Fact Sheet 7 - Annual Allowable Rent Increases and Banked Rent Increases

Rent increases for residential rental units covered by the San Francisco Rent Ordinance are generally limited to the amount of the annual allowable increase. A landlord may increase the tenant’s base rent once every 12 months by the amount of the annual allowable increase. The annual allowable increase amount changes every year on March 1st and is based on 60% of the increase in the Consumer Price Index for All Urban Consumers in the Bay Area. The Rent Board re-calculates the annual allowable increase each year and announces the new rate around the end of December, to become effective the following March 1st. You can obtain a list of the current and past annual allowable rent increases at the Rent Board’s office or through our Fax Back system by calling 252.4660 or by visiting our website at www.sfrb.org. 

While a landlord must obtain prior Rent Board approval for most other types of rent increases (e.g., capital improvement costs or increased operating and maintenance expenses), a landlord is permitted to impose the annual allowable increase each year without filing a petition with the Rent Board.

Because incorrect rent increases can result in very costly errors, it is important for landlords to understand how to properly calculate rent increases. This Fact Sheet offers some examples of different scenarios for calculating rent increases. This is not a comprehensive document, so if you have any questions about its contents or how to calculate an annual or banked rent increase, please contact a Rent Board counselor by calling 252.4602. 

Annual Allowable Rent Increases

 

There is no limit on the amount of rent a landlord may first charge the tenant when renting a vacant unit. The rent that is charged upon initial occupancy is called the tenant’s “initial base rent.” The first annual increase can be imposed 12 months (or more) after the date the tenancy began. The increase is calculated by multiplying the tenant’s initial base rent by the annual allowable increase percentage. For example, if the tenancy began on June 1st at an initial base rent of $1,000.00, and the annual allowable increase in effect on June 1st of the following year is 1.7%, the dollar amount of the annual increase is $17.00 ($1,000.00 x .017 [1.7%] = $17.00) and the tenant’s new base rent is $1,017.00 ($1,000.00 + $17.00 = $1,017.00).

 

The date on which the tenant’s current base rent became effective is known as the tenant’s “anniversary date.” If there has been no rent increase since the tenant moved in, the tenant’s anniversary date is the date that the tenancy commenced. If there has been a rent increase after the commencement of the tenancy, the tenant’s anniversary date is the effective date of the most recent rent increase. In the example above, the tenant’s new anniversary date is June 1, the date the most recent rent increase became effective; the next annual allowable rent increase can be imposed no earlier than June 1 of the following year.

 

Most landlords impose the annual increase on the same date each year, keeping the tenant’s anniversary date the same. However, a landlord can change or “shift” the tenant’s anniversary date, provided that it has been at least 12 months since the last annual rent increase was imposed. If the landlord imposes an annual increase more than 12 months after the tenant’s anniversary date, the effective date of the increase becomes the tenant’s new anniversary date and the landlord must wait at least 12 months from the new anniversary date to impose the next annual rent increase. See Examples 1 and 4 below for shifting anniversary dates.

 

The landlord must give the tenant at least a thirty-day written notice of the proposed annual rent increase. A sixty-day notice is required if the increase, either by itself or combined with any other rent increase in the one year period before the effective date, is more than 10%. An additional five days must be added to the notice period if the rent increase notice is served by mail.

 

The rent increase notice should include both the dollar and the percentage amount of the increase, as well as the total rent due and the date the new rent will go into effect. The landlord should use the annual allowable increase percentage that will be in effect on the date of the increase, not the percentage in effect on the date the notice is served. For example, if the landlord serves the notice of rent increase on February 20, 2010, to be effective April 1, 2010, the proper annual increase amount is 0.1%, the amount in effect on April 1, 2010, not 2.2%, the amount in effect on February 20, 2010.

 

Annual increases must be calculated only on the tenant’s base rent, which does not include capital improvement passthroughs, utility passthroughs or bond measure passthroughs. Rent increases cannot be “rounded up” to the nearest dollar.  

 

Banked Rent Increases

 

If the landlord does not impose the annual allowable rent increase each year on the tenant’s anniversary date, the landlord can “bank” the unimposed increase and impose it at a later date, provided that the landlord follows the banking rules. Simply stated, the banking rules provide that a skipped annual increase is “banked” when it has been at least 24 full months since the last annual increase was imposed. In addition, when only a portion of an annual allowable increase has been imposed on the tenant’s anniversary date, the remaining portion is banked and may be imposed after 12 full months have elapsed or on any subsequent anniversary date. There is no requirement that the entire banked rent increase be imposed at one time.

 

The banking provisions of the rent law went into effect in April 1982. A landlord cannot bank accumulated rent increases that were unimposed prior to that date. However, there is no limit to the amount of rent increases that can be banked since April 1, 1982 and there is no time limit for imposition of these banked amounts. New owners may impose banked increases that were accumulated by prior owners. However, banked increases from a prior tenancy may not be imposed on a new tenancy – once a tenancy is terminated, all prior banking expires since the landlord can charge market rent for a new tenancy.

 

Banked increases do not have to be approved by the Rent Board, but must be calculated correctly and cannot be compounded or pro-rated. The landlord must add the banked percentage amounts together and then multiply the banked percentage amount times the tenant’s current base rent. For example, suppose the tenant moved in on August 1, 2006 at an initial base rent of $1,300.00 and the landlord wants to increase the tenant’s rent for the first time on August 1, 2009. Since the landlord did not impose the annual allowable rent increases on August 1, 2007 (1.5%) and August 1, 2008 (2.0%), the total amount of banked increases that could be imposed on August 1, 2009 is 3.5% (1.5% + 2.0% = 3.5%). In addition, the landlord is entitled to impose the annual allowable increase in effect on August 1, 2009 (2.2%). In order to determine the amount of the allowable rent increase, the landlord would add the total percentage of banked rent increases (3.5%) to the annual allowable rent increase in effect on August 1, 2009 (2.2%), which results in a total allowable increase of 5.7% (3.5% banked + 2.2% annual = 5.7%). The landlord would then multiply the tenant’s base rent of $1,300.00 by 5.7% to determine the dollar amount of the allowable rent increase as follows: $1,300.00 x .057 (5.7%) = $74.10. Thus, the tenant’s new base rent is $1374.10 ($1,300.00 + $74.10 = $1374.10). The tenant’s anniversary date remains August 1.

 

When it has been more than 12 months but less than 24 months since the last increase was given, the skipped annual rent increase is not considered a “banked” increase, and the landlord is only entitled to impose the annual increase amount in effect at the time the new rent increase takes effect. For example, if the landlord increased the tenant’s rent on February 1, 2008 by the annual allowable amount (1.5%), but waits until November 1, 2009 to impose the next annual rent increase, the landlord is only entitled to impose the annual increase in effect on November 1, 2009 (2.2%) and has “lost” the increase of 2.0% that could have been imposed on February 1, 2009. Moreover, the effective date of this increase (November 1) becomes the tenant’s new anniversary date, which means that the landlord must wait at least 12 months, until November 1, 2010, before the next annual increase can be given. As demonstrated, such a change in the tenant’s anniversary date may result in the loss of an annual allowable increase. To avoid this result, most landlords give annual and banked rent increases on the tenant’s original anniversary date, or wait for an entire twenty-four month period to have elapsed.

 

Any rent increase notice that includes a banked amount must explain which portions of the increase are attributable to banking and the dates upon which said banking is based. Banked increases, like the annual rent increase, can only be given on or after the tenant’s anniversary date.

 

For more information on banked increases, refer to Ordinance Section 37.3(a)(2) and Rules and Regulations Section 4.12  

 

Example No. 1:  Shifting Anniversary Dates

 

Facts: The tenant moved in on February 1, 2009. The landlord forgot to give a notice of rent increase in time for February 1, 2010, the tenant’s anniversary date, and instead gave a 30-day notice on March 1, 2010 to impose a 2.2% increase as of April 1st. The allowable annual rent increases were:

 

March 1, 2009 through February 28, 2010 – 2.2%.

March 1, 2010 through February 28, 2011 – 0.1%.

 

Is the 2.2% increase amount correct?

 

No. The correct amount is 0.1%. The landlord did not “bank” the 2.2% annual increase, because the banking provisions of Rules and Regulations Section 4.12 state that 12 months must have elapsed from the time the rent increase could have been imposed before an increase is banked. In this case, only 2 months elapsed since the increase could have been given on February 1, 2010. For banking to be applicable, the rent could not be increased until February 1, 2011, or 24 months since the last increase, or as in this case, since the tenant moved in. Because the landlord did not wait until February 1, 2011, s/he could only give a notice for a 0.1% increase, the annual allowable amount in effect on the date of the rent increase. This is a common mistake that landlords make. By shifting the anniversary date to April 1, 2010, four things have happened: (1) the landlord has lost the right to the 2.2% annual increase; (2) the landlord lost the increase for the months of February and March of 2010; (3) the anniversary date for future increases has now been shifted from February 1 to April 1; and (4) the landlord cannot bank the 2.2% increase. See the following example as to how the landlord could have banked the 2.2% increase.

 

Example No. 2:  Giving a Banked Increase
and Retaining the Same Anniversary Date

 

Using the same example above, how could the landlord preserve the right to both the 0.1% increase and the 2.2% increase and not lose the increase for February and March? The landlord must wait a full 12 months (until February 2011) in order for banking to become available. In Example No. 1, the landlord could have “banked” the 2.2% from February 1, 2010 by waiting until February 1, 2011, at which time s/he could have imposed a 2.3% increase (2.2% banked increase from February 1, 2010 plus 0.1% annual increase from February 1, 2011). Banking an increase as done in this example will keep the same month (February) as the tenant’s anniversary date, which simplifies the calculations, and may prevent costly repayments due to errors. 

 

Example No. 3:  Banked Increases for
Multiple Years with the Same Anniversary Date

 

Facts: The tenant moved into the unit on June 1, 2000 at a base rent of $1,000.00. The base rent was increased by the amount of the annual allowable increase (2.7%) on June 1, 2002, to $1,027.00. As of June 1, 2010, the landlord has BANKED increases totaling 12.8%, which are calculated as follows:

 

2.8% for June 1, 2001

0.0% for June 1, 2002 (The landlord imposed a 2.7% increase on June 1, 2002.)

0.8% for June 1, 2003

0.6% for June 1, 2004

1.2% for June 1, 2005

1.7% for June 1, 2006

1.5% for June 1, 2007

2.0% for June 1, 2008

2.2% for June 1, 2009

12.8% Banked Increases

+ 0.1% Annual Increase for June 1, 2010

12.9% Total Available Increase as of June 1, 2010

 

It is now April 1, 2010 and the landlord has given a rent increase notice to take effect on June 1, 2010. How much of a rent increase is the owner entitled to as of June 1, 2010?

 

As you can see, the landlord is entitled to a banked increase amount of 12.8%. The landlord is also entitled to a 0.1% annual allowable increase for June 1, 2010, bringing the total allowable amount to a straight (not compounded) 12.9% (12.8% + 0.1% = 12.9%). To arrive at the dollar amount of the new rent, simply multiply 12.9% (.129) times the base rent of $1,027.00, for an allowable increase of $132.48. This would bring the new base rent to $1,159.48 ($1,027.00 + $132.48 = $1,159.48).

 

REMEMBER, a landlord cannot compound the increases— the entire banked amount must be added together before multiplying. Also, rounding up is not permitted. 

 

Example No. 4:  Banked Increases for
Multiple Years with Shifting Anniversary Date

 

Facts: They are the same as in Example No. 3, with one exception as noted below. The tenant moved into the unit on June 1, 2000, at a rent of $1,000.00 per month. There has only been one 2.7% increase on June 1, 2002, bringing the base rent to $1,027.00. However, in this example, the landlord decided to impose the banked and annual increases in December 2009. The annual allowable increase in December 2009 is 2.2%. As of December 2009, the landlord has BANKED increases totaling 10.6%, which are calculated as follows:

 

2.8% for June 1, 2001

0.0% for June 1, 2002 (The landlord imposed a 2.7% increase on June 1, 2002.)

0.8% for June 1, 2003

0.6% for June 1, 2004

1.2% for June 1, 2005

1.7% for June 1, 2006

1.5% for June 1, 2007

2.0% for June 1, 2008

10.6% Banked Increases

+ 2.2% Annual Increase for December 1, 2009

12.8% Total Possible Increase as of December 1, 2009

 

It is now October 1, 2009 and the landlord has given a notice of rent increase to take effect on December 1, 2009. How much of a rent increase is the landlord entitled to as of December 1, 2009?

 

A rent increase of 12.8% ($131.46) could be imposed, which includes a 10.6% banked amount plus the annual allowable amount of 2.2%. The total new rent would be $1,158.46 ($1,027.00 x .128 [12.8%] = $1,158.46). In this example, the landlord: (1) has lost the rent increase for the months from June 1, 2009 (anniversary date) through November 30, 2009 because the anniversary date was shifted to December 1; and (2) has shifted the tenant’s anniversary date, so the next annual rent increase cannot be given until December 1, 2010. 

 

Example No. 5:  Calculating a Partial Banked Increase

 

Facts: Using the facts in Example No. 3, the tenant’s base rent is $1,027.00 per month and the landlord has BANKED increases totaling 12.8%, which are calculated as follows:

 

2.8% for June 1, 2001

0.0% for June 1, 2002 (The landlord imposed a 2.7% increase on June 1, 2002.)

0.8% for June 1, 2003

0.6% for June 1, 2004

1.2% for June 1, 2005

1.7% for June 1, 2006

1.5% for June 1, 2007

2.0% for June 1, 2008

2.2% for June 1, 2009

12.8% Banked Increases

+ 0.1% Annual Increase for June 1, 2010

12.9% Total Available Increase as of June 2010

 

The landlord wants to impose 10% of the total increase amount and reserve the balance for future years. What is the increase amount?

 

Banked amounts do not have to be used all at the same time, and there is neither a limit on the amount that can be accumulated nor a time limitation on when these amounts must be imposed (i.e., a landlord doesn’t “use it or lose it”). The landlord decided to give only 10% of the banked increase calculated on the base rent of $1,027.00, or $102.70 per month. This would leave a balance of 2.9% in banked rent increases that could be imposed in part or in full on any future anniversary date (12.9% [available increase] – 10% [imposed increase] = 2.9%).

 

Because it is easier to calculate, we recommend that imposition of a partial banked increase be based on a percentage amount rather than a dollar amount. However, it is possible to impose a dollar amount. For example, if the landlord in this example wanted to give a $100.00 increase, that would equal 9.74% ($100.00 ÷ $1,027.00 = .0974 [9.74%]), leaving 3.16% banked (12.9% [available increase] – 9.74% [imposed increase] = 3.16%).

 

Regardless of how the partial banked rent increase is determined, we recommend putting the remaining banked percentage amounts in the notice of rent increase. This puts the tenant on notice and also serves as a record of what was given and/or left over. 

 

Rounding

 

Rent increases cannot be rounded up. For example, if a tenant’s new base rent is $1,093.87, the landlord cannot charge the tenant $1,093.90 or $1,094.00. However, the landlord can round down if s/he prefers an even amount, and bank the remaining unimposed increase (calculated as the remaining percentage of the total allowable increase).

 

Sometimes, when multiplying a tenant’s base rent by the allowable increase percentage, the resulting amount goes out three or more decimal places. In such situations, the Rent Board’s practice is to round up the number in the second decimal place to the next highest penny if the number in the third decimal place is 5 or above. For example, $1,093.87 x 1.7% (.017) = $1,112.46579. In this case, since the number in the third decimal place is 5, it is permissible to round up the second decimal place from 6 to 7 and the tenant’s new base rent is $1,112.47. On the other hand, if the tenant's new rent was calculated to be $1,112.46379, the tenant's new base rent would be $1,112.46 since the number in the third decimal place (3) is less than 5. 

 

Null and Void Rent Increases

 

A landlord or tenant can file a Rent Board petition to seek a determination of the tenant’s lawful rent. The petitioning party should provide documents, such as rent increase notices and/or cancelled checks, to establish the tenant’s complete rent history. The Administrative Law Judge (ALJ) will evaluate each rent increase going back to the commencement of the tenancy or April 1, 1981, whichever is later, to determine the current lawful rent.

 

Where the ALJ determines that an annual or banked rent increase exceeded the allowable limits by more than 0.5% (one-half of one percent), or was imposed less than 12 months after the tenant’s anniversary date, the rent increase will be found null and void in its entirety. This means that the entire rent increase is unlawful, not just the amount in excess of the allowable increase. In such cases, the ALJ will re-set the tenant’s rent to the amount of the prior lawful rent. In addition, the ALJ will also order the landlord to refund all rent overpayments made by the tenant during the three-year period preceding the month of the filing of the petition, plus the period between the month of filing and the date of the ALJ’s decision.

  

September 2010