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Adopt a Resolution Establishing Regulations for a “Vega Adjustment” to be included in the Fair Return Standard of the Regulations (Chapter 6).
The purpose of the CSFRA is to stabilize rents in Mountain View by making rent increases that might otherwise be imposed on resident renters more predictable, while ensuring landlords receive a fair and reasonable return on their investments. During its July 24 meeting, the Rental Housing Committee adopted three chapters of regulations to implement sections 1710 and 1711 of the CSFRA defining the petition and hearing process for landlord and tenant petitions for upward and downward adjustments of rent. In the motionto adoptthe regulations, the RHC directed staff to draft a “generous” Vega Adjustment regulation, with at least two methodologies as described below.
The RHC has adopted a fair return standard that ensures landlords may earn a fair rate of return on their investment, as required by the U.S. and California Constitutions, using the maintenance of net operating income (“MNOI”) methodology. The purpose of the MNOI methodology is to “maintain” the value of the net operating income received by the landlord prior to stabilization of rents.
The first step of the MNOI methodology identifies the net operating income a landlord received in the Base Year (i.e.2015 gross income from the property, less 2015 operating expenses). The second step adjusts the 2015 net operating income based on an index (the CPI –Rent of Primary Residence), in order to “maintain” the value of the base year net operating income.If in the Petition Year the landlord is not earning at least the 2015 net operating income as adjusted by the CPI –Rent of Primary Residence from the property, then the landlord would be entitled to a rent increase beyond that allowed by annual general adjustments and vacancy decontrol.
The “Vega Adjustment” addresses situations where the base year net operating income is unusually low because the gross income from the property was unreasonably low (e.g. the rent charged for one or more Rent Stabilized Units in 2015 was unreasonably low).Notably, Vega Adjustments are one-way: they allow increases in rent to address unreasonably low Base Year Gross Income but do not allow downward adjustments for high Base Year Gross Income.In a 1990 court case, Vega v. City of West Hollywood, West Hollywood was required to revise the base year gross income for a landlord when implementing rent stabilization using the MNOI methodology.1 West Hollywood’s rent stabilization ordinance allowed for base year gross income to be adjusted if that income was “disproportionately low” due to “peculiar circumstances.” West Hollywood had not defined what income qualified as “disproportionately low,” which lead to a complicated hearing process and ultimately, litigation.Therefore, staff recommends defining “unreasonably low” rents to determine Vega Adjustments.
The RHC identified two potential methods to define and quantify “unreasonably low” Base Year Gross Income in accordance with the Vega case to provide a clear rule for landlords, tenants, and Hearing Officers. One method to define unreasonably low Base Year Gross Income would be based on standardized rent amounts published by the U.S. Department of Housing and Urban Development (“HUD”). Another method would require statistical analysis, comparing the rent for any unit for which a landlord allegedly received unreasonably low rent in the Base Year with the average rent charged by the same landlord in the base year for other Rent Stabilized Units in Mountain View. Options incorporating each methodology are analyzed below.
In response to the direction from the RHC, Staff has prepared threeoptions of draft regulations to define and quantify unreasonably low Base Year Gross Income based on data published by HUD and based on a statistical analysis of the petitioner-landlord’s Base Year rents. In addition to the three proposed regulation methodologies, there are two questions that will inform any proposal. First, which HUD data should be usedin each of the draft regulations?After selecting the data set and methodology, there is a question about the proper allocation of any rent increases based on a Vega Adjustment.
HUD County-Level and ZIPCode-Level Fair Market Rents (FMRs)
HUD annually estimates fair market rents (FMRs) for 530 metropolitan areas and 2,045 nonmetropolitan county FMR areas. Standard FMR data is published at the County level (e.g. the draft regulations could use data published for all of Santa Clara County). HUD recently began publishing more localized FMRs by ZIPcode, including data covering Mountain View.
County-level FMRs are primarily used to determine payment standard amounts for the Housing Choice Voucher program, to determine initial renewal rents forsome expiring project-based Section 8 contracts, to determine initial rents for housing assistance payment contracts in the Moderate Rehabilitation Single Room Occupancy program, and to serve as a rent ceiling in the HOME rental assistance program. ZIPcode-level FMRs are a pilot project and are officially permitted to be used only to set Section 8 Housing Choice Voucher payment standards in the Dallas, Texas HUD Metropolitan FMR Area and by public housing authorities participating in the SmallArea FMR Demonstration Program.Adequate Santa Clara County-level and ZIPcode-level data is available for the Base Year of 2015 to use either data set. The HUD county-level and ZIPcode-level FMRs for the 2015 Base Year are listed below.
| . | Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
|---|---|---|---|---|---|
| Santa Clara County | $1,213 | $1,419 | $1,809 | $2,325 | $2,636 |
| 94035 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94040 | $1,210 | $1,410 | $1,800 | $2,540 | $3,100 |
| 94041 | $1,270 | $1,480 | $1,890 | $2,670 | $3,250 |
| 94042 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94043 | $1,250 | $1,460 | $1,860 | $2,620 | $3,200 |
Option A: HUD Fair Market Rents—Per Unit Adjustment
Option A, the FMR—Per Unit Adjustment, is the simplest method to quantify unreasonably low unit rents in the Base Year. Upon submitting a petition for upward adjustment of rents, if a landlord received less than the identified FMR rent per month during the Base Year for a Rent Stabilized Unit in the subject property, then that landlord’s Base Year Gross Income would be increased to equal what the landlord would have hypothetically earned if the landlord had received the FMR rent for that unit. An example of the FMR—Per Unit Adjustment methodology is provided below.
EXAMPLE 1: County-Level FMR—Per Unit Adjustment
| Unit | Unit Type | Rent/Month | Annual Rent/Unit | Base Year Gross Income |
| 1 | Efficiency | $1,150 | $13,800 | $108,000 |
| 2 | Efficiency | $1,250 | $15,000 | $108,000 |
|3 | 1-Bedroom | $1,500 | $18,000 | $108,000 |
| 4 | 1-Bedroom | $1,550 | $18,600 | $108,000 |
| 5 | 2-Bedroom | $1,750 | $21,000 | $108,000 |
| 6 | 2-Bedroom | $1,800 | $21,600 | $108,000 |
County-Level FMR—Per Unit Adjustment(Applied to Unit 1)
| Unit | Unit Type | Rent/Month | Annual Rent/Unit | Vega Adjusted Base Year Gross Income |
|---|---|---|---|---|
| 1 | Efficiency | $1,213 | $14,556 | $108,756 |
Option B:HUD Fair Market Rents—Per Property Adjustment
Option B, the FMR—Per Property Adjustment, is slightly more complicated than Option A, the FMR—Per Unit Adjustment, but better accommodates the MNOI methodology by quantifying unreasonably low Base Year unit rents in the context of the property. Upon submitting a petition for upward adjustment of rents, the landlord’s Base Year Gross Income would be compared to the hypothetical Base Year Gross Income that the Landlord would have received if the landlord had charged FMR rents for all units in the property. If the landlord’s Base Year Gross Income were less than the hypothetical Gross Income using the FMRs, then the landlord’s petition for upward adjustment of rents would use the hypothetical Gross Income for purposes of the MNOI methodology. Example 2 shows the FMR—Per Property Adjustment methodology.
EXAMPLE 2: County-Level FMR—Per PropertyAdjustment
| Unit | Unit Type | Rent/Month | Annual Rent/Unit | Base Year Gross Income |
| — | — | — | — | — |
| 1 | Efficiency | $1,150 | $13,800 | $108,000 |
| 2 | Efficiency | $1,250 | $15,000 | $108,000 |
| 3 | 1-Bedroom | $1,500 | $18,000 | $108,000 |
| 4 | 1-Bedroom | $1,550 | $18,600 | $108,000 |
| 5 | 2-Bedroom | $1,750 | $21,000 | $108,000 |
| 6 | 2-Bedroom | $1,800 | $21,600 | $108,000 |
County-Level FMR—Per Property Adjustment
| Unit | Unit Type | Rent/Month | Annual Rent/Unit | Vega AdjustedBase Year Gross Income |
| — | — | — | — | — |
| 1 | Efficiency | $1,213 | $14,556 | . |
| 2 | Efficiency | $1,213 | $14,556 | . |
| 3 | 1-Bedroom | $1,419 | $17,028 | . |
| 4 | 1-Bedroom | $1,419 | $17,028 | . |
| 5 | 2-Bedroom | $1,809 | $21,708 | . |
| 6 | 2-Bedroom | $1,809 | $20,708 | . |
Base Year Gross Income > Vega Adjustment, so no Vega Adjustment warranted
Example 2 uses the same unit count, unit mix, and rents as Example 1. However, in Example 2 Base Year Gross Income ($108,000) is greater than the Vega Adjusted Base Year Gross Income ($106,584) and so the landlord would not be entitled to a Vega Adjustment for that property.In this example, if the Base Year Gross Income were less than $106,584, then the landlord would be entitled to a Vega Adjustment.
The FMR—Per Property Adjustment better fulfills the purposes of the MNOI methodology by looking holistically at a landlord’s gross income from the property. The FMR—Per Property Adjustment is more consistent with the MNOI fair return methodology than the FMR—Per Unit Adjustment, which adjusts only for individual units with unreasonably low rents without accounting for other unit rents from the property that may cross-subsidize or otherwise justify the unreasonably low rent from a particular unit.
Option C: Two Standard Deviations from Mean Rents Received by LandlordOption C, initially outlined by RHC Member Means, would quantify unreasonably low rent on a per-unit basisin the Base Year. Upon submitting a petition for upward adjustment of rents, a Hearing Officer would compare the difference between the monthly rent for each unit with the average rent charged by the landlord for all units in the same property. If the monthly rent for any unit was less than the average monthly rent chargedfor all units in the buildingby the landlord by two standard deviations, then the landlord would be entitled to a Vega Adjustment for the property.
A standard deviation is a statistical quantification of variations among a set of numbers. Figure 1 visualizes what is referred to as a “normal distribution.” The percentages in and above the figure show where most of the data points would be graphed (e.g. most data points are clustered near the center line or mean). The numbers and symbol (σ or sigma) below the figure identifies the standard deviation associated with each statistical area in a normal distribution (e.g. a standard deviation measures the statistical distance between one data point and the average value of the complete data set).Zero sigma (0) is the center line, or the statistical mean. 34.1% of the data points in a normal distribution will be between the mean and positive one sigma (1σ); 64.2% of all data points in a normal distribution will be plus or minus one standarddeviation from the mean (+/-1σ, the dark blue area in Figure 1). Similarly, 95.6% of all data points will be plus or minus two standard deviations from the mean (+/-2σ).
FIGURE 1: Normal Distribution2 [insert image]
For use in the Vega Adjustment setting, the average, mean rent would be zero on the normal distribution figure. Any unit with an average monthly rent in the Base Year that was less than negative two sigma (-2σ) would be considered unreasonably low and therefore qualify for a Vega Adjustment.
Example 3, below,demonstrates how the standard deviation methodology would work using the same rents as Examples 1 and 2. Like Example 2, the two standard deviation methodology does not result in a Vega Adjustment in Example 3.
EXAMPLE 3: Two Standard Deviations from Mean Rents Adjustment
| Unit | Unit Type | Rent/Month($) | Annual Rent/Unit($) | Difference Unit Rent less Mean Rent ($) | Qualifies for Vega Adjustment? |
| — | — | — | — | — | — |
| 1 | Efficiency | 1,150 | 13,800 | -350 | . |
| 2 | Efficiency | 1,250 | 15,000 | -250 | . |
| 3 | 1-Bedroom | 1,500 | 18,000 | 0 | No |
| 4 | 1-Bedroom | 1,550 | 18,600 | 50 | . |
| 5 | 2-Bedroom | 1,750 | 21,000 | 250 | . |
| 6 | 2-Bedroom | 1,800 | 21,600 | 300 | . |
Sum: 108,000
Mean Monthly Rent(Sum / Unit Count) / 12 Months: 1,500
Standard Deviation: 238.05
Two Standard Deviations: 476.10
Mathematically the two standard deviation methodology would never allow a Vega Adjustment for properties with five or fewer units because any rents charged for the five units will always fall within two standard deviations of the mean rent, even if one of the five units paid only one dollar per month. Accordingly, staff recommends that the two standard deviation methodology use the HUD FMRs to augment the rents of four and five unit properties.
Example 4, on the following page, demonstrates how the HUD FMRs would be used to augment rents for a four-unit property, as drafted in Option C of the regulations.
EXAMPLE 4: Two Standard Deviations from Mean Rents Adjustmentwith HUD FMRs
| Unit | Unit Type | Rent/Month($) | Annual Rent/Unit($) | Difference Unit Rent less Mean Rent ($) | Qualifies for Vega Adjustment? |
| — | — | — | — | — | — |
| 1 | 1-Bedroom | 900 | 10,800 | -523 | . |
| 2 | 1-Bedroom | 1,600 | 19,200 | 177 | . |
| 3 | 1-Bedroom | 1,600 | 19,200 | 177 | Yes |
| 4 | 1-Bedroom | 1,600 | 19,200 | 177 | . |
| FMR | 1-Bedroom | 1,419 | 17,028 | . | . |
| FMR | 1-Bedroom | 1,419 | 17,028 | . | . |
Sum: 102,456
Mean Monthly Rent(Sum / Unit Count) / 12 Months: 1,423
Standard Deviation: 247.50
Two Standard Deviations: 495
Because of the complexity of the standard deviation methodology and as it requires augmentation for four and five unit properties, staff recommends using another methodology.
Allocation of Rent Increases Based on the Vega Adjustment
It is important to note that the Vega Adjustment standard is one component of the fair return standard and any upward increase in rent in excess of the annual general adjustment under the CSFRA requires a landlord petition. However, properties with units for which unreasonably low rents were charged in 2015, and that have not experienced vacancy decontrol,will be more likely to receive a rent increase under the MNOI fair return methodology.
The RHC must determine whether the portion of the rent increase attributed to the Vega Adjustment should be allocated only to those units that triggered the Vega Adjustment, or should be equally allocated to all units in the building. Either of these variants (allocating Vega Adjustment-based rent increases per unit or equally to all units) can be accommodated in any of the options (FMR-Per Unit Adjustment, FMR-Per Property Adjustment, or Two Standard Deviations from Mean Rents).
The adopted regulations will be used to determine the time and consequently the costs the Hearing Officers spend on each petition, and therefore, the budget of the RHC.
[Insert image] http://www.zipmap.net/California/Santa_Clara_County/Mountain_View.htm
Standard Deviation Formula
[insert image]
Notes:
[insert image]
For purposes of the Vega Adjustment, the standard deviation is calculated by first calculating the average rent for all units in the building (mean rent). Second, each unit rent is compared to the mean rent. Third, the difference between the unit rent and mean rent is squared. Fourth, the squared differences for all rents are added together. Fifth, the sum of the squared differences is divided by the number of units; the square root of that number is the standard deviation. The formula for calculating the standard deviation is provided above and interpreted below.
| Chapter | Title |
|---|---|
| Chapter 1 | General |
| Chapter 2 | Definitions |
| Chapter 3 | Rules of Conduct |
| Chapter 4 | Petition Process |
| Chapter 5 | Hearings Procedure |
| Chapter 6 | Fair Return |
| Chapter 7 | Rental Housing Fee |
| Chapter 8 | — |
| Chapter 9 | — |
[Previously Adopted.] It is presumed that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property. Landlords shall be entitled to maintain their Net Operating Income from year to year in accordance with this Chapter 6.
[Previously adopted.] The Landlord, in a Petition for Upward Adjustment of Rents, may rebut the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property by demonstrating peculiar circumstances unique to the property that caused either the Gross Income or Operating Expenses during the Base Year to differ significantly from either the Gross Income or Operating Expenses of other properties of similar size, quality, andconditions.
Vega Adjustment Standard.
a. Defining Unreasonably Low Average Monthly Rent. The Landlord, in a Petition for Upward Adjustment of Rents, will be presumed to have rebutted the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property if the average monthly Rent received in the Base Year for an individual Rent Stabilized Unit in the property was unusually low. For purposes of this section, unusually low means that the average monthly Rent received for the occupancy and use of the Rent Stabilized Unit was less than [OPTIONA(i)or A(ii): choose either (i) county FMRs or (ii) zip code FMRs.]
i. the “fair market rents” published by the U.S. Department of Housing and UrbanDevelopment for fiscal year 2015 for Santa Clara County, as replicated in the table below, for the most similar unit type based on the number of bedrooms.
| Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
| — | — | — | — | — |
| $1,213 | $1,419 | $1,809 | $2,551 | $2,892 |
ii. the small area “fair market rents” published by the U.S. Department of Housing and Urban Development for fiscal year 2015 for Mountain View zip codes, as replicated in the table below, for the most similar unit type in the same zip code and based on the number of bedrooms.
| Zip Code | Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
| — | — | — | — | — | — |
| 94035 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94040 | $1,210 | $1,410 | $1,800 | $2,540 | $3,100 |
| 94041 | $1,270 | $1,480 | $1,890 | $2,670 | $3,250 |
| 94042 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94043 | $1,250 | $1,460 | $1,860 | $2,620 | $3,200 |
b. Calculating the Average Monthly Rent Received in the Base Year for an Individual Rent Stabilized Unit. To calculate the average monthly Rent received in the Base Year, divide the sum of all Rent received that relates to one Rent Stabilized Unit by the number of months for which Rent was received for that unit, regardless of the number of tenants occupying, or the number of tenancies for, that Rent Stabilized Unit in the Base Year (e.g. if Unit X was occupied from January 2015 through June 2015 for $1,000 per month, was vacant in July 2015, and was occupied from August 2015 through December 2015 for $1,110 per month, then the average monthly Rent received in the Base Year for Unit X would be $11,550 divided by 11 months of occupancy, or $1,050 per month of occupancy).
c. Recalculating Base Year Gross Income. If the average monthly Rent received for any individual Rent Stabilized Unit in the property during the Base Year was less than the fair market rents defined in subsection (a) of this Section G(3) above, then the Base Year Gross Income for the property shall be recalculated for purposes of determining the Base Year Net Operating Income by (1) subtracting the actual Rent received from each Rent Stabilized Unit for which the average monthly Rent received was unusually low, and (2) adding the fair market rent for the most similar unit type, for the same dates of occupancy and, in the same geographic area, as described above.
d. Contesting Recalculation of Base Year Gross Income. One or more Tenants may contest or dispute any recalculation of the Base Year Gross Income for purposes of determining the Base Year Net Operating Income in a Landlord’s Petition for Upward Adjustment of Rents. Tenant arguments contesting or disputingany recalculation of the Base Year Gross Income may include, but are not limited to, evidence or documentation related to the physical condition of the property or any individual Rent Stabilized Unit, the market conditions that relate to the property or any individual Rent Stabilized Unit, and/or any other relevant evidence that a recalculation of the Base Year Gross Income, as contemplated in this Section G, is unnecessary for the landlord to receive a fair return on investment for the property, fails to ensure fairness, or is otherwise contrary to the purposes of the Act.
e. Allocation of Upward Adjustment of Rents. The portion of any Upward Adjustment of Rents that results solely from the Vega Adjustment described in this Section G(3) shall be allocated: [Option A choose either(i) or (ii)]
i. equally among each Rent Stabilized Unit for which average monthly Rents were unreasonably low, or
ii. equally among all Rent Stabilized Units subject to the Petition, subject to the condition that in the interest of justice, a Hearing Officer and/or the Rental Housing Committee may allocate Rent increases in another manner necessary to ensure fairness and further the purposes of the Act.
| Chapter | Title |
|---|---|
| Chapter 1 | General |
| Chapter 2 | Definitions |
| Chapter 3 | Rules of Conduct |
| Chapter 4 | Petition Process |
| Chapter 5 | Hearings Procedure |
| Chapter 6 | Fair Return |
| Chapter 7 | Rental Housing Fee |
| Chapter 8 | — |
| Chapter 9 | — |
[Previously Adopted.] It is presumed that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property. Landlords shall be entitled to maintain their Net Operating Income from year to year in accordance with this Chapter 6.
[Previously adopted.] The Landlord, in a Petition for Upward Adjustment of Rents, may rebut the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property by demonstrating peculiar circumstances unique to the property that caused either the Gross Income or Operating Expenses during the Base Year to differ significantly from either the Gross Income or Operating Expenses of other properties of similar size, quality, andconditions.
Vega Adjustment Standard
a. Defining Unreasonably Low Annual Rent. The Landlord, in a Petition for Upward Adjustment of Rents, will be presumed to have rebutted the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property if the total Rent received for all Rent Stabilized Units in the property during the Base Year was unusually low. For purposes of this section, unusually low means that the total Rent received for all Rent Stabilized Units in the property was less than [OPTIONB(i)or B(ii): choose either (i) county FMRs or (ii) zip code FMRs.]
i. the sum of the Rent that would have been received from the property, if the occupancy remained the same but the Rent for each Rent Stabilized Unit equaled the “fair market rents” published by the U.S. Department of Housing and Urban Development for fiscal year 2015 for Santa Clara County, as replicated in the table below, for the most similar unit type based on the number of bedrooms.
| Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
| — | — | — | — | — |
| $1,213 | $1,419 | $1,809 | $2,551 | $2,892 |
ii. the sum of the Rent that would have been received from the property, if the occupancy remained the same but the Rent for each Rent Stabilized Unit equaled the small area “fair market rents” published by the U.S. Department of Housing and Urban Development for fiscal year 2015 for Mountain View zip codes, as replicated in the table below, for the most similar unit type based on the number of bedrooms and located in the same zip code.
| Zip Code | Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
| — | — | — | — | — | — |
| 94035 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94040 | $1,210 | $1,410 | $1,800 | $2,540 | $3,100 |
| 94041 | $1,270 | $1,480 | $1,890 | $2,670 | $3,250 |
| 94042 | $1,210 | $1,420 | $1,810 | $2,550 | $3,120 |
| 94043 | $1,250 | $1,460 | $1,860 | $2,620 | $3,200 |
b. Recalculating Base Year Gross Income. If the total Rent received for all Rent Stabilized Units in the property during the Base Year was less than the total Rent that would have been received if the Rent for each Rent Stabilized Unit were equal to the fair market rents defined in subsection (a) of this Section G(3) above, then the Base Year Gross Income for the property shall be recalculated for purposes of determining the Base Year Net Operating Income. The Base Year Gross Income shall be replaced with the total Rent that would have been received if the Rent for each Rent Stabilized Unit in the property were equal to the fair market rent for the most similar unit type, in the same geographic area, and based on the same occupancy status, as described above (e.g. if a Landlord received Rent for four one-bedroom units in Building X for 12 months of occupancy each, and received Rent for 11 months of occupancy for a fifth one-bedroom unit in Building X, then the total recalculated Base Year Gross Income would equal the fair market rent for a one-bedroom unit multiplied by four units, multiplied by 12 months, plus the fair market rent for a one-bedroom unit, multiplied by one unit, multiplied by 11 months, or 59 total months of occupancy of one-bedroom units at fair market rent).
c. Contesting Recalculation of Base Year Gross Income. One or more Tenants may contest or dispute any recalculation of the Base Year Gross Income for purposes of determining the Base Year Net Operating Income in a Landlord’s Petition for Upward Adjustment of Rents. Tenant arguments contesting or disputing any recalculation of the Base Year Gross Income may include, but are not limited, evidence or documentation related to the physical condition of the property or any individual Rent Stabilized Unit, the market conditions that relate to the property or any individual Rent Stabilized Unit, and/or any other relevant evidence that a recalculation of the Base Year Gross Income, as contemplated in this Section G, is unnecessary for the landlord to receive a fair return on investment for the property, fails to ensure fairness, or is otherwise contrary to the purposes of the Act.
d. Allocation of Upward Adjustment of Rents. The portion of any Upward Adjustment of Rents that results solely from the Vega Adjustment described in this Section G(3) shall be allocated:[OptionB Choose Either(i) or (ii)]
i. equally among each Rent Stabilized Unit for which average monthly Rents were unreasonably low, or
ii. equally among all Rent Stabilized Units subject to the Petition,subject to the condition that in the interest of justice, a Hearing Officer and/or the Rental Housing Committee may allocate Rent increases in another manner necessary to ensure fairness and further the purposes of the Act.
| Chapter | Title |
|---|---|
| Chapter 1 | General |
| Chapter 2 | Definitions |
| Chapter 3 | Rules of Conduct |
| Chapter 4 | Petition Process |
| Chapter 5 | Hearings Procedure |
| Chapter 6 | Fair Return |
| Chapter 7 | Rental Housing Fee |
| Chapter 8 | — |
| Chapter 9 | — |
[Previously Adopted.] It is presumed that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property. Landlords shall be entitled to maintain their Net Operating Income from year to year in accordance with this Chapter 6.
[Previously adopted.] The Landlord, in a Petition for Upward Adjustment of Rents, may rebut the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property by demonstrating peculiar circumstances unique to the property that caused either the Gross Income or Operating Expenses during the Base Year to differ significantly from either the Gross Income or Operating Expenses of other properties of similar size, quality, andconditions.
Vega Adjustment Standard.
a. Defining Unreasonably Low Average Monthly Rent. The Landlord, in a Petition for Upward Adjustment of Rents, will be presumed to have rebutted the presumption that the Net Operating Income produced by a property during the Base Year provided a fair return on investment for the property if the average monthly Rent received for any individual Rent Stabilized Unit in the property during the Base Year was unusually low. For purposes of this section, unusually low means that the average monthly Rent received for the Rent Stabilized Unit was less than the mean monthly Rent received for all of the Rent Stabilized Units in the property by two standard deviations.
b. Calculating the Average Monthly Rent Received in the Base Year for an Individual Rent Stabilized Unit. To calculate the average monthly Rent received in the Base Year, divide the sum of all Rent received that relates to one Rent Stabilized Unit by the number of months for which Rent was received for that Rent Stabilized Unit, regardless of the number of tenants occupying or the number of tenancies in the Base Year (e.g. if Unit X was occupied from January 2015 through June 2015 for $1,000 per month, was vacant in July 2015, and was occupied from August 2015 through December 2015 for $1,110 per month, then the average monthly Rent received in the Base Year for Unit X would be $11,550 divided by 11 months of occupancy, or $1,050 per month of occupancy).
c. Calculating the Standard Deviation and Mean Monthly Rent Received for All Rent Stabilized Units for Properties with Five or Fewer Rent Stabilized Units.
i. Mean Monthly Rent. To calculate the mean monthly Rent, complete the following steps:
(1) Add each average monthly Rent for every Rent Stabilized Unit in the property, as calculated in accordance with subsection (b) of Section G(3) above,
(2) Add one”fair market rent” (as published by the U.S. Department of Housing and Urban Development for fiscal year 2015 for Santa Clara County, as replicated in the table below), for the most prevalent Rent Stabilized Unit type in the property based on the number of bedrooms, until the hypothetical total number of units equals six (e.g. in step two, a property with four Rent Stabilized, one-bedroom units would add two fair market rents [2 x $1,419], or $2,838 to the sum in step one).
| Efficiency | 1-Bedroom | 2-Bedroom | 3-Bedroom | 4-Bedroom |
| — | — | — | — | — |
| $1,213 | $1,419 | $1,809 | $2,551 | $2,892 |
(3) The mean monthly Rent is the result when the sum of steps one and two above are divided by six (6).
ii. Standard Deviation from Mean Monthly Rent. To calculate the standard deviation from mean monthly rent for properties with five or fewer Rent Stabilized Units, complete the following steps:
(1) For each average monthly rent for every Rent Stabilized Unit and for each fair market rent added in subsection (c)(i)(2) of Section G(3), subtract the Mean Monthly Rent, and then square the result.
(2) Add all of the values calculated in step 1.
(3) Divide the sum calculated in step 2 by six (6).
(4) The standard deviation from the mean monthly Rent equals the square root of the result from step 3.
d. Calculating the Standard Deviation from the Mean Monthly Rent Received for All Rent Stabilized Units for Properties with Six or More Rent Stabilized Units.
i. Mean Monthly Rent. To calculate the mean monthly Rent, addeach average monthly Rent for every Rent Stabilized Unit in the property, as calculated in accordance with subsection (b) of Section G(3) above, and then divide the sum by the total number of Rent Stabilized Units.
ii. Standard Deviation from Mean Monthly Rent. To calculate the standard deviation from mean monthly rent for properties with six or more Rent Stabilized Units, complete the following steps:
(1) For each average monthly rent for every Rent Stabilized Unit, subtract the Mean Monthly Rent, and then square the result.
(2) Add all of the values calculated in step 1.
(3) Divide the sum calculated in step 2 by the total number of Rent Stabilized Units.
(4) The standard deviation from the mean monthly Rent equals the square root of the result from step 3.
e. Recalculating Base Year Gross Income. If the average monthly Rent received for any individual Rent Stabilized Unit in the property during the Base Year was less than the mean monthly Rent by two standard deviations from the mean monthly rent, then the Base Year Gross Income for the property shall be recalculated for purposes of determining the Base Year Net Operating Income by: (1) subtracting all Rent received from each Rent Stabilized Unit for which the average monthly Rent received was unusually low, and (2) replacing the subtracted Rent on a month-by-month basis, per Rent Stabilized Unit, with the mean monthly Rent, less two standard deviations from the mean monthly rent.
f. Contesting Recalculation of Base Year Gross Income. One or more Tenants may contest or dispute any recalculation of the Base Year Gross Income for purposes of determining the Base Year Net Operating Income in a Landlord’s Petition for Upward Adjustment of Rents. Tenant arguments contesting or disputing any recalculation of the Base Year Gross Income may include, but are not limited, evidence or documentation related to the physical condition of the property or any individual Rent Stabilized Unit, the market conditions that relate to the property or any individual Rent Stabilized Unit, and/or any other relevant evidence that a recalculation of the Base Year Gross Income, as contemplated in this Section G, is unnecessary for the landlord to receive a fair return on investment for the property, fails to ensure fairness, or is otherwise contrary to the purposes of the Act.
g. Allocation of Upward Adjustment of Rents. The portion of any Upward Adjustment of Rents that results solely from the Vega Adjustment described in this Section G(3) shall be allocated:[OptionC choose either(i) or (ii)]
i. equally among each Rent Stabilized Unit for which average monthly Rents were unreasonably low, or
ii. equally among all Rent Stabilized Unit subjectto the Petition,subject to the condition that in the interest of justice, a Hearing Officer and/or the RentalHousing Committee may allocate Rent increases in another manner necessary to ensure fairness and further the purposes of the Act.
Last updated on 8/24/2017