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A. Basis For Application: A landlord may file a rent adjustment application with the City for all rental units in the landlord's rental complex to achieve a just and reasonable return based on net operating income principles as set forth in subsection B of this section, or on any other ground authorized by this chapter or by regulations adopted by the city council.
1. Application: An application for a rent adjustment pursuant to this chapter shall be filed upon a form prescribed by the city and shall be accompanied by the payment of a fee as determined by resolution of the city council. If no fee has been established at the time of application, the applicant shall pay a fee within thirty (30) days of the date the fee is established. The applicant shall produce at the request of the hearing officer any records, receipts, reports or other documents in the applicant's possession, custody or control that the hearing officer may deem appropriate to make a determination whether a rent adjustment should be approved. The application shall be made under penalty of perjury and supporting documents shall be certified or verified as requested. Once the registration process is established by the city, no application from a landlord shall be accepted unless the building in which the unit is located is registered and any registration fees have been paid. If a landlord is seeking an adjustment pursuant to subsection B1g(2) of this section the application shall not be filed with or accepted by the city unless the landlord provides any and all documents and information on which the landlord relies to establish that the base date rent was disproportionately low.
2. Incomplete Applications: The city shall determine whether said application is complete within ten (10) business days of filing of the application by the landlord. If it is determined that an application is not complete, the applicant shall be notified in writing as to what additional information is required. In the event the applicant notifies the hearing officer that the requested information is unavailable, the hearing officer shall proceed with scheduling a hearing as though the application is complete. Notice that an application has been filed shall be sent to the landlord and all affected tenants by the hearing officer; said notice shall invite submittal of evidence from all concerned parties.
3. Hearing Date: The hearing officer shall hold a hearing on said application within sixty (60) days after the application is determined to be complete. Notice of the time, date, and place of the hearing shall be mailed to the applicant and the affected parties at least ten (10) business days prior to date of the hearing. The notice of the hearing also shall be delivered to the affected parties by posting the notice at the property at least ten (10) business days prior to date of the hearing. The notice to the affected parties shall include a brief summary of the stated justification for the rent increase application and shall state that all submitted documents and materials as well as any report prepared by the hearing officer or staff will be available for public review prior to the hearing.
4. Hearing Rules: At the hearing, the parties may offer any documents, testimony, written declarations, or other evidence that is relevant to the requested rent adjustment. Formal rules of evidence shall not be applicable to such proceedings.
5. Conduct Of Hearing: The hearing officer shall control the conduct of the hearing and rule on procedural requests. The hearing shall be conducted in the manner deemed by the hearing officer to be most suitable to secure that information and documentation that is necessary to render an informed decision, and to result in a fair decision without unnecessary delay.
6. Ex Parte Communications: There shall be no oral communication outside the hearing between the hearing officer and any party or witness. All discussion during the hearing shall be recorded. All written communication from the hearing officer to a party after the hearing has commenced shall be provided to all parties.
7. Order Of Proceedings: The hearing shall ordinarily proceed in the following manner, unless the hearing officer determines that some other order of proceedings would better facilitate the hearing:
a. A brief presentation by or on behalf of landlord, if landlord desires to expand upon the information contained in or appended to the petition for rent adjustment, including presentations of any other affected parties and witnesses in support of the application.
b. A brief presentation of the results of any investigations or staff reports by staff in relation to the petition.
c. A brief presentation by or on behalf of opponents to the petition, including presentations of any other affected parties and witnesses in opposition to the application.
d. Rebuttal by landlord.
e. The hearing officer shall establish equitable time limits for presentations at a hearing, subject to adjustments for translation and reasonable accommodation.
f. The hearing officer shall maintain an official hearing record, which shall constitute the exclusive record for decision.
8. Right Of Assistance: All parties to a hearing shall have the right to seek assistance in developing their positions, preparing their statements, and presenting evidence from an attorney, tenant organization representative, landlord association representative, translator, or any other person designated by said parties to a hearing.
9. Reopening Of Hearing: The hearing officer may reopen the hearing record when he or she believes that further evidence should be considered to resolve a material issue, when the hearing has been closed, and when a final decision has not been issued by the hearing officer. In such circumstances, the parties may waive a further hearing by agreeing in writing to allow additional exhibits into evidence.
10. Hearing Decision: Within thirty (30) days after the hearing is closed, the hearing officer shall issue a decision, with written findings in support thereof, approving, partially approving or disapproving a rent adjustment.
11. Notice Of Decision: A written notice of decision on a rent adjustment application shall be mailed to the applicant and all affected tenants within one day of the issuance of the decision by the hearing officer. Such notice shall be accompanied by a copy of the hearing decision.
12. Decision Subject To Review: Any final decision of the hearing officer is subject to judicial review pursuant to California Code Of Civil Procedure section 1094.5 and must be filed in accordance with the time periods specified therein.
B. Substantive Grounds For A Rent Increase Application: A rent adjustment shall be approved in order to provide a just and reasonable return and maintain net operating income in accordance with the following criteria:
1. Fair Net Operating Income: Fair return applications shall be considered according to the following guidelines:
a. Net Operating Income: Net operating income equals gross income minus operating expenses.
b. Gross Income: Gross income equals the following:
(1) Gross rents, computed on the basis of one hundred percent (100%) occupancy, using current rent levels, including the current year annual general adjustment. To the extent that the annual general rent adjustment was not fully implemented or received during the entire current year, it shall be annualized to reflect the total annual gross rents to which the property owner is already entitled, plus
(2) Interest from security and cleaning deposits (except to the extent that said interest is payable to the tenants), plus
(3) Income from 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, minus
(5) Uncollected rents due to vacancy and bad debts, to the extent that the same are beyond the landlord's control. Uncollected rents in excess of five percent (5%) of gross rents shall be presumed to be unreasonable and shall not be deducted from gross rents unless it is established that they result from circumstances that are likely to continue to exist in future years.
c. Operating Expenses; Inclusions: Operating expenses shall include the following:
(1) Rent increase application filing fees (if the application is found to be meritorious);
(2) Annual registration fees to the extent that they cannot be passed through to tenants, pursuant to resolution of the city council;
(3) License fees, real property taxes, utility costs, insurance;
(4) Normal and reasonable repair and maintenance expenses for rental units and the building or complex of buildings of which the building is a part, including common areas, which shall include, but not be limited to, painting, normal cleaning, fumigation, landscaping, repair and replacement of all standard services, including electrical, plumbing, carpentry, furnished appliances, drapes, carpets and furniture. Owner performed labor shall be counted at reasonable rates established by the cost of obtaining similar services in and around the city, provided the applicant submits documentation showing the date, time, and nature of the work performed by the property owner;
(5) Allowable legal expenses, and management expenses (contracted or owner performed), including necessary and reasonable advertising, accounting, other managerial expense. Management expenses are presumed to be six percent (6%) of gross income, unless established otherwise. Management expenses in excess of eight percent (8%) of gross income are presumed to be unreasonable and shall not be allowed unless it is established that such expenses do not exceed those ordinarily charged by commercial management firms for similar residential properties;
(6) Attorney fees and costs incurred in connection with successful good faith attempts to recover rents owing and successful good faith unlawful detainer actions not in violation of applicable law, to the extent the same are not recovered from tenants;
(7) Building improvements, the cost of any improvement mandated by any government statute, rule or regulation enacted after January 1, 2017, major repairs, replacement and maintenance, except to the extent such costs are compensated by insurance proceeds, subject to the condition that said improvements shall be amortized in years according to the schedule below, provided that the hearing officer may use seven (7) years for unlisted items, or such other period of time as is determined by the hearing officer to be reasonable.
Appliances, major (other than those specifically listed)
Fire alarm system
(8) Reasonable expenses, fees and other costs for professional services reasonably incurred in the course of successfully pursuing or defending rights under or in relationship to this chapter.
d. Excluded From Operating Expenses: Operating expenses shall not include:
(1) Maintenance and repair work that resulted from the intentional deferral of other repairs or work, which deferral caused significant deterioration of housing services, the building or individual units (if the time since the work was performed significantly exceeds the amortization periods established in subsection B1c(7) of this section, it shall be presumed that it was intentionally deferred);
(2) Avoidable and unnecessary expense increases since the base year;
(3) Mortgage interest and principal payments; fees, other than fees expressly authorized by subsection B1c of this section;
(4) Penalties and interest awarded for violation of this or any other law; or legal fees, except as provided in this section;
(6) Any expenses for which the landlord has been reimbursed by any utility rebate or discount, security deposit, insurance settlement, judgment for damages, or settlement;
(7) Any expense that has been passed through lawfully to tenants pursuant to the provisions of this chapter.
e. Base Year: Base year for the purpose of this chapter shall be 2016. Landlords are required to keep all financial records for 2016, which may be necessary for making a net operating income determination. In the event that an owner for good cause cannot produce base year income and expense information, the hearing officer may use a different base period or estimate base year income and expenses.
f. Presumption Of Fair Base Year Net Operating Income: Except as provided in subsection B1g of this section, it shall be presumed that the net operating income produced by the property during the base year provided a fair return (fair net operating income). Landlords shall be entitled to earn a just and reasonable return and to maintain and increase their base year net operating income in accordance with subsection B1h of this section.
g. Rebutting The Presumption: It may be determined that the base year net operating income yielded other than a fair return, in which case, the base year net operating income may be adjusted accordingly. In order to make such a determination, the hearing officer must make at least one of the following findings:
(1) The landlord'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 that the base year operating expenses reflect average expenses for the property over a reasonable period of time. In considering whether the base year net operating income yielded more or less than a fair net operating income the hearing officer shall consider the following factors:
(A) The landlord made substantial capital improvements during the base year, which were not reflected in the base year rent levels;
(B) Substantial repairs were made due to damage caused by uninsured disaster or vandalism;
(C) Maintenance and repair were below accepted standards or resulted from the intentional deferral of other repairs or work, which deferral caused significant deterioration of housing services, the building or individual units. If the time since the deferred work was performed significantly exceeds the amortization periods established in subsection B1c(7) of this section, it shall be presumed that it was intentionally deferred;
(D) Other expenses were unreasonably high or low, notwithstanding prudent business practice.
(2) The rent in the base year was disproportionately low due to the fact that it was not established in an arms length transaction or other peculiar circumstances. To establish peculiar circumstances, the landlord must prove one or more of the following: there existed between the tenant and the owner a family or close friend relationship; the rent had not been increased for three (3) years prior to the base year; the tenant performed services for the owner; there was low maintenance of the property by the owner in exchange for low rent increases or no rent increases; or any other special circumstances which affected the rent level outside of market factors.
h. Fair Net Operating Income: If the Hearing Officer adjusts the base year rents, then the Hearing Officer shall permit rent increases in the maximum allowable rent such that the landlord's net operating income shall be increased by one hundred percent (100%) of the percentage increase in the Consumer Price Index between the base year and the current year. Unless the Hearing Officer selects a base period other than the year 2016, the base year CPI shall be 240.007. For the purposes of this chapter, the current CPI shall be the CPI last reported as of the date of the application. A rent increase granted pursuant to this chapter shall not exceed the increase requested in the application.
C. Savings Clause: Nothing in this chapter shall be construed to prevent the grant of a rent adjustment upon application by a landlord when required to permit a just and reasonable return to the landlord. This paragraph is a savings clause which provides a basis for a Hearing Officer to receive relevant evidence demonstrating that a landlord is not receiving a just and reasonable return under the provisions of the net operating income formula, so that the application of the net operating formula may be modified to provide a just and reasonable return to the landlord. (Ord. 17-O-2729, eff. 5-5-2017)