1276. Debt Service Cost

The Board or Hearing Examiner shall consider debt service as a basis for adjustment of rent ceilings only in the following circumstances:

(A) The Board or Hearing Examiner may adjust rent ceilings by reasons of increased debt service costs for properties purchased or financed between June 6, 1978, and June 3, 1980, if, and to the extent that, the owner demonstrates that rents were not increased prior to the adoption of the Ordinance to cover such increased costs.

(B) The Board or Hearing Examiner may adjust rent ceilings by reason of increased debt service costs for properties refinanced subsequent to June 3, 1980, only if such refinancing is required as a result of a financing agreement entered into prior to the adoption of the Ordinance.

(C) For the purposes of this Regulation, the following definitions and limitations shall apply:

(1) "Increased debt service" shall mean the difference in interest payments and loan costs associated with the current or proposed financing arrangement and those financing arrangement which immediately preceded it.

(2) In the case of refinancing, increased debt service shall include only interest payments and costs associated with the original principal balance remaining at the time the replacement financing arrangement was entered into.

(3) Any decrease in interest payments and/or one-time loan costs associated with arranging financing shall be offset against any increased debt service costs.

(4) All adjustment of rent ceilings herein shall be in conformity with the provisions of Regulations 1263 and 1264 concerning computation of net operating income. Consideration shall be given to any increases in said income which result from decreased operating and maintenance expenses and which serve to offset increased debt service costs.

(5) Insofar as there is conflict between this Regulation and Regulation 1272, the former shall prevail.

(6) Except in the case of imputed financing an upwards adjustment of the rent ceiling may be granted only when the financing agreements which form the basis of the requested adjustment are secured by the subject property pursuant to a recorded deed of trust or comparable mortgage arrangement.

(D) In making rent ceiling adjustments for increased debt service costs under Subsection A. above, the Board or Hearing Examiner shall:

(1) Adjust the rent ceiling upwards to compensate for increased interest costs. For purposes of this subsection, increased costs are those costs actually incurred or those costs based on the assumption that the property was purchased with a minimum down payment of twenty-five percent (25%), that the loan was fully amortized over a period of twenty-five (25) years, with interest costs not exceeding the interest costs reported by the Real Estate Research Council of Northern California for the month in which the property was purchased.

(2) Adjust the rent ceiling upwards to compensate for increased one-time costs of arranging financing. All such increased costs shall be amortized over the life of the loan and at the loan rate.

(E) In making rent ceiling adjustments pursuant to Subsection B above, the Board or Hearing Examiner shall:

(1) Adjust the rent ceiling upwards to compensate for increased interest costs. For the purposes of this subsection, increased interest costs are those costs actually incurred or those costs based on the assumption that the property was purchased or refinanced with a minimum down payment of twenty-five percent (25%), that the loan is fully amortized over a period of twenty-five (25) years, with interest costs not exceeding the interest costs reported by the Real Estate Council of Northern California for the month in which the debt was incurred, whichever is less.

(2) Adjust the rent ceiling upward to compensate for increased one-time costs of arranging financing. All such costs shall be amortized over the life of the loan and at the loan rate. The costs allowable under this subsection shall be the lesser of the actual costs incurred or those which would have been incurred in a commercially normal transaction with an institutional lender. In the case of imputed financing pursuant to subsection E.1., the costs shall be those which would have been incurred in the imputed financing arrangement with an institutional lender.

(F) Rent Ceiling adjustments may be approved by the Board or Hearing Examiner prior to the actual execution of a refinancing agreement. Any such approval shall be contingent upon execution of the refinancing agreement. Rents may not be increased pursuant to such a contingent adjustment prior to the disbursement of loan proceeds. In all cases where a contingent rent adjustment is granted, the Board or Hearing Examiner shall retain jurisdiction modify the approved adjustment should the actual increased debt service costs differ from those originally projected. In all cases where a contingent adjustment is granted, the Board or Hearing Examiner shall retain jurisdiction to modify the approved adjustment should the actual increased debt service costs differ from those originally projected. In all cases where a contingent adjustment is granted, the owner shall submit to the Board of Examiners such documentation as is necessary to verify that the projected increased debt service costs have in fact been incurred.

(G) All rent ceiling adjustments allowed under this Regulation shall be allocated to each unit of the property in proportion to the rent paid unless it is demonstrated to the satisfaction of the Board or Hearing Examiner that another allocation will result in a more rational distribution of total rent among the units of the property. Any such alternative allocation of the adjustment shall be in accordance with the purposes of the Ordinance.

[Revisions effective October 21, 1988]