In San Francisco under current law, a landlord can increase a rent-controlled tenant’s rent with a “debt service” passthrough. This is a loophole in the San Francisco Rent Ordinance that allows a landlord to buy a building using a large loan and then pass through the cost of servicing the loan (i.e., making interest payments) to the tenant. These passthrough rent increases are in addition to the annual rent increase and can often be hundreds of dollars.
The San Francisco Rent Ordinance characterizes debt service payments as an “operating and maintenance” expense. Typically, operating and maintenance expenses are for services that keep the building clean, safe, and well-run—that is, services that benefit the landlord and the tenant. However, “debt service” expenses provide no benefit at all to the tenant and reflect no improvement to the building.
Recently in San Francisco, certain large corporate landlords have bought buildings using large loans and then attempted to drastically increasing their rent-controlled tenants’ rent (who are often on fixed incomes) using a “debt service” passthrough. Often these tenants have no way to pay the increased rent and are forced to move. The rent increase is equivalent to an eviction. Then, the landlord can rent the newly vacant unit to a new tenant at market rate rents. It is not unreasonable to think that these landlords are justifying the inflated purchase prices of these buildings because they are counting on many of their tenants to vacate after receiving these rent increases.
On April 3, 2018, Supervisor Sandra Lee Fewer introduced an amendment to the San Francisco Rent Ordinance that would close the “debt service” passthrough loophole. The amendment was co-sponsored by Supervisors Aaron Peskin, Norman Yee, Hillary Ronen, and Jane Kim. The proposal would bring San Francisco in line with Berkeley, Oakland, and San Jose, which also do not allow a landlord to pass through debt service payments to tenants. Under the proposal, for any Operating and Maintenance Expense Petition that was filed on or after December 11, 2017, the passthrough rent increase cannot reflect any increased debt service or any increased property taxes that resulted from an increased assessment due to a change in ownership.