by the petition. The net operating income for these spaces will be determined under the procedure outlined in Section 5.36.260. Should specific documentation not be available on individual spaces for the base year, the hearing panel shall make a reasonable determination of the net operating income.

(Ord. 998 N.S. § 4, 1990: Ord. 856 N.S. § 1 (part), 1988)

(Ord. No. 1929 N.S., § 2, 4-22-2009)

Where scheduling of rent increase, or other calculations require projections of income and expenses, it shall be assumed that operating expenses, exclusive of property taxes and management expenses, increase at ten percent per year, that property taxes increase at two percent per year, and that management expenses are five percent of gross income.

(Ord. 856 N.S. § 1 (part), 1988)

A. Upon filing of a petition by an owner, rent increases may be permitted such that the owner's net operating income will be increased at the rate of forty percent of the increase in the CPI over the base year. The increase in the CPI shall be calculated by dividing the most recently reported monthly figure at the time of filing of the petition by the monthly figure for February 1981 = (2/81 CPI = 260.5).

B. In the event that a petition by an owner involves less than fifty percent of the spaces in a mobile home park, rent increases may be permitted such that the owner's net operating income on the affected spaces will be increased at the rate of forty percent of the CPI over the base year.

(Ord. 998 N.S. § 5, 1990: Ord. 856 N.S. § 1 (part), 1988)

Notwithstanding any other provision of this chapter, no upward rent adjustment may be authorized for any given year in an amount in excess of twice the San Francisco/Oakland Bay Area Consumer Price Index (CPI) or fifteen percent, whichever is less. The applicable figure for the CPI shall be the figure for the twelve month period ending sixty days before the notice of rent space was given. If the amount of any individual adjustment otherwise justified under this article is greater than such limit, the full justified amount shall be granted over a period of years such that the rent does not increase by greater than the limit in any given year.

(Ord. 998 N.S. § 6, 1990: Ord. 856 N.S. § 1 (part), 1988)