Question

I have a tenant that moved from California and my belief is that he brought bedbugs with him. He reported that he started seeing little bugs soon after moving in and that they bit him. I immediately went in and inspected the apartment and could not find anything. I asked him if he could capture one so I could show the extermination company what they will be dealing with. Sure enough it was a bedbug. I had pest professionals take care of the problem and after 3 treatments the bugs are still present. Does anyone know what kills these bugs and how to get rid of them? I spent already about $750 and no positive results yet.

Answer                            

Bedbugs are back, everywhere and with a vengeance. Certain factors such as the U.S. Environmental Protection Agency ban on the use of DDT, the increase in international travel to countries and immigration from countries with bedbug populations, the world population growth, and the increasing mobility of U.S. society in general have produced a significant increase in bedbug populations. The number of bedbug cases in the U.S. is growing rapidly and is projected to become an even bigger problem in the future.

Self-help treatments are rarely effective and not advisable, as they come with great risks, notably an increased probability of lawsuits. Since bedbugs can go as long as one year between feedings, a “wait and see” attitude to starve them out is not feasible.

Professionals have more potent chemicals than are available to the public and can swiftly and effectively deal with the problem. This can include insecticidal dusts, contact insecticides, and insect growth regulators. Multiple treatments may be required at scheduled intervals over several months and depending upon the circumstances can be quite costly.

Even in states where there are no specific habitability statutes, courts have held that all residential leases contain an “implied warranty of habitability.” In general, vermin are considered a habitability issue. Housing regulations in many jurisdictions explicitly require the landlord to keep the premises free from vermin and the regulations usually do not make any allowance for cost.

The mere presence of bedbugs might subject a landlord to possible rent reductions at the very least and, in the worst-case scenario, might result in lawsuits for constructive eviction even though the landlord has diligently attempted to eradicate the infestations and even if eventually successful in doing so. There is even the possibility of claims regarding damage to the health of tenants. Within recent years, courts have awarded tenants judgments related to bedbugs, in some cases for tens of thousands of dollars. Accordingly, landlords who receive tenant claims of bedbug infestation should address those claims immediately and must continue to attack the problem no matter how long it takes and how much it costs.

You did not mention the number of units, but, since you use the word “apartment,” I assume you may be dealing with a multi-unit building. Every unit in a multi-unit building should usually be treated. I would not consider $750 to be a large expenditure when solving such a problem. While you say that you used “pest professionals,” you don’t say whether they were properly licensed under your state’s law and that they are experienced in dealing with bedbugs, as different vermin require different treatment. Even if they were adequately licensed and experienced, you might consider trying a different vendor chosen from referrals provided by property management companies in your area.

Question

I am a relatively new landlord and wondered what is considered to be the most effective way to advertise my rental condo.

Answer

The most effective way to advertise vacant rental units can depend on the type of property, the location of the property, the current market conditions, and sometimes several other factors. It can also depend on whether you mean the most cost effective or the most time effective. Since time is money when a unit is vacant, the cheapest advertising method is not the lowest cost advertising method if it results in a long-term empty unit that is producing no income when certain expenses, such as mortgage payments, property taxes, insurance premiums, and certain utility services which must be left on even during a vacancy, e.g., gas or electricity when below freezing temperatures are possible.

A FOR RENT sign on the rental property is usually the least costly advertising method no matter what the property type, property location, and market conditions. Under many circumstances a sign is also most often the most productive advertising, producing the least vacancy period.

If there is a HOA involved with your property, be aware that many HOAs restrict, even prohibit signs. However, be also aware that many states now have statutes that require HOAs to allow reasonable signage no matter what the HOA rules might say, “reasonable” being defined in the statutes. Accordingly, check both the HOA’s Bylaws and the state’s statutes so that you know both the rules of your HOA and the law of your state.

Another low-cost advertising method, your time being the primary cost, is posting notices of vacancies on various free bulletin boards in grocery stores, Walmart stores, and/or Laundromat bulletin boards in area where a vacant rental unit is located.

Modern technology provides other options. There are many Web sites specific to vacancy listing services on the Internet as well as more general purpose sites that provide for listings offering a wide variety of services and products. Some are free, while others are not. You need to do a Web search and find out which sites are free to landlords or have fees within your budget.

On the high end of the advertising cost spectrum are newspaper classified ads and specialized rental publications. Classified advertising in major metropolitan newspapers has become quite expensive unless only a very minimal amount of information is provided. Specialized rental publications are not available in all areas and where available they are most suited to larger apartment complexes because of cost. Where available, they are most efficient for large apartment complexes where there will always be some available units. This means that the same ad can run continuously at significantly lower cost per vacancy.

Finally, consider the use of your own Web site. I’m not talking about a Web site that will be found by the general public using a search engine, but a Web site on which the landlord provides detailed information, including photos, floor plans, and maps if desired. Prospective applicants are then pointed to this site by the landlord including its Web address on all forms of advertising including signs, flyers, postings on, and very short newspaper classified ads.

The amount of information landlords can provide on such a Web site is not really limited, since, once the site is created little further work is required except for changing the rent and/or deposit amounts and an occasional update fact such as “new carpet.” Each unit will have a detailed Web page that is permanently on the server, with links being available the home for only vacant units.

The benefits of such a Web site are considerable. First, the cost of hosting a Web is as low as a few dollars per month for the landlord able to do the work himself/herself or having an employee or spouse/child do it. Also, most hosting services include the tools to create the site and one or more email address so that the landlord needn’t receive vacancy inquiries mixed in with other email on personal or other business email addresses. Second, it reduces the time spent responding to questions regarding details from those unlikely to become applicants. Third, the annual cost can be far less than paying higher prices in order to include detailed information in one ad in a major metropolitan newspaper, as relatively little in addition to the Web address need be provided in the classified ad.

Lease Agreements – Part 8

In Part 7 of this series we covered some of the special lease issues related to owner associations. In this Part 8 we’ll discuss some aspects of and issues related to commercial property lease agreements.

Importance of Leases

The value of an income property is affected by the leases for that property. Leases are often the most important factor in determining the value of an income property, both residential and commercial. The value of a lease is determined primarily by (1) the length of the lease term, (2) the rents specified in the lease, (3) options to extend or renew given in the lease, (4) the financial qualifications of those executing the lease and/or those co-signing/guaranteeing the lease, and (5) the adequacy and enforceability of the lease document.

The above factors are much more important for commercial leases than for residential leases because of the (1) longer lease terms, (2) the multitude of possible variations in the way that rents are determined, (3) the complex options often included, (4) the fact that many commercial tenants will be limited liability entities which make co-signers or guarantors imperative, and (5) the fact that there are often significant differences among lease agreements for tenants within a multi-tenant commercial property. The last is particularly so when the property has a variety of types of lease space including perhaps general office space, retail merchandise stores, food service establishments, and even medical/dental offices.

Commercial Leases

Commercial lease agreements generally have the following clauses that are usually not part of a residential lease:

• Permissible business use of premises
• Non-competition
• Signs required or allowed
• Insurance requirements
• Hazardous use issues
• Indemnity clause
• Lock-out provisions and liens
• Multi-year rent increase schedule
• Renewal and/or extension options
• Common area expense contribution – triple-net or variation thereof

Commercial leases will usually cover the following issues that are usually not part of a residential lease:

• Tenant’s trade name
• Size of leased premises
• Complex rent schedules
• Multi-year rent increase schedule
• Option to renew or extend
• For retail, sometimes percentage of sales
• Common Area Maintenance (CAM) charges
• Use of building name restrictions or prohibition
• Tenant improvements – landlord build-out, standard allowance, or tenant cost;  mechanic’s liens
• Ownership of attached fixtures and/or removal requirement
• Required and/or prohibited business hours
• Choice of law jurisdiction
• Environmental responsibility
• Plans and/or other exhibits

The typical length of commercial leases and the often included options for extensions or renewals beyond the original term mean that some issues are more important for commercial landlords. Assignment and bankruptcy are two examples of such issues.

In addition, commercial leases often include the following subsidiary documents because the tenants are often corporations or other limited liability entities:

• Corporate authority or special resolution authorizing the lease
• Personal guaranty(s) making one or more individual corporate directors, officers, or shareholders or LLC managers or members liable for the lease.

Commercial lease rental rates are usually advertised and written into leases on the basis of cost per square foot per annum, although a total monthly rent is often used for small spaces. When specified on the square foott/annum basis. One must, of course, multiply the rent by the square footage (including any common area share), and divide by 12 in order to determine monthly rent.

Commercial Lease Definitions

There are basically three types of commercial leases – Gross, Net, and Percentage. In practice, leases often include one or more attributes of one or more of the three basic types.

Gross Lease – In a gross form of lease the tenant pays a fixed amount of rent for all services associated with his leased premises including maintenance costs, property taxes, and insurance. In other words your monthly rent would be the single amount specified in the lease, including any annual increases. Small office spaces will sometimes be on a gross lease, with the rent sometimes including cleaning services.

Net Lease – In a net form of lease the tenant pays a fixed amount of base rent plus a share of one or more categories of expenses. This is the form most often used in commercial leasing. There are variations of net leases, sometimes referred to as N, NN, and NNN, depending which of expense categories are included. A commonly used version is the triple-net (NNN) lease whereby the tenant pays a fixed amount of base rent plus a share of property tax, insurance, and operating expenses (hence, NNN). The percentage share is usually the same percentage as the tenant’s leased space bears to the total available space, usually including common area. Not only is the base rent usually subject to annual adjustment, but the NNN contribution is usually adjusted annually following calculations based on previous years’ expenses.

In order to avoid misunderstandings and disputes it is also important the calculation of leased premises be defined, preferably within the lease agreement itself. A tenant can become upset when he measures the lease space after signing the lease and finds that his assumption that the dimensions provided by the landlord are measured from the outside surfaces of walls rather than the actual useable inside wall-to-wall dimensions. Similarly, when the NNN costs include a percentage of common areas (such as restrooms, patios, and parking lots) this must be adequately disclosed to the potential tenant.

Because of the issues mentioned above, the net charges can vary drastically depending on the type of property (including both building construction and common area design), the age of the property, the current condition of the property, the way in which common area is measured, and the manner in which the property is managed. Furthermore, the NNN cost is often 20 to 30 percent of the base rent. Accordingly, in order to minimize misunderstandings and future disputes and in order to win in the event of a dispute, it is important that all NNN issues be clearly defined in the lease agreement.

As an example, assume that the tenant is to pay 10 percent of net charges. Must he only pay 10 percent of roof repairs, which, depending on the condition of the property, might be zero during his entire lease term? Or must he pay 10 percent of a completely new roof installation, which might be thousands of extra dollars in the year it is done, because the roof was essentially shot when he signed the lease agreement?

Obviously, how the NNN is defined will significantly affect whether your asking rent is competitive in the area market. In fact, for knowledgeable potential tenants it may be more important than the base rent.

Percentage Lease – In a percentage form of lease, usually only used for retail center space, the tenant pays a fixed amount of base rent plus a share of property tax, insurance, and operating expenses as with a general NNN lease, the share usually the same percentage as the tenant’s leased space bears to the total available space. In addition, a percentage of sales revenues are part of the rent. The percentage may be calculated based on gross sales or as otherwise defined and the potential tenant must be provided adequate explanations of how percentage is calculated and what business accounting records may be required for the landlord to determine the percentage part of the rent.

A landlord must thoroughly understand all terms and conditions of the lease agreement being used. The lease should be continually improved as deficiencies are noticed and as new problems are encountered.

Fair Housing Laws

Fair Housing Laws and fair housing-related Presidential Executive Orders promote equal opportunity for individuals to seek, obtain, and hold housing without discrimination. The most familiar of the fair housing laws is the federal Fair Housing Act.

The month of April celebrates Fair Housing Month, honoring the anniversary of the passage of the Fair Housing Act. To further public awareness of the Fair Housing Act and focus on compliance with fair housing laws, educational workshops and traveling exhibits are customarily scheduled throughout the month by federal, state, and local agencies in various locations. The media attention helps to remind landlords that they should review their rental policies for fair housing compliance on a regularly scheduled basis. Keeping current with all applicable landlord-tenant laws will help the landlord remain compliant.

Fair Housing Act

Title VIII of the Civil Rights Act of 1968 (Fair Housing Act), as amended, prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability.

Any person involved in the sale, rental, or financing of dwellings is responsible under law to conduct housing related transactions in a non-discriminatory manner. Understanding fair housing laws and setting rental policies for fair housing compliance is the landlord’s best protection against claims of rental housing discrimination.

The Fair Housing Act covers most housing-related transactions for public, assisted, and private dwellings. Dwelling refers to any building, structure, or part of a building or structure that is occupied or intended to be lived in by one or more families. The dwellings covered under the Fair Housing Act include rental apartments, houses for sale or rent, boarding and rooming house rentals, mobile home parks, and condominiums.

Housing Exemptions

The following types of property are exempted under the Federal Fair Housing Act:

• Owner-occupied buildings with      four or fewer units.
• Single-family housing sold or      rented without the use of a real estate broker and without the use of      discriminatory advertising.
• Certain types of housing      operated by religious organizations and private clubs that limit occupancy      to their own members.
• Housing that is intended for and solely occupied by      persons 62 years or older or a household with at least one person 55 years      or older. To qualify at least 80% of the units must be occupied by at      least one person 55 years or older.

Advertising Guidance

Section 804(c) of the Fair Housing Act makes it illegal “to make, print, or publish, or cause to be made, printed, or published, any notice or statement with respect to the sale or rental of a dwelling that indicates any preference, limitation, or discrimination based on race, color, religion, national origin, sex, disability, or familial status.” This prohibition applies to all advertising media, including newspapers, magazines, television, radio, and the Internet. It also includes a landlord’s printed materials such as brochures, signs, banners, flyers, or business forms (applications, leases, agreements, etc.).

A key point in fair housing advertising compliance is to focus on the property features using words that are facially neutral.

It is important to note that housing that may be otherwise exempt from federal fair housing laws is still subject to prohibition against discriminatory advertising.

Protected Class

A protected class is a characteristic of a person which cannot be targeted for discrimination. Federal fair housing laws prohibit discrimination on the basis of these protected classes:

• Race
• Religion – personal beliefs, faiths, practices.
• National origin – association of ancestry,      culture, accent, spoken language or surname.
• Sex
• Color – characteristics associated with      certain races and ethnic groups.
• Familial status – having a child under      age 18 in the household, whether living with a parent, a legal custodian,      or their designee. It also covers a woman who is pregnant, and people in      the process of adopting or gaining custody of a child or children.
• Disability      – a physical or mental disability (including hearing, mobility and      visual impairments, chronic alcoholism, chronic mental illness, AIDS, AIDS      Related Complex and mental retardation) that substantially limits one or      more major life activities, having a record of such a disability or are      regarded as having such a disability.

State & Local Fair Housing Laws

Many states and some local jurisdictions have substantially equivalent fair housing laws that protect the same rights as granted by federal laws. Some states grant greater protection to protected classes and/or have added categories of protected class. Fair housing compliance will be in accordance with the most stringent requirements. It is unlawful to coerce, threaten, intimidate, or interfere with anyone for exercising or enjoying their fair housing rights or encouraging or aiding others in the exercise or enjoyment of their fair housing rights.

State and local fair housing laws can be more restrictive than federal laws. For example, the New York City Human Rights Law prohibits housing discrimination based on a person’s real or perceived race, color, national origin, gender (including gender identity and sexual harassment), creed, disability, sexual orientation, marital status, partnership status, alienage or citizenship status, age, lawful occupation or because children may be or will be residing with the tenant.

California protects against housing discrimination through the Fair Employment and Housing Act (FEHA) and the Unruh Civil Rights Act. The Unruh Civil Rights Act, prohibits discrimination in “all business establishments of every kind whatsoever “and has been interpreted to include businesses and persons engaged in the sale or rental of housing accommodations. Not only does the California Civil Code prohibit landlords from inquiring as to tenants’ and rental applicants’ immigration and citizenship status, as previously mentioned, the Code also forbids any municipality from passing laws that direct landlords to make such inquiries. The FEHA and the Unruh Civil Rights Act can be enforced against any owner, lessor, sub-lessor, assignor, managing agent, real estate broker, salesperson, or any person having any legal or equitable right of ownership or possession or the right to rent a housing accommodation.

Age is a characteristic that while not specifically protected under federal law can be a protected class in many states. Landlords cannot reject an applicant solely on account of age although, again, some exceptions apply. There are regulatory guidelines for renting seniors-only multi-family housing. Landlords can refuse to rent to minors who are not emancipated or otherwise of legal age to authorize a contract.

Many states have added source of income protections in their fair housing laws. Some states have passed legislation to protect against housing discrimination based on sexual orientation, gender identity, or gender expression.

Some state courts have also interpreted fair housing laws to mean that protected class categories serve as examples of illegal discrimination or harassment practices and that any arbitrary discrimination based on an individual’s characteristics or traits is also a violation of fair housing laws.

Since an applicant/tenant is potentially a member of any of the federally protected classes, or state and local protected classes, the landlord’s rental screening and selection policies should be based on sound business policies rather than exclusion of certain group characteristics.

What Is Prohibited?

In the sale and rental of housing, no one may take any of the following actions based on the protected classes:

• Refuse to rent or sell      housing,
• Refuse to negotiate for      housing,
• Make housing unavailable,
• Deny a dwelling,
• Set different terms,      conditions or privileges for sale or rental of a dwelling,
• Provide different housing      services or facilities,
• Falsely deny that housing is      available for inspection, sale, or rental,
• For profit, persuade owners      to sell or rent (blockbusting), or
• Deny anyone access to or membership in a facility or      service (such as a multiple listing service) related to the sale or rental      of housing.

Disparate Impact

The landlord must also guard against another form of discrimination. Disparate impact occurs when a policy that is fair and applied fairly ends up discriminating against one or more protected classes of individuals. For example, if a landlord criterion was non-acceptance of any government assistance, this would be disparate impact on individuals receiving housing vouchers or disability payments, etc.

Claims

Complaints must specify the discriminatory actions that allegedly violated fair housing laws. The most common complaints are discriminatory terms, conditions, privileges, services, and facilities in the rental or sale of property. Failure to make reasonable accommodation, refusal to rent, coercion, intimidation, threat, or interference with exercising fair housing rights, and housing advertising that indicated discrimination, limitation, or preference are also common actions of alleged discrimination.

Violating Fair Housing laws can be quite costly in actual penalties awarded, legal expenses, and the time involved in the investigation and hearing of complaints. If an administrative hearing determines discrimination did occur, legal awards for actual compensatory damages, injunctive or equitable relief damages, punitive damages, attorney fees and costs, and civil penalties can be awarded.

Question 1

Can I allow a 17-year-old sign a lease?

Answer 1

In general, a person who can write an X can sign a lease agreement or any other type of contract. However, a person who is less than the age of maturity under the law of the particular state or who does not have the mental capacity as defined by statutes of that state cannot be held contractually liable. Most states define legal maturity as age 18. A contract executed by a minor would in general be considered invalid.

An exception to this statement is that a legally “emancipated minor” can be legally bound when signing a contract. All states have laws dealing with the “emancipation” of minors; laws that specify when and under what conditions children become independent of their parents for important legal purposes.

Approximately half of the states regulate emancipation by statutes specifically designed for that purpose. These statutes may specify the conditions required or the procedures for seeking emancipation. Statutes vary considerably from state to state, but under common law most states allow for the possibility of court-reviewed emancipation. No fixed age of emancipation exists, yet a minor is presumed to become emancipated upon reaching the age of majority. In most states, the age of majority is 18.

If a state does not have a specific emancipation statute or even a procedural rule, the court may act as the primary arbiter of cases involving a minor’s claim to emancipated legal status. Emancipation might also be determined by the appropriate court when a case doesn’t exactly meet the requirements of the statute.

There are possible issues related to a non-emancipated minor signing a contract, some depending on the state or on the judge.

A non-emancipated minor signing a lease along with one or more non-minors should not affect the ability to enforce the lease against the non-minors.

A guarantee agreement by a non-minor for a lease executed only by a non-emancipated minor may not be enforceable against the guarantor because a judge may rule that the basic non-validity of the lease cannot be overcome by having a guarantor.

These and other specific issues should be discussed with a competent attorney who is knowledgeable and experienced regarding emancipated minor law of the particular state.

Question 2

My latest insurance renewal statement is showing the replacement value at being substantially higher than the market value, resulting in a significantly higher premium than I like. Can I reduce the coverage amount to something closer to market value?

Answer 2

In general, a person can obtain whatever coverage amount is desired subject to mortgage lender requirements. However, insuring below replacement cost value can create issues, some of which greatly increase financial risk. I’ll discuss some of the issues.

It is important to understand the various types of value as related to insurance. It is particularly important to understand that replacement cost of a property is not:

• The property’s current      market value.
• The purchase      cost of the land and the cost of constructing the existing improvements on      that land.
• The original or      subsequent amount of the loan secured by the property.

Replacement cost coverage is exactly what the words say. It is an amount of money that will cover the cost of replacing the exact structure if it is totally destroyed or rendered totally unusable and requiring demolition. Most policies allow for some small amount of under insuring to take into account some changes in construction labor and materials costs during the current policy term.

Insurance policies provide that companies will pay the insured for losses in one of two ways.

One way is the actual cash value of damaged or destroyed property which is the cost of replacing property less physical depreciation (depreciation is the decrease in property value due to age or wear and tear). This value can be substantially less than the cost of replacement.

The other way is replacement cost which is the amount it would take to replace, rebuild or repair damaged or destroyed property with materials of like kind and quality without deducting for physical depreciation.

An owner can obtain replacement cost values from a competent professional or depend on the insurer to provide the information.

It is important to understand that the replacement cost of your property might be significantly greater than that of a similar property in the same area because of:

• Upgraded      kitchens or bathrooms, including flooring, cabinets, countertops, or      appliances/fixtures.
• Additional rooms      or living spaces, finished basement, or additional unfinished spaces.
• Extended garages      (larger pickup or longer boat), more garage stalls.
• More exterior      parking or storage space.
• Custom windows,      doors, moldings, alcoves, or arches.
• Special features      such as a pool or spa, security systems, or
• Different types      of landscaping.
• Recent      remodeling that updates the property to more current wants and needs.
• Other unique      features.

Furthermore, lenders will require coverage for a number of different hazards, including at least fire and, in some locations flood and/or earthquake coverages. Failure to maintain required coverages is a violation of the loan agreement, and may result in various penalties, including calling the loan all due and payable. At the very least, a bank will place “forced insurance” on the property that may cost the property owner significantly more than for acceptable policies available elsewhere.

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Question 3

A tenant gave notice by phone 9/25/2013 that everything would be moved out on 9/29/2013. He dropped off the keys at my office, but there is still furniture and other items in the unit. I tried to contact them by phone and left messages several times but they have not responded. When can I dispose of the property that was left?

Answer 3

When you can remove personal property left by the tenant and what you can or must do with the property depends on the intent of the tenant, perhaps the clauses in your lease agreement, and the specific laws of your particular state.

Obvious trash or garbage that no one could possibly want to reclaim can certainly be disposed of without causing any problems. However when certain personal effects or items of even small value are left behind, the landlord faces a dilemma. The tenant may or may not have deliberately left those items for discard. Perhaps the tenant ran out of time to pack all personal belongings or did not have enough packing materials or room in the trailer or truck to take care of every item but intends to come back for the remaining property. The landlord must be cautious regarding the disposal of tenant personal property.

It is that a tenant, who appeared to have moved out, to claim that his personal property left on the property had not been abandoned and he planned on returning for it. As might be expected, the value of what disappeared is usually claimed to be quite high. That is, pieces of junk become valuable antiques.

In many states, the landlord should not be in a hurry to donate, sell or otherwise dispose of any items because the states have certain requirements regarding the handling of abandoned property.

At one extreme, a state does not have a specific law regarding abandoned property. At the other extreme, a state has a statute spelling out detailed procedures for dealing with abandoned property that must be followed even when the lease has expired, all personal property except for a few items has been removed, and the tenant is almost certainly no longer occupying the premises. These procedures often include the requirement of putting the belongings in secure storage, providing notices to the tenant in accordance with that state’s law, holding a public sale of the abandoned property, and providing an accounting of the sale proceeds to the tenant, along with giving the tenant any funds in excess of what the tenant owed the landlord for rent and damages.

The state law may stipulate procedures on how to notify the tenant and how much time the tenant may have to reclaim the property. Items may need to be stored until requirements have been met. The law may also have different rules for different situations based on the reason for the tenant’s departure. For example, did the tenant plan a voluntary move-out, were there eviction proceedings, or did the tenant abandon the rental unit with no notice leaving everything behind? Care should be taken to protect against tenant claims of destruction or theft, including photos and using a third party to document items and the condition of those items that were left behind.

If a tenant leaves and also owes the landlord money, the landlord may think that he is entitled to take or sell whatever property of value that was left on the premises and not worry about finding the tenant. Even with a court order for judgment for money damages, this action might put the landlord at risk.

Some states do allow a landlord to keep or sell abandoned property if the tenant owes the landlord money. This is known as an automatic lien on the tenant’s possessions. The landlord should keep in mind that he may be seizing possessions that may not be paid for and the merchant for those items has a superior lien ahead of any lien interest the landlord may have.

There may be state requirements that the landlord post legal notices (publish) in local newspapers stating his intentions to sell or dispose of items abandoned by the tenant.

Also, certain items necessary for basic living or employment may be exempt from automatic liens. In addition to state statutes, there may be case law that requires certain other procedures. The landlord should not rely solely on lien statutes for information on how to handle abandoned property.

In order to reduce the uncertainly regarding items left on the premises in spite of the above discussion, it is of benefit to include a lease clause stating that any items left on the premises beyond the date of termination of tenancy shall be considered abandoned and may be disposed of as the landlord sees fit without contact with the tenant. Abandoned property laws of many states might have priority over such lease clauses, but such clauses can still have value before some judges. Even if that isn’t certain, the clauses will likely discourage tenants from pursuing the matter to begin with.

In most cases, if a landlord is knowledgeable about the abandoned property law of his/her state a landlord can reasonably decide that the tenant intended to abandoned the items and can dispose of the property as he/she deems fit. However, under certain circumstances the landlord should consider consulting with a competent attorney who is knowledgeable and experienced in the particular subjects of possession and/or abandoned property laws before attempting any removal of the tenant’s personal property.

A Landlord Pet Policy

Pet ownership is growing throughout the country. Market and consumer trends point to a continuing increase in the numbers of pet households. Pets have become a more important issue for landlords because more tenants wish to have them than was the case some years ago. While there are no available statistics on the ratio of pet owners who rent, a conservative estimate is that 50 percent of renters own pets. For a number of years now, pets have been increasingly regarded as family members and renters carefully search out living arrangements and amenities suitable for their entire family. A pet friendly atmosphere is a higher priority than a private parking space for many families.

Pet friendly housing is a growing niche market that is underserved in many areas. Renting to pet owners may make good business sense. Landlords may receive the benefits of additional rental income and potentially fewer vacancies, as studies have shown that renters with pets average a longer rental stay than those renters without pets.

Although one usually doesn’t consider all animals as possible pets, there are some people who do consider any animal to be a possible pet. Accordingly, a pet policy must take this fact into account.

A landlord’s simplest pet policy is probably a policy that prohibits all animals on the leased premises at all times. However, landlords who prohibit animals in their rental properties may be reducing the size of their pool of qualified potential tenants when filling vacancies and overlooking an opportunity to increase profitability of their investments.

Those landlords with a “No Pets” policy cite concerns about pet related damage, noise, liability for injury, and insurance restrictions. Landlords who welcome animal companions, advertising “Pet Friendly” living, address these concerns through the use of pet deposits, rent differentials, and written policies and rules.

Additional rent, a separate pet deposit, other pet related financial items, as allowed by state statute, can help offset costs to repair pet damage. Requiring that pets have been spayed or neutered, have successfully completed obedience training, have regular health examinations, are licensed, are current with required vaccinations, and kept under control at all times (leash or harness) can reduce unwanted behaviors and help with safety and security issues.

Any additional deposits, rents, or other fees based on the animal must be accordance with state law and landlords should not charge such amounts for service animals without being sure that doing so will not violate federal, state, or local fair housing laws. For example, pet security deposits may be in addition to the maximum usual security deposit in some states, but the maximum security deposit includes the amount of any pet deposit in other states. In those states not having a limit on a separate animal deposit, the maximum amount is limited by the rental market and the financial conditions of potential applicants.

Even if landlords don’t wish to have pet friendly rentals, they cannot prohibit service animals. However, fair housing laws do not usually prevent landlords from collecting for damages caused by service animals.

Understandably, pet friendly housing does carry some restrictions necessary to protect and preserve quality of life and property value. The most common restrictions are the number of pets allowed per household, the breed of animal, the size (weight and height) of the pet, and proof of required licensing and vaccinations.

Restrictions on types of animals as well as control requirements can be incorporated into the landlord’s rental policies and lease agreements. Most importantly, restrictions should take include those species and breeds of animals that the landlord’s insurance policy will not cover for liability.

Landlords should always prohibit any animals that are excluded from the liability coverage under their landlord insurance policy – e.g., dog breeds that are considered dangerous. If allowed by law where a rental property is located and if market conditions allow, landlords should consider requiring that tenants carry rental insurance that includes adequate liability coverages for tenant-owned animals, with the policy naming the landlord as additional insured.

Landlords should be aware of the fact that an increasing number of jurisdictions are making the landlord fully liable for injuries to others and for damages to the property of others caused by tenants’ animals. Landlords should keep up to date regarding such laws in the state or local jurisdiction where their rental properties are located. In jurisdictions where landlords are made explicitly liable for tenant-owned animals, landlords must take extra care to have adequate lease documentation, adamantly prohibit animals excluded from the landlord’s liability insurance, and always enforce all animal restrictions.

Lease agreements and/or separate “pet agreements” available from most legal document publishers will fail to adequately cover the animal issue or have the degree of detail that should be desired by all landlords. A landlord should create the necessary documentation based on issues mentioned in this article and on the landlord’s experience with tenants that had animals.

It is not possible to provide the text of an adequate animal agreement in this arena because the exact wording can depend on the specific policies desired by a particular landlord as well as by the type and location of the rental property. For example, the types and quantities of animals will be significantly different for a city condominium, where one is affected both by municipal zoning laws and owner association bylaws and rules, than for a house on large acreage located where there are no zoning issues and few nearby neighbors.

In general, a landlord can hold a tenant responsible for any damages caused by the tenant, by members of the tenant’s family, by guests of the tenant, by agents of the tenant, and by animals brought on to the leased premises. This includes damages to property of the landlord inside and outside the tenant’s particular rental unit, damages to property of other tenants, and damages to property of visitors to the property.

However, rather than depend on general principles of law, it is far better to utilize specific lease agreement clauses related to particular potential problems. Such clauses should include both rules/agreements regarding prohibition against tenant actions and penalties for violating those rules/agreements. Although many landlords resist creating long lease agreements, more detail is almost always better than less.

The desired clauses can be totally within the lease agreement itself or a separate “Animal Agreement” addendum can be utilized. Such a paragraph within the lease agreement is often titled “Pets” and a separate document is usually called a “Pet Agreement.” However, it is best to always use the term “animal” in either place in order to avoid arguments about whether or not a particular animal is a pet in the strictest sense if the word.

The animal clauses, wherever found, should include (1) types of animals allowed and/or not allowed, whether those of tenants or their guests; (2) procedures for obtaining approval for animals – e.g., advance written permission, proof of insurance covering risks associated with the type of animal, proof of any shots usually advised for the type of animal; (3) proof of licensing required by local law; (4) care and control of animals – e.g., prohibited areas, restraint, feed only inside unit, noise, care, cleanup, on leash outside of unit or fenced yard, etc.; (5) penalties for having unapproved animals (e.g., lease termination or removal of animal); (6) examples of types of damages (e.g., cleaning, flea treatment, and deodorizing); and (7) immediate remediation of damages discovered by landlord during regular inspections.

Tenants should also be made strictly liable for the entire amount of injury to the person or property of others caused by such animal and tenants shall indemnify the landlord for all costs of litigation and attorney’s fees resulting from same. No animal damage of any kind will be considered to be “normal wear and tear.” Such clauses must be written so as to apply also to any visiting animals brought onto the premises by the tenants, minor family members, and guests or agents of the tenants.

Obviously, different categories of animals potentially create vastly different potential problems and types of damages – for example, fish compared to hamsters compared to certain breeds of dogs. Accordingly, considering the number of issues that must be discussed and the number of different animal categories that must be covered, a good animal agreement will be lengthy. An adequate agreement, whether a section in the lease agreement or a separate document cross referenced with the lease, will likely be 2 or more pages in length. All tenants, whether or not they initially have an animal, should be required to sign the lease having an animal section or a separate animal agreement so that the tenants are aware of the rules and procedures if an animal is acquired after moving in. If the animal issue is not totally covered within the lease agreement, all occupants who sign the lease agreement should also sign the separate animal agreement.

Turning now to issues related to animals other than the typical cat or dog. While there are numerous examples, we will herein consider only fish. Fish, while not usually considered a problem, can be. Even minor aquarium leaks, when undetected for a significant period, can produce thousands of dollars in damages if flooring is ruined, drywall of ceilings and walls of multiple units require repair, and other tenants must be provided temporary housing while their units are being repaired. The agreement should limit the size of the tank to the amount of water which would not cause serious damage upon total collapse of the tank, perhaps at most a few gallons.

Water is heavy! So, for larger tanks specific approval of the landlord or his qualified contractor should be required and the tenant should be required to provide adequate insurance naming the landlord as additional insured. The tenant should be required to place the tank in a safe location within the unit, taking into account structure flooring and supporting framing, including use of weight distribution principles and materials to protect flooring, and to utilize a stand or table sufficient to stably support the weight of the filled tank. The insurance should cover both minor leaks and catastrophic events.

Since it usually impossible to collect a deposit high enough to cover all possible animal-related damages, the best protection is to set screening financial qualifications high enough to improve the chances of collecting for damages that exceed the available deposit. This includes applicants having enough income and assets to cover significant damages and a good credit record that indicates financial responsibility for obligations. Of course, the bar at which financial qualifications can be set depends greatly on the type of property and the location of the property, as well current rental market conditions.

Expenditures – Part 8

In this article we continue our “Expenditures” series of articles with some discussion regarding capital expenditures.

Capital Expenditures

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called “capital expenditures.” Capital expenditures are considered assets in your business. There are, in general, three types of costs you must capitalize.

1. Business start-up costs
2. New business assets
3. Improvements and      restorations

New Business Assets

There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. You must fully capitalize the cost of these assets, including freight and installation charges. Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules.

Improvements or Restorations

You must separate the costs of repairs from the costs of improvements or restorations.

A repair keeps your property in good operating condition. Work done on your property that does not add much to either the value or the life of the property, but rather keeps the property in good condition, is considered a repair rather than an improvement. You can deduct the cost of repairs as a business expense that can be deducted in the year the work is performed.

Repainting your property inside or fixing gutters or floors, fixing leaks, plastering, replacing broken windows, or replacing parts of a machine that only keep it in a normal operating condition are examples of work that can usually be classified as repairs.

An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. Some examples of improvements are:

Exterior – heating/cooling systems or additions to existing ones, fencing or block walls, new landscaping, new water heater, new roof.

Interior – kitchen modernization, flooring, storm windows/doors, wall-to-wall carpeting, electric wiring or plumbing upgrades, adding insulation.

The costs of making improvements to a business or investment asset must be capitalized. The capitalized cost can generally be depreciated as if the improvement is separate property.

You must also capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration project. Furthermore, if you make repairs as part of an extensive remodeling or restoration of your property, the whole job, including tasks that would by themselves usually be classified as a repair, must be capitalized.

For example, for the rehab of a unit that includes new carpeting and/or tile throughout, painting of the interior, new window coverings, and replacement of a broken kitchen faucet, the cost of the entire project is classified as a capital improvement even though replacement of a faucet and even the painting would usually be classified as a deductible expense when done alone.

Capital Expenditures vs. Deductible Expenses

To further help distinguish between capital expenditures and deductible expenses, some additional examples follow.

Motor vehicles – You usually capitalize the cost (or a percentage thereof) of a motor vehicle you use in your business. You can recover its cost through annual deductions for depreciation or under Section 179. There are dollar limits on the depreciation (or Section 179 deduction) you can claim each year on passenger automobiles used in your business. You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period.

A passenger automobile is defined as any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). Larger vehicles or vehicles which have specialized uses are subject to different rules.

Generally, repairs you make to your business vehicle are currently deductible. However, amounts you pay to recondition and overhaul a business vehicle (e.g., a new or rebuilt engine or transmission) are capital expenditures and are recovered through depreciation.

Tools – Amounts spent for tools and equipment used in your business are capitalized unless they are deductible under Section 179 or are deductible expenses because the tools have a life expectancy of less than 1 year or their costs are “minor.” For example, a $500 table saw must be capitalized unless it is qualifies for a Section 179 deduction and it is desired to use Section 179 rather than depreciate it.

Heating equipment – The cost of repairing a leak in a Freon line and recharging Freon is a deductible expense. The cost of changing from one heating system to another is a capital expenditure. Replacement of a failed compressor must be capitalized.

Roof – The cost of maintaining or repairing an existing roof is a deductible expense, but the cost of re-shingling a roof is a capital improvement.

Cost Recovery

Although you generally cannot take a current deduction for a capital expenditure, you may be able to recover the amount you spend through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expenditure. Depreciation is the method of most interest for rental property owners.

Because costs of capital improvements are added to cost basis of the property, you will need to know the cost of improvements when you sell your property in order to minimize income taxes on a gain from its sale.

Depreciation

Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.

You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Land cannot be depreciated and remains part of the cost basis.

To be depreciable, the property must:

• Be property you own,
• Be used in your business      or income-producing activity,
• Have a determinable useful      life,
• Be expected to last more      than one year, and
• Not be excepted property.

You are considered as owning property even if it is subject to a debt. Therefore, items purchased with a credit card qualify.

If you use the property to produce income (investment use), the income must be taxable. You cannot depreciate property that you use solely for personal activities. For property that has both business and personal use, only the business use percentage of the basis can be depreciated each year.

To be depreciable, your property must have a determinable useful life that extends substantially beyond the year you place it in service. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

There is certain property that cannot be depreciated even though it meets the above criteria. For example, you cannot depreciate property placed in service and disposed of in the same year.

The IRS provides for different methods of calculating depreciation, assigns useful lives for a variety of categories of depreciable items, and specifies recovery periods for each category. As examples, a new computer would usually have a recovery period of 5 years, software 3 years, office furniture 7 years, a residential building 27.5 years, and a commercial building 39 years.

You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first.

Property is considered placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.

Question

A tenant moved out leaving a large unpaid water bill. The deposit was not nearly large enough to cover it, but the owner has to pay to continue getting water service to the property. I am considering two possible actions: 1. Turn the bill over to a collection agency; 2. File a case in small claims court.

Answer

You don’t state whether the water account was in your name or in the tenant’s name or, if the latter, whether the problem is that the water provider has the legal right to make the owner liable anyway. Also, in some states utility providers have a legal right to hold the owner liable for payment of a tenant contracted utility service; in other states don’t. You need to determine whether or not the law in your state allows the water provider to hold the owner responsible for tenant-contracted service. If the account is in your name then you can be held liable no matter who was supposed to pay the bills. In either case, you will need to pay the bill and, if the lease agreement adequately makes the tenant liable, you should file a suit against the tenant.

You can use a collection service, but you will usually be much better off attempting to collect it yourself by suing the tenant, obtaining a judgment, and taking appropriate actions – e.g., liening his assets and/or his garnishing his wages. Furthermore, even if the tenant might be considered judgment proof at the moment – i.e., has no known income or assets – an original judgment can be collected for 5 to 10 years, depending on the state, and it can be renewed for additional periods in most states. Judgments obtained in one state can usually be collected in any other state, although it can require significant effort. Furthermore, judgments appear on a debtor’s credit record and the judgment must often be paid before a debtor can obtain credit – e.g., a home loan or other financing, perhaps even renting an apartment. Finally, the judgment should include legal costs and the ongoing costs of attempting to collect can usually be added to the judgment, with interest continuing to accrue on debtor’s bill until paid. The legal interest rate varies among states, but at a significantly higher rate than can usually be found anywhere else. Rates by state laws are often as high as 10 percent, whereas, it’s difficult to get more than a couple percent on CDs these days.

Regarding using collection agencies, there are numerous disadvantages compared to doing your own collections. First, the collection agency will take a significant portion of anything collected – sometimes as much as one-half. Second, some of their costs may be deducted from the gross amount collected prior to splitting the collected amount. Third, the collection agency may do very little to pursue the debt – perhaps simply make a few phone calls and/or write a few letters to the debtor, the effort depending on the amount and their estimate regarding the chance and difficulty of being successful. Fourth, the collection agency may require that you first obtain a judgment before they will make serious effort to collect. The contract with the collection agency will likely give them the right to receive their share of any amount collected from the debtor when funds are collected through no effort on their part, but is the result of your own actions or simply voluntary payment by the debtor either because of bad conscience or the need to remove the judgment from his credit report.

For any service for which the property owner can be held liable, it is by far best that the owner pay the bills directly and charge enough rent to cover the service. This is true whether or not the owner can be held liable for services not paid by the tenant. It is usually easier to obtain a judgment and/or an eviction against a tenant for failure to pay rent than for any other matter for which the tenant owes the landlord.

Are there any reasons why I might not want to have Section 8 tenants?

Answer

Section 8 has both advantages and disadvantages. The main theoretical advantage is that the government guarantees the rent. However, in practice there are many ways in which this can become untrue. For example, if the tenant originally qualifies for 100 percent subsidy and a couple of months later the tenant qualifies for only 20 percent subsidy due to a change in financial circumstances (e.g., found a job), the landlord must depend upon the tenant for 80 percent. Furthermore, rent increases are limited and require permission of the housing agency and if the market rent (FMR) goes down the rent you’ll receive is reduced. There are circumstances where the landlord may not receive payments for certain periods of time.

You also have the same problems regarding unpaid rent and damages that you have with any other tenant because the government is not responsible for the tenant’s share of rent or what the tenant does to your property. In fact, you are less likely to collect for unpaid rent and damages beyond the amount of the security deposit than for non-Section 8 tenants because the typical Section 8 tenant has less financial resources.

The most basic disadvantage of the program is that the government gets more control of your business. There is an initial inspection, annual inspections, and inspections if the tenant complains about something. Section 8 standards are often higher than habitability laws and/or what the landlord must usually do in order to attract good tenants for the particular property.

If the tenant must be evicted it is the landlord’s problem and there will be little or no help from the agency that administers Section 8. In fact, they may terminate payments upon commencement of the eviction.

Be sure you understand the program before you get involved with Section 8 and, if you do, be sure that you select tenants using the same screening and selection standards as you would for an applicant who is not Section 8, only taking into account that Section 8 will initially be paying part of the rent.

Question

Do you have the forms I need to file for an eviction?

Answer

A landlord cannot file a complaint for eviction with the court until expiration of the required period after serving the tenant with the appropriate notice. The period varies among states – it can vary from 3 to 30 days, depending on the state – and in some states it can depend on the reason for eviction. The notice period required can also depend on whether serving a “Cure or Quit” or an “Unconditional Quit” notice. The manner of service required can also vary significantly among states.

Many states provide for posting of the notice at the property. Most states allow for U.S. mail, some requiring it be sent Certified. All states allow for personal service by either the landlord or by a representative, e.g., an authorized employee or a process server. Inadequate service can mean needing to start over if the issue doesn’t come up until you and the tenant (or his attorney) are in court.

When one is not experienced in evictions, particularly when it is thought that the tenant might choose to maximize occupancy, it is often more cost effective to turn the matter over to an attorney who specializes in evictions. In some states certain entities (e.g., corporations) must be represented by an attorney.

The cost of doing it this way is usually much less than doing it improperly and having a large delay because you must start over. Also, if the tenant is represented by an attorney or appeals the eviction judgment, an attorney can probably better deal with the matter on your behalf.

If you are talking about forms that are filed with the court – e.g., the Summons and the Complaint – it is always preferable to use forms provided by the court and in many jurisdictions those are the only ones allowed. It is even possible that requirements vary among different courts within the same state. Accordingly, landlords should use the forms provided by the particular court and follow the specified procedures, including proper preparation of the forms, attachment of required documents (many courts require copies of all lease documentation) and the proper method and the timelines related to service.