Taking a Look at Non-Owner Occupied Rental Properties
April 15th, 2013
by Henry (Hank) Levy, CPA/ABV, CFF/CFE
Oakland Business Review, April 2013
Last September, the Oakland City Council adopted an ordinance requiring the registration and inspection of small non-owner occupied rental properties (1-4 units).

The ordinance cites studies from two respected policy organizations, Urban Strategies Council and Policy Link, which conclude that owneroccupants are more likely than "some" investor property owners to maintain real property to higher standards. (It is unfortunate that the ordinance does not cite any specific percentage quantity for “some,” which leaves the readers confused about how extensive the problem may be.)

The ordinance will cause these investors to pay fees to have the properties inspected and then, presumably, will cause them to rehabilitate and correct any sub-standard conditions found. A close reading of the ordinance may cause some confusion as to the motivations of the City Council. One clause implies that the Council would like to find ways to actually prevent non-owner occupiers from even purchasing homes in Oakland (in which case any fees/costs to such investors might be deemed "just punishment"), while other clauses simply seem to desire to regulate the improvement of such properties.

I assume that the primary purpose of this ordinance is to cause improvements to real property. I will not address the other issue, which is a policy issue.

As a CPA, an Oakland small business owner, a former Oakland landlord, and a concerned community member, I applaud the efforts to find methods to improve living standards and to reduce blight, hazards, and sub-standard living conditions. There is no doubt in my mind that there are many “investors” who have a similar larger view beyond their own immediate self-interest.

However, all investors and landlords are concerned about their own bottom line – this is the motivation for them to accept the risks and costs of property ownership. A program that causes investor/landlords to improve their properties will cause the following costs and risks to themselves:

1. The costs of this ordinance will not be insubstantial – annual registration at $339 and probably multiple inspections at $99 each, plus additional fees.
2. The costs of the upgrades themselves.
3. If the inspections require substantial rehabilitation of the property, this will cause an increase in county property taxes.
4. The investor/landlord is not guaranteed to get higher rents due to his or her rehabilitation of the property.
5. The investor/landlord will only get income tax advantages through depreciation over a long period of time (27.5 years).

So, it is not unreasonable to think that this ordinance will generate significant opposition. Fortunately, I think the city of Oakland can achieve its goals and reduce the opposition to this ordinance by incentivizing improvement and blight reduction through the city’s Gross Receipts tax.

I propose that the City Council provide incentives through its Gross Receipts tax to give credits for both the fees and any resulting rehabilitation required by this ordinance. For example, I suggest that 50 percent of the fees imposed by this program and 75 percent of any costs of substantial improvements to properties as a result of this program reduce the Gross Receipts tax imposed by the city. Because it is likely that small landlords pay relatively small amounts of business taxes, I recommend that any credits which reduce the tax below zero could be carried forward for 15 years.

If such incentives proved to be beneficial, the city could also consider extending such credits to improvements done to all real property, whether as a result of this inspection program or not.

If this idea were to be adopted, the city would lose some funds through a loss of Gross Receipts tax, but it would benefit by increasing the conditions of housing properties in a manner that is fair to both the city and investor/landlords.