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Page 8 of 12 <br />5/5/2026 <br />ATTY/DOCS-ORDINANCE-REGULATIONS/05-05-26 FAIR RATE OF RETURN APPEAL GUIDELINES AND APPEAL FORM <br />REV: 05-05-26 LF <br />removal), the City will accept a letter from the licensed contractor that the substantial <br />remodel is completed. <br /> <br />2. Costs incurred prior to the vacancy of the rental unit will not be considered. <br /> <br />3. Any costs reimbursed by insurance or some other subsidy will be excluded from <br />Verified Substantial Remodel Costs. <br /> <br />4. Building or property-wide improvement costs will be distributed proportionately <br />across all units in the building/property when determining the Verified Substantial <br />Remodel Costs applicable to a particular rental unit. <br /> <br />5. Relocation assistance costs must be verified through proof of payment. <br /> <br />6. Any forgone income during the substantial remodel is not included in the VSRC <br />calculation. <br />4.2 Overview of the Process <br />The City will apply the formula specified below to determine whether the Right to Return Rent is <br />insufficient to provide the landlord with a fair return on the Verified Substantial Remodel Cost. If the <br />Right to Return Rent is sufficient, no rent increase above the Right to Return Rent is allowed. If the <br />Right to Return Rent is determined to be insufficient, a higher Fair Rate of Return Rent may be <br />approved. <br />Whether the landlord is entitled to a rent increase higher than the Right to Return Rent will be <br />determined by calculating a projected future rent two years after the substantial remodel is <br />completed (known as the Stabilization Period) and assuming the minimum allowable rent increase <br />(5% per year) under the California Tenant Protection Act of 2019 (TPA). This produces the Baseline <br />Stabilized Rent, which represents a conservative, standardized rent level after the market has had <br />time to “settle” following the remodel. <br />After calculating the Baseline Stabilized Rent, the substantial remodel costs that could be supported <br />by the Baseline Stabilized Rent are calculated using a published Capitalization Rate (referred to as <br />the Supported Cost). It then tests whether the Right to Return Rent is sufficient to support the <br />Verified Substantial Remodel Cost. If the Supported Cost is greater than the Verified Substantial <br />Remodel Cost, then the Right to Return Rent is sufficient and no further rent increase is warranted. <br />If the Supported Cost is less than the Verified Substantial Remodel Cost then the Fair Rate of Return <br />Rent is calculated using the same Capitalization Rate and the actual Verified Substantial Remodel <br />Cost. Once the Fair Rate of Return Rent is calculated, the appeal officer will determine the allowed <br />rent increase, taking into account any extenuating circumstances. <br /> <br />8.A. - Page 57 of 85 <br />315