PALM DESERT MOBILE HOME PARK RENT REVIEW BOARD GUIDELINES FOR CAPITAL IMPROVEMENT AND HARDSHIP RENT INCREASE (Fair Return on Property)

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1 PALM DESERT MOBILE HOME PARK RENT REVIEW BOARD (Fair Return on Property) In order to ensure a fair and orderly procedure for hearing before the Board, the following guidelines are adopted: 100. Fair Return It is the intent of this regulation to permit rent to be established at a level, which will provide landlords with a fair return on their property consistent with the Palm Desert Mobile Home Park Rent Ordinance and the laws of the State of California. Except as otherwise provided hereinbelow, it shall be presumed that the net operating income produced by a property during the base year provided a fair return on property Allowable Rent Increases A. Hardship Increases Upon filing of an individual hardship petition by a landlord, the Commission shall permit hardship rent increases such that the landlord s net operating income in the base year will be increased by 50% of the increase in the Consumer Price Index (CPI) over the base year. The increase in CPI shall be calculated by subtracting the CPI for December 1982 from the CPI for the most recently reported month at the time of filing of the petition and dividing the resulting figure by the CPI for December (Amended by Resolution No. RRC-1, adopted December 18, 1992) B. Discretionary Hardship Increases It shall be presumed that the rent increases allowed by Palm Desert Municipal Code Section and the hardship (MNOI) increases allowed by subdivision A of this section of the guidelines enable landlords to receive a fair return on their property. However, once a landlord has applied for and provided all necessary information for consideration of a hardship (MNOI) increase under subdivision (A) of this section, then and only then may a landlord be entitled to present evidence and arguments to the Board in support of a discretionary hardship application rebutting this presumption. Interested third parties may also attend the hearing and present evidence and arguments for or against the landlord. Acknowledging that what constitutes a fair return on property is debatable, the Board may consider any and all evidence or arguments it deems relevant to valuing the landlord s property such that the result is in conformity with existing law and operates to prevent a confiscatory taking. Relevant methods for valuing a landlord s property may include, but are not limited to, the following: 1) Present Fair Market Value; 2) Capitalization of Income; 3) Comparable Sales; 4) Replacement Cost; and/or 5) Original Investment.

2 If a landlord successfully rebuts the presumption that the mandatory rent increase provided by Palm Desert Municipal Code Section and the hardship rent increase authorized by Subdivision A of this section of the guidelines provides the landlord with a fair return on his or her property, or for other good and sufficient reasons, the Board may award the landlord a discretionary rent increase in the amount the Board deems necessary to achieve a fair return. (Amended by Resolution No. 00-6, adopted January 13, 2000) C. Capital Improvement Increase Without regard to whether a landlord qualifies for an increase pursuant to Guideline Section 101 (A), a landlord who invests new or additional money into mobilehome park facilities may file a petition for a capital improvement increase. Upon the filing of a capital improvement increase petition by a landlord, the Board may permit a capital improvement rent increase in order that the landlord receive a fair and reasonable return on expenditures for capital improvements where those capital improvements are for one of the following, only: 1. The capital improvements are new and did not exist before and have been approved by a two-thirds vote of the tenants of the particular mobilehome park, based on one vote per mobilehome space; or 2. The capital improvements are to modernize, upgrade or refurbish already existing improvements and have been approved by a majority vote of the tenants of the particular mobilehome park, based on one vote per mobilehome space; or 3. The capital improvements are involuntary improvements, such as, but not limited to: (a) improvements required by a governmental entity such as required sewer connections, handicapped access or the earthquake retrofit; or (b) unreimbursed expense for repair of damage from natural disaster. A landlord shall not be entitled to receive a rent increase based on capital improvements alone except for capital improvements of the type listed in this section. Any capital improvement increase granted under this section shall not be subject to an automatic CPI increase. Any capital improvement increase granted under this section shall remain in existence only so long as necessary to reimburse the cost of the improvement plus a fair return to the owner. (Amended by Resolution No. 00-6, adopted January 13, 2000) 2 UPDATED 7/10/2008

3 D. Notification of Residents 102. Definitions Consistent with Section of the Palm Desert Municipal Code, a landlord seeking a hardship or discretionary hardship increase pursuant to this section of the guidelines shall attest in writing to the Board at the time his or her petition is filed that he or she has served on each affected resident written notice that the landlord is applying to the Board for a hardship or discretionary hardship rent increase, that said petition may be obtained or reviewed, and that the affected residents have a right to be present at the hearing and to present arguments or evidence to the Board for or against the sought increase. Landlords shall notify residents of the hearing date once it is set. Failure to comply with such notice requirements shall be grounds, in the Board s discretion, for rescission of any rent increase granted pursuant to this section of the guidelines. (Amended by Resolution No. 00-6, adopted January 13, 2000) For purposes of hardship rent adjustment proceedings, the following definitions shall be used: A. Net Operation Income equals gross income, less allowable operating expenses. B. Gross Income equals (1) gross rents computed as gross rental income at 100% paid occupancy, plus (2) interest from rental deposits, unless directly paid by the landlord to the tenant (interest shall be imputed at the rate of 5 ½% of all deposits unless such deposits actually earn greater interest), plus (3) income from laundry facilities, vending machines, amusement devices, cleaning fees or services, garage and parking fees, plus (4) all other income or consideration received for or in connection with the use of occupancy of rental units or 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 3% gross rents shall be presumed to be unreasonable unless established otherwise by the landlord by clear and convincing evidence. Where uncollected rents must be estimated, the average of the preceding three years experience shall be used or in the discretion of the Board some other comparable method. 3 UPDATED 7/10/2008

4 C. Operating Expenses 1. Operating Expenses shall include the following: a. Management fees (contracted or owner-performed) of 5% or less of gross income are presumed to be reasonable. Management fees in excess of 5% of gross income are presumed to be unreasonable. Such resumption may be rebutted by clear and convincing evidence. b. Other unreasonable management expenses including but not limited to necessary and reasonable advertising, accounting and insurance. c. Reasonable attorneys fees and costs incurred as normal and reasonable costs of doing business, including but not limited to good faith attempts to recover rents owing and good faith unlawful detainer actions not in derogation of applicable law, to the extent same are not recovered from tenants. d. Normal repair and maintenance expenses, including but not limited to painting, normal cleaning, fumigation, landscaping, and repair of all standard service, including electrical, plumbing, carpentry, furnished appliances, drapes, carpets, and furniture. e. Owner-performed labor, which shall be compensated at the following hourly rates upon documentation of the date, time and nature of the work performed. 1. At the general prevailing rate of per diem wages for the Palm Desert area for the specific type of work performed, as determined and published by the Director of the Department of Industrial Relations of the State California, pursuant to Section 1770 et seq of the Labor Code of the State of California. 2. If no such general prevailing rate has been determined and published, then General maintenance Skilled labor $ 7.00/hour $13.00/hour Notwithstanding the above, a landlord may receive greater or lesser compensation for self-labor if the landlord proves by clear and convincing evidence that such excess labor expenses resulted in proportionately greater services for the benefit of the tenants. 4 UPDATED 7/10/2008

5 f. Real property taxes g. License and registration fees required by law to the extent same are not otherwise paid by tenants. h. Utility costs i. Capital expenses. The amortized portion of capital expenditures applicable to the year in question. Amortization of capital expenditures made in prior years shall be based upon the reasonable useful life of the capital asset in accordance with Exhibit A. Where a capital expenditure is proposed for the prospective year and is to be paid for through financing, the amortization of such expenditure may reflect the terms of such financing. The Board shall have discretion to allocate such expense to certain units without allocating to all units if it should be found by the Board that the units to which the allocation is made are specifically benefitted as a result of the particular capital expense. The Board may limit the duration of the allocation to such period as it finds reasonable. 2. Operation Expenses shall not include: a. Avoidable and unreasonable or unnecessary expenses; b. Mortgage principal and interest payments; c. Lease purchase payments and rent or lease payments to landlord s lessor; expect that the increase in such payments in any year may be included; d. Any penalties, fees or interest assessed or awarded for violation of this or any other law; e. Attorneys fees and other costs incurred for preparation and presentation of current proceedings before the Board, or in connection with civil actions or proceedings against the Board. f. Depreciation of the land or amortized portions of capital expenditures made either (1) prior to the base date (April 1, 1983); or, (2) prior to the date of the purchase of the mobile home park by the present owner. 5 UPDATED 7/10/2008

6 g. Any expenses for which the landlord has been reimbursed by any security deposit insurance settlement, judgment for damages, settlement or any other method. D. Base year for purpose of this regulation shall be calendar year 1982 or the most recent fiscal year ending on or prior to April 30, 1983, if the records of that property were kept and reported to the Internal Revenue Service on a fiscal year basis. E. Consumer price index is the consumer price index for Urban Wage Earners and Clerical Workers for the Los Angeles Long Beach Anaheim Metropolitan area (all items, 1967 base), provided by the U.S. Bureau of Labor Statistics Rebutting the Presumption A. If the Board determines that the base year NOI yielded other than a fair return on property, it shall adjust the base year NOI accordingly. The Board shall not make such determination unless it has first made at least one of the following findings: 1. That the landlord s operation and maintenance expenses in the base year were unusually high or low. In such instances, the expenses for each of the three years last preceding the base year shall be adjusted in accordance with Section 105, and the average of such adjusted expenses shall be substituted in calculating the base year NOI. Such average shall be presumed to reflect reasonable average annual expenses; such presumption may be rebutted by clear and convincing evidence. In the event that the property shall not have been continuously occupied as a rental unit for three years last preceding the base year, the base year operating expenses shall be adjusted to reflect average expenses over a period of time deemed reasonable by the Board. In determining whether the landlord s expenses were unusually high or low, the Board shall consider: a. The landlord made substantial capital improvements during the base year, which were not reflected in the rent levels on the base date. b. Substantially unreimbursed repairs were made due to damage caused by fire, natural disaster or vandalism. c. Maintenance and repair were below accepted standards so as to cause significant deterioration in the quality of housing service. 6 UPDATED 7/10/2008

7 d. 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 1982 may have been higher than in the base year shall not be considered. 2. That the rent on the base date was disproportionate due to one of the enumerated factors below. In such instances, adjustments shall be made in calculating gross rents consistent with the purposes of these standards; a. The rent on the base date was established by a lease or other formal rental agreement which provided for substantially higher rent at the other periods during the term of the lease; b. 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; c. The rent on the base date was substantially higher or lower than preceding months by reason of premiums being charged or rebates given for reasons unique to particular units or limited to the period determining the base rent. B. It shall be presumed that where net operating income is less than 50% of gross income in the base year, after making adjustments as permitted by Subsection A of this section, the landlord was receiving less than a fair 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 Determination of Base Year Net Operating Income A. Base year net operating income shall be determined by deducting from the base year gross income the actual or adjusted operating expenses for the base year except as provided in Subsection B. B. In the event the landlord did not own the subject property on January 1, 1982, the operating expenses for 1982 shall be determined in accordance with one of the following: 1. The previous owner s actual operating expenses as defined in Section 102C; or, where petitioner has established to the satisfaction of the Board that same are unavailable; 2. Actual operating expenses for the first calendar year of ownership, discounted to 1982, in accordance with Section 105. ` 7 UPDATED 7/10/2008

8 105. Schedule of Increase in Operating Expenses Where scheduling of rent increases or other calculations require projections of income or expenses, it shall be assumed that operating expenses, exclusive of property taxes and management fees, increase at no more than 10% per year, that property taxes increase at 2% per year, and that management fees are 5% of gross income Required Form of Petition Petitions for individual hardship rent increases shall be prepared and submitted upon the form or forms designated by the Board. Failure to use the proper form(s) or to provide any information requested on the form(s), except for good cause shown to the satisfaction of the Board, shall be grounds for dismissal of the petition. Documentation of the content of the petition may be submitted by the landlord at the time of filing of the petition; such documentation shall be provided by the landlord upon demand of the Board. Failure to provide documentation within a reasonable time after demand by the Board, except for good cause proved to the satisfaction of the Board, shall be grounds for dismissal of the petition Retroactive Effect In no event shall retroactive rent increases by authorized by application of this regulation, except as permitted by the rent control ordinance or by other duly adopted regulation of the Board, and in no event shall any rent increase be retroactive to a date preceding the filing of the petition for hardship adjustment of rent Partial Invalidity If any provision of this regulation or application thereof to any person or circumstances is held invalid, this invalidity shall not affect other provisions or applications of this regulation, which can be given effect without the invalid provision or application, and to this end the provisions of this regulation are declared to be severable. This regulation shall be liberally construed to achieve the purposes of this regulation Relationship to Annual Adjustment Any individual hardship adjustment established pursuant to these guidelines shall take into account the extent of any annual adjustments the landlord may be implementing or otherwise entitled to at and during the time the individual hardship adjustment is to be implemented, and the hardship adjustment may be limited or conditioned accordingly. The Board may limit the duration of a hardship increase to such period as it finds reasonable. 8 UPDATED 7/10/2008

9 IMPROVEMENTS YEARS IMPROVEMENTS YEARS Air conditioners 10 Appliances Dishwasher 5 Garbage Disposal 2 Refrigerator 5 Stove 5 Water Heater 5 Cabinets 10 Carpentry 10 Doors 10 Electrical Wiring 10 Elevator 20 Fencing Block 10 Chain 10 Wood 10 Fire Alarm System 10 Fire Escape (metal) 10 Flooring Asbestos Tile & Linoleum 5 Carpet 5 Hardwood 10 Furniture 5 Gates Chain Link 10 Wood 10 Wrought Iron 10 Heater Central 10 Electric 10 Gas 10 Sauna 5 Water (Potable) 5 Water (Therapy) 5 Water (Swimming) 5 Insulation 10 Landscaping Planters 10 Sprinklers 10 Lighting 10 Locks 5 Plumbing Fixtures 10 Pipes 10 Painting Exterior 5 Interior 2 Pools, Swimming 25 Pumps Pool 5 Sump 10 Paving Asphalt 10 Cement 10 Reslurry 3 Resurfacing 3 Plastering 10 Roofing Asphalt Shingle 10 Built-up Tar & Gravel 5 Polyurethane 5 Tile 15 Wood Shakes 7 Sauna 25 Security Entry Telephone Intercom 10 Sewers 25 Stucco 10 Tennis Courts 25 Therapy Pools 25 Window Awnings 5 Drapes 3 Screens 3 Shades 5 9 UPDATED 7/10/2008