Major Remodeling: What You Need to Know

A neighbor asked a good question about the ‘major remodeling’ provision of the rent stabilization ordinance: “What if the landlord is giving false information to tenants about remodeling a property just to get us out?” The question is relevant because we are seeing more properties emptied for remodeling and repositioning. But remodeling comes at a cost: tenant displacement. Let’s look at our rights when the landlord wants to remodel.

Some Background on ‘Major Remodeling’

121 South Elm interior remodelToday Beverly Hills has limited the available reasons for lawfully terminating a tenancy. Because no-just-cause is now off the table, the landlord who wants to do major work on an apartment must abide by the ‘major remodeling’ provision in the rent stabilization ordinance. Section 4–6–6(k) reads: “A landlord may bring an action to recover possession of an apartment unit if the landlord seeks in good faith to recover possession so as to do alteration work on the building for the purposes of major remodeling…”

In the old days — indeed as recently as October — the landlord could simply hand his Chapter 6 tenants 60-day notice and be done with it. (And before relocation fees the landlord could empty his property without even paying a dime.) Clearance of an entire property was an easy task in those days. But 60-day notices never applied to Chapter 5 tenants and so the remodeling provision was on the books. Now it applies to Chapter 6 tenants too.

121 South Elm Welcome home sign
‘Welcome home’ to your old apartment at 121 South Elm…but at a much higher rent!

Today the ordinance prescribes the conditions under which the landlord can force a tenant to move. And that’s important because the financial incentive to terminate a tenant is real. New floors, kitchens, baths and new paint — an investment of $20,000 to $30,000 perhaps — will return a great premium in the form of much higher rents over the years. The landlord may even make back his investment in a few years. That makes it worth his while to follow the ‘major remodeling’ procedure.

Of course an alternative is to make a cash-for-keys offer to the tenant. That’s what the new of 121 South Elm did. And Renters Alliance received a couple of calls about it. But we want to caution tenants to think twice about accepting any buyout. Our tenancy is more valuable than ever now that we can’t be terminated for no-just-cause.

Moreover, a vacancy is especially valuable to a landlord who wants to reposition his property because the rent stabilization ordinance’s ‘major remodeling’ provision requires one-year advance notice to the tenant. That is real leverage in the buyout negotiation. Don’t sign away that tenancy prematurely!

And there is a third good reason to rethink accepting a buyout: under the relevant provision a tenant enjoys the option to return to her remodeled apartment and in some cases even to move to a comparable unit from the same landlord. The upgraded amenities will come with a somewhat higher rent, true, but accepting a buyout means signing away these option. Read on!

’Major Remodeling’ Explained

Major remodeling refers not to the construction task itself but to the provision in the rent stabilization ordinance (section 4–6–6 (k)) that allows a landlord to terminate a tenant with certain protections. The protections kick-in when construction is anticipated to exceed a dollar amount (a threshold that varies according to unit size). But the relevant provision is complicated and there are key decision points (and caveats).

Unfortunately the city is of limited help: there is no tenant’s guide to ‘extended remodeling’ and the city’s FAQ for tenants is not only not informative; it is simply misleading! The only question pertaining to remodeling reads, “Is a major remodel considered a just-cause for termination of tenancy?” The answer given:

No. A major remodel is not considered a just-cause for eviction and the apartment unit does not become “de-controlled”. A one year notice is required for a major remodel. Additionally, a sixty (60) day written notice, served in accordance with State and local law, is required for termination of tenancy and after the remodel is completed, and the apartment unit may not be rented for more than the amount that was being paid by the resident whose tenancy was terminated for the remodel.

While the document is correct on the one-year notice, it is mistaken on the key point: remodeling is indeed a just-cause reason for termination. Indeed it is identified as such in the rent stabilization ordinance. (It is not an at-fault reason for termination though.)

Even worse is that the FAQ says nothing about when ‘major’ threshold for remodeling. When is it triggered? The Municipal Code does provide some dollar thresholds specific to unit size that can trigger a tenancy termination. They are identified in the rent stabilization ordinance.

Today’s remodeling thresholds
Studio 1-BR 2-BR 3-BR
Valuation $7,000 $10,000 $15,000 $20,000

Those thresholds are simply too low. The $7,000 ‘remodel’ that would displace a tenant living in a studio is precisely the amount spent by landlords for a simple kitchen cabinet job, according to city building permits. That is hardly the scale of remodel that should trigger a tenancy termination. A down-to-the-studs remodel would cost triple those thresholds at least.

So why are the trigger thresholds so low? Because they were established in 2004 and were never updated for the change in construction costs. As costs rise, ever smaller jobs can trigger a termination. (City Council considered updating those fees in February but took no action. We urged councilmembers to make it a priority in order to stem abuse related to ‘extended remodeling.’ Stay tuned.)

Our Options If We Get a Remodeling Notice

The ‘major remodeling’ provision when invoked with an official notice mandates certain protections for tenants:

  • One-year notice of tenancy termination (which cannot be served until the landlord has complied with all building & safety requirements and it must be approved by the city);
  • Some safeguards against bad-faith abuses (for example, building permits must be obtained within 90 days of a tenant leaving the unit and work must finish within one year);
  • A relocation fee is required if a tenant accepts the termination within 60 days after the one-year notice; or, the tenant is relocated to a “comparable unit” (if one with the same number of bedrooms is available) at the landlord’s cost;
  • The tenant enjoys right of first refusal after remodeling (but at a higher rent that reflects the value of the improvements).

Each tenant will have some decisions to make once she receives the required one-year notice of major remodeling. Let’s break down the options so long as the tenant does not accept the buyout. (That of course will end the landlord’s obligation to the tenant.)

  1. The tenant chooses not to locate to a comparable unit and accepts the termination. She stays in the unit up to one year from the one-year notice and then departs with a relocation fee after having given 30 days notice (paying rent though that time) and never returns to the unit.
  2. The terminated tenant has the right of first refusal, so upon notice of the completion of work she has 30 days to choose to move back. She then retakes her original unit but at the higher rent as established by the city.
  3. The tenant instead requests a comparable unit within 60 days of the required one-year advance notice. She is committed to taking the comparable unit when it becomes available and the landlord will pay to relocate her. When the original unit is ready she moves back (again at the landlord’s expense).

More on Those Key Decision Points

The key decision point for the tenant comes 60 days after receiving the one-year remodeling notice. Does the tenant want to return to her apartment — and is she willing to relocate to a comparable unit during construction if one is available? If more than one tenant asks for a unit the city decides based on hardship and other factors. (It is not clear if the landlord can decline to make available a comparable unit.)

The tenant who chooses to locate to comparable unit has made a commitment and now faces a second decision point: does she take it? If she chooses to relocate to the comparable unit, she has 30 days to move. If she declines the comparable unit, then there are two consequences. First, a 90-day clock starts ticking from the date of the notice of availability. If she has taken about 30 days to decline, she has about 60 more days to find new housing. Second, she will receive no relocation fee because the tenancy termination that triggers the fee was nullified the moment she asked for a comparable unit (4–6–6(k)(5).

The tenant who has relocated to a comparable unit will ultimately have to make a third decision: should she move back to her original unit when it comes available? If so, she has 30 days to move back. If she chooses not to move back, again a 90-day clock starts ticking from the date of the notice of completion of construction. So if she takes almost 30 days to decide but declines, she has another 60 or so days to find housing — again with no relocation fee.

A contingency affects that tenant who relocates to a comparable unit: if the new rent set by the city is higher than was the estimated rent, then she can decline it and instead take her relocation fee. (That’s at least some compensation for the inconvenience of the temporary move to a comparable unit.)

As for the terminated tenant who exercises her right of first refusal — she wants to move back — she will be offered the remodeled unit at an estimated rent as the city determines the new base rent. (The final rent can rise to up to 20% higher than the estimate but the actual rent can also be lower.)

HOWEVER…the tenant who does move back at a higher rent will have to repay the relocation fee minus her actual costs of moving (and up to $150 for each month that the rent in her new apartment was higher than she was originally paying).

See, the ‘major remodeling’ provision is complex!

How is the New Rent Determined?

Every tenant will want to know: How high can the new rent be? The city determines the new allowable rent for a remodeled unit by adding the actual remodeling costs (with interest and associated expenses) to the old base rent per the Municipal Code:

If an apartment unit has been vacated for major remodeling, upon the completion of such remodeling the new allowable base rent for the apartment unit shall not exceed an amount equal to the previous base rent increased by the actual amount expended on such remodeling, including such items as interest or the value of capital up to eighteen percent (18%) per annum, and any fees or costs required to be paid to or on behalf of tenants pursuant to the provisions of this chapter, amortized in accordance with the straight line depreciation schedules allowed under the Federal Income Tax Law, but in no case less than five (5) years. — BHMC 4–6–6 (k)(7).

Besides the cost of remodeling, another key consideration for the tenant is how the expenses can be amortized. Over how many years can the costs of improvements, the cost of financing, and any associated cost be amortized to comprise the new base rent?

A longer amortization period benefits the tenant because a relatively smaller slice of the total remodeling cost is added to the monthly rent each month. Spreading that cost over ten years rather than five means a much lower bump-up. Also it increases the chance that the tenant relocating back to her remodeled apartment may move again before she capitalizes the full cost of the remodeling. (The apartment will return to market rent for the next tenant.)

Amortizing the cost over a shorter period, in contrast, benefits the landlord but pushes the rent considerably higher. Moreover, the relocating tenant is disadvantaged another way: if her tenancy outlasts the amortization period, she has paid for the improvements but will continue to pay the higher rent because her base rent now includes the cost of the improvements. (The rent does not drop down after the remodeling cost is recovered.)

The rent stabilization ordinance is not specific on the issue, however. It says only that the remodeling cost will be “amortized in accordance with the straight line depreciation schedules allowed under the Federal Income Tax Law.” That could be the minimum five years in the code…or it could be twice as long.

As a guide, there is a depreciation schedule included in the rent stabilization ordinance for rent adjustments, which is an unrelated section of the ordinance. That schedule ranges from seven years for appliances and flooring to fifteen years for electrical and averages to about ten years overall. Does it apply? The city provides no guidance.

All in all the ‘major remodeling’ provision is an important tenant protection that containes some safeguards against bad-faith terminations. However it is a complex provision and the dollar thresholds are simply too low. Now that the city has ended no-just-cause eviction we expect this provision to be invoked more frequently. Have you been terminated in accord with the ‘major remodeling’ provision? Please get in touch.