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- LAHD's cost recovery programs let an RSO owner pass part of the cost of approved work to tenants as a temporary surcharge on top of the rent.
- A capital improvement surcharge is half the cost spread over 60 months, capped at $55 a unit a month, and it ends after 72 months or once the approved total is collected. The application is due within 12 months of finishing the work.
- Mandatory seismic retrofit passes through up to half the cost at no more than $38 a month for 120 months, which LAHD may extend until the approved amount is collected. Primary renovation splits the cost in half over 180 months after LAHD approves a Tenant Habitability Plan, and rehabilitation work is capped at $75 a month.
- A surcharge sits outside the base rent and ends when its term or its approved total runs out, so a buyer counts only what it has left.
What can an RSO owner pass through to tenants?
An RSO owner who pays for certain work can recover part of it from the tenants who benefit, through a temporary surcharge LAHD approves. The department lists six cost recovery programs, and the four below pay for work on the building. They differ in what they cover, how much of the cost reaches the tenants and for how long:
| Program | What it pays for | Tenants' share | Monthly limit per unit | Term |
|---|---|---|---|---|
| Capital improvement | Improvements to a unit or common area that benefit the tenant and will last at least five years | Half the approved cost | $55, the most the program can charge a unit at one time | 72 months, or until the approved total is collected |
| Primary renovation | Major renovation of building systems, or work to reduce exposure to hazardous materials | Half the approved cost | Read RAC regulation 220.00 or ask LAHD | 180 months |
| Seismic retrofit | Retrofit work required by Ordinance 183893 | Up to half the total cost, divided equally among all rental units | $38 | 120 months, which LAHD may extend until the approved amount is collected |
| Rehabilitation work | Work a federal, state or local agency orders under the health, safety or building codes, or repair of damage from a fire, flood, earthquake or other natural disaster | LAHD's formula divides the total cost by 60 months, then by the number of units that benefit | $75, the most at one time | Spread over 60 months in the formula |
LAHD adds a temporary surcharge after it computes the unit's maximum adjusted rent, so the surcharge sits apart from the rent the annual increase is figured on. For price, that one rule decides how a buyer reads the line. Base rent grows with the allowable increase for as long as the tenant stays, and a surcharge stops at the end of its term.
How does a capital improvement surcharge work?
LAHD's formula halves the total cost and spreads the half over 60 months, and that monthly amount is shared by the tenants who benefit. No unit may carry more than $55 a month from the program at one time, and the surcharge ends after 72 months or when the approved total has been collected, whichever comes first. The application goes to LAHD within 12 months of finishing the work, and on it each tenant's move-in date decides whether that tenant is eligible.
Two made-up jobs on a six-unit building show how the cap bites. New windows at $36,000 put $18,000 on the tenants, which is $300 a month over 60 months, or $50 a unit. That is under the cap. The surcharge stops after 60 months, because by then the $18,000 is in. A $60,000 job puts $30,000 on the tenants, which works out to $83.33 a unit a month. The cap holds it to $55. Six units then pay $330 a month, and after 72 months the owner has collected $23,760 and forgoes the other $6,240.
For price, the second job is the trap. An owner who reads the approval as recovering half the cost has overstated what the tenants will pay, and a buyer who capitalizes $330 a month as permanent income has paid for money that stops.
How do renovation, seismic and repair work recover?
Primary renovation runs in two parts, in a fixed order. First comes an application to the Tenant Habitability Program, handled by LAHD's Code Enforcement Division, and the plan must be approved before any work begins. Once the work is finished, the cost recovery application goes to the Rent Stabilization Division, and the approved surcharge splits the cost in half and runs for 180 months. The program page and RAC regulation 220.00 set the details, including any monthly limit. For price, 180 months is a long tail. A buyer will want the approval letter before counting a single month of it.
Seismic retrofit recovers work required by Ordinance 183893, which covers pre-1978 wood-frame soft-story buildings and non-ductile concrete buildings. LADBS's soft-story program is aimed at wood-frame buildings two stories or taller, designed under building codes older than January 1, 1978, whose ground floor is parking or similar open space, and it excludes residential buildings with three units or fewer. The City Council held the tenants' share to 50 percent of the cost of the required work. Owners first meet the Tenant Habitability Program's requirements, file the cost recovery application once the work is complete, and pass through only what LAHD approves.
Take a made-up $100,000 retrofit on an eight-unit building. The tenants' half is $50,000, or $6,250 a unit, and the other $50,000, the owner's half, stays with the owner from the start. At the $38 cap, 120 months bring in $4,560 a unit, or $36,480 across the eight. LAHD says the period may be extended until the approved total is in, so the remaining $1,690 a unit takes another 45 months at $38, the last one a partial $18, for 165 months in all. For price, a buyer counts the months left at $38, extension included. The finished retrofit matters more than its surcharge. Without it, the buyer inherits the order and the whole bill.
Rehabilitation work covers what an agency orders under the health, safety or building codes and repairs after a natural disaster. LAHD's formula divides the total cost by 60 months and then by the number of units that benefit, and $75 is the most the program can charge a unit at one time.
What does a surcharge mean when you sell?
A buyer reads every surcharge as income with an end date. A capital improvement surcharge stops at 72 months or once its approved total is in, a seismic one may be extended past 120 months until its approved total is collected, and a primary renovation surcharge runs 180 months. When a surcharge stops, the unit's rent is its maximum adjusted rent again, and the months and dollars left are what a buyer pays for.
Unfinished business needs a decision before you list. Work completed but not yet filed has a clock on it, since a capital improvement application is due within 12 months of completion, and a filed application may be approved after closing. Who files, who pays for the work and who collects a surcharge approved after the sale all belong in the purchase agreement. Shaya can tell you what each version is worth to a buyer, and the wording is for a real estate attorney, which he is not.
What will a buyer ask to see?
Expect a buyer's diligence list to cover each surcharge and each job:
- LAHD's approval for every surcharge being collected, with the units, the monthly amount and the start date.
- The months left on each, and how much of each approved total has been collected.
- Which tenants pay it, since eligibility turns on move-in date.
- The Tenant Habitability Program approval behind any primary renovation or seismic recovery.
- For a soft-story building, where the retrofit stands with LADBS.
- Any finished work not yet filed, with its completion date.
Bring that file current before the buyer asks. A surcharge with no approval behind it is money a tenant may never have owed, and a buyer prices that doubt against you.