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City of Mountain View

Memorandum

To: Rental Housing Committee

From: Jannie Quinn, City Attorney & Anky van Deursen, Associate Planner & Karen Tiedemann, Special Counsel & Justin Bigelow, Special Counsel

Subject: Fair Return Standard

Date: June 19, 2017


RECOMMENDATION

Staff recommends the Rental Housing Committee consider the public input provided and select a fair return standard and direct staff to draft regulations for future adoption.

BACKGROUND

In its meeting on May 22, 2017, the Rental Housing Committee (RHC) was introduced to the concept of a fair return standard in a staff report and by means of a presentation, discussing the fair return concept, analysis of three potential methodologies for calculating a fair return, and the legal necessity to select a standard (see Attachments 1 and 2). The RHC directed staff to solicit input from stakeholders on a potential fair return standard both in the form of written comments and by organizing stakeholder meetings.

ANALYSIS

Solicitation of written comments was initiated through posting on the CSFRA website, and by sending an e-mail to all subscribers of MyMV — Rental Housing Committee. Stakeholder meetings were held on June 12 with landlord advocates and on June 13 with tenant advocates.

Written Comments

The following message was posted to guide the requested input:

“Purpose of Stakeholder input:

As part of the implementation of the CSFRA, the Rental Housing Committee is considering the adoption of a fair return standard to be used when hearing individual landlord petitions for upward rent adjustments. One of the stated purposes of the CSFRA is to control excessive rent increases for rental units covered by the CSFRA while ensuring landlords receive a fair and reasonable return on their investment. The CSFRA identifies a number of factors that may be considered when calculating a fair return but does not identify or create a fair return methodology. A Fair Return Standard would provide clarity, transparency and understanding of what constitutes fair return by landlords, and public consistency, clear guidance to RHC and Hearing Officers when hearing petitions and consistency in the decisions.

The Rental Housing Committee wants to hear from the stakeholders and consider the input of both landlords and tenants as part of their decision making process. The Rental Housing Committee heard a presentation on the concept of a fair return standard on May 22, 2017.

Q1: Should the Rental Housing Committee adopt a specific standard to calculate fair return for petitions filed by landlords for upward adjustment of rent?
Q2a: If no, how would a petition be adjudicated in order to achieve a fair return that accomplishes the goal of the CSFRA if there is no standard?
Q2b: If yes, which of the following options should be the standard? (An explanation of these options is available in the Agenda Report and PowerPoint on the CSFRA website).
a.Maintenance of Net Operating Income—CPI Adjustment
b.Maintenance of Net Operating Income—Ratio Adjustment
c.Fixed Return on Investment
d.Other?

Q3: Please explain why you chose this standard.
Q4: Is there any other information you would like the Rental Housing Committee to consider in deciding whether to adopt a fair return standard?”

This section contains a summary of the 44 submittals of written public input received. Acomplete set of written comments can be found in Attachment3 to this staff report:

The following standards were suggested:

Respondents also offered the additional feedback to the RHC:

Stakeholder Meetings

Stakeholder meetings were held on June 12, 2017 with 15 landlord representatives and advocates present and on June 13, 2017 with 13 tenant representatives and advocates present. A copy of the staff memo and the presentation were made available on the CSFRA website prior to the meetings and were handed out during the meeting.

The summaries in this section contain the key issues raised at each meeting, organized by topic and not chronologically.

Landlord Stakeholder Meeting:

All present agreed that some form of fair return standard needs to be implemented and applied whenalandlord petitions for an individual upward rent adjustment.

Most agreed on the following two standards, using the appraised market-rate value of the rental property as of a recent relevant date:

  1. Fixed Rate of Return: 12 percent [suggested as a percentage that would include recognition of a CPI component]
    • Would provide predictability and would require a less complex formula.
  2. Fixed Spread Rate of Return: 8 percent to 12 percent plus CPI
    • Would still provide more predictability than the other MNOI formulas, but would also provide more flexibility in light of future changes in the market for rental property.

Those in attendance did not support either the MNOI with CPI adjustment or MNOI with ratio adjustment.

In support of this standard, the landlords explained that afixed rate at a level such as 12 percent would be a more reasonable rate of return, because:

Suggestions Related to Capital Improvements Allowed under CSFRA:

Other Suggestions and Comments:

Tenant Stakeholder Meeting

All present agreed that a fair return standard needs to be implemented and applied when landlord petitions for individual upward adjustments are being reviewed.

According to all present, the standard MNOI plus CPI adjustment would be the best option for a specific standard.

Those in attendance supported neither the MNOI with ratio adjustment nor the Fixed Rate of Return on Investment. The latter is particularly disfavored. From the vantage point of the tenants, a Fixed Rate of Return formula works contrary to the purpose of the CSFRA to prevent excessive rent increases and it encourages speculation in the market. It does not recognize that landlords already benefit from the significant appreciation in the value of their rental property, especially if the base year is set at a recent or current date. The value of rental property has benefited in recent years from the significant infrastructure and vibrant community in Mountain View with high employment. These factors are much more important in determining the value of rental property than whether the rental income from the property is limited by rent control. Also, this standard may expose the City to legal liabilities.

The tenants explained the MNOI plus CPI adjustment is the most reasonable rate of return, considering:

Suggestions Related to Capital Improvements Allowed under CSFRA:

Other Suggestions and Comments:

STAFF RECOMMENDATION

At the May 22, 2017 meeting, staff recommended the RHC adopt the MNOI fair return standard because it is has been reviewed and accepted by the courts, it is widely used in California, it offers the simplest calculations for Hearing Officers and the RHC to use when hearing petitions,and it maintains individual landlord’s net operating income as received prior to the CSFRA. Although staff is mindful that the landlord stakeholders disfavored this approach, the proposals from the landlord stakeholders appear counter to the intent and purposes of the CSFRA and will likely result in litigation.

DRAFT DEFINITIONS FOR CAPITAL IMPROVEMENTS AND NET OPERATING INCOME

In response to the prior discussions of the RHC, staff has prepared draft definitions for both capital improvements and net operating income as these terms are not defined in the CSFRA and are factors to be considered by a Hearing Officer or RHC when hearing a petition (see Attachment 4). These definitions are based on review of other cities ordinance and regulations and they are being presented to the RHC during its discussion on the fair return standard to provide some context. Staff would also like direction from the RHC regarding these definitions as they are not being proposed for adoption at this meeting but will be presented at a future meeting.

FISCAL IMPACT

The methodology selected could impact the time and costs the Hearing Officers spend on each petition, and therefore, the budget of the RHC. Staff’s recommendation would result in the most effective methodology to implement.

NEXT STEPS

Once the RHC completes its deliberations on the fair return standard, staff will draft a fair return regulation and return to the RHC with all three components of the petition process (petition, hearing, and fair return standard regulations).

PUBLIC NOTICING — Agenda posting.


Last updated on 7/2/2017