We have been talking at length about how landlords are supposed to make capital improvements with the St. Paul rent cap. If you can only raise rent by 3% each year and you charge $1000 for rent, how can you replace the kitchen cabinets for $2000 when you are only making $360 more per year? While the city has made some changes to the rent stabilization rules, I still think most landlords are not going to be investing in their units. Here is a summary of the details on how you can apply for an exception to go above the 3% rent cap (to a total of 8%) using capital improvements as your exception reason.
Any improvements in the property that are more than $250 per unit or total may be used in the exception calculation. The costs of these capital improvements must be amortized over the periods set in the ordinance. See the list here, but some examples are:
- Most appliances=5 year amortization
- Cabinets, countertops, doors=10 year amortization
- Electrical and HVAC work=10 year amortization
- Most flooring (other than new hardwood floors)=5 year amortization
You can not include costs that are required by city inspectors or state law to make property habitable or bring into compliance. You can appeal the amortization period if you can justify why a different time period is required.
The ordinance does also allow you to add an interest allowance (even if you did not pay interest) on the capital improvement which is calculated on the current 30-year fixed rate on home mortgages plus 2%. So today, that would be about 8.5%. (pro tip: use online calculator to figure this out)
With this process, you would take the total cost of the improvement, amortize it over the years, divide by 12 and then that could be used to justify your rent increase above the 3% (but still below maximum of 8%). For example, you spend $5000 to replace a furnace. Add in the allowed interest of $2439.14, for total of $7439.14, which amortizes over 10 year or $743.39/year which is $61.99 per month. If the rent is $1000 per month you could use this capital improvement to justify increasing your rent to $1061.99 instead of the $1030.
Word of Warning: It is best to apply for the rent adjustment before you do the capital improvement if possible. There is no guarantee you will be granted this exception and then you could be looking at a standard rent increase of 3% if you are denied. You can’t take the larger rent increase until you have been approved for the exception! And then, you are supposed to reduce the rent at the end of the amortization period. So somehow, in the above example, you are supposed to remove the extra $31.99 from the rent after 10 years.
The steps in the process summarize like below, but there are multiple forms that you need to complete and submit. Some of the submitted data includes operating income statements and other items some landlords may find to be a little too evasive:
- Complete initial financial worksheet and other forms
- Submit “Rent Increase Exception Request” form (Self-certification is available for rent increases between 3% and Consumer Price Index (CPI))
- Staff Determination (Residents will be notified of a pending application)
- Work Towards Determination
- Appeal to Hearing Officer
These new processes and updated rules go into effect on January 1, 2023 which is 2 weeks from now. The forms on the Saint Paul website are still marked as draft. While I don’t expect the process to change, we will have to see how it ultimately shakes out in reality.