The following information speaks to a landlord becoming wealthy -- as a landlord.
Landlords know that the law specific to landlords and tenants often favours tenants. It’s common knowledge that the Residential Tenancies Act (RTA) is a remedial law and, therefore, it proactively seeks to give tenants a very fair and reasonable opportunity to make their tenancy work, even when a tenant’s difficult circumstances are of their own making.
While this asymmetrical working relationship is unlikely to change for small landlords, there is optimism for larger landlords or potential landlords who have the means and the desire to invest in large projects.
Landlords also know that the Landlord and Tenant Board (LTB) sets an annual guideline rent increase ceiling. The maximum rent increase allowed in 2019, for example, is 1.8%. That is, with proper and timely notification, a landlord can unilaterally raise a tenant’s rent by 1.8 per cent above current.
Lesser known, however, is that a landlord may also increase rent by up to 9% (over a period of 3 years), in addition to the guideline amount. Such an increase is an “Above Guideline Increase” (AGI). This significantly higher than guideline rent increase is allowable to facilitate landlords being compensated for a number of specific extraordinary expenses such as unusually high increases in taxes, extraordinary security expenses, and/or capital expenditures.
The following narrative is an example of an AGI due to a capital expenditure by a landlord. The narrative is based, closely, on a true occurrence. The data was tweaked to protect the identity of the real participants but this anecdote reflects, accurately, what actually happened and what often happens in AGI situations.
A landlord of means owned, as one of a number of income properties, an apartment building, which contained 108 rental units. At the relevant time, 104 of the units were occupied by tenants. The building was over 60 years old and the two elevators were over 40 years old. There was no known record of maintenance done frequently or regularly on the elevators but the superintendent was contacted with some frequency to help with functional irregularities of the aging elevators. By the time of the completion of the elevator replacement, 88 of the 104 tenants were eligible to pay an AGI; 16 of the 104 tenants had moved in after the elevator replacement and were not eligible to be subjected to an AGI.
The landlord incurred a fee, for materials and labour, of $317,000.00. If the elevators were financed at a 7.0% interest rate, paid over 15 years, then the total cost to the landlord would be $510,000.00. The landlord considered the elevators to be a capital expenditure and applied to the LTB for an AGI on that basis. The LTB considered the relevant information submitted and determined that the landlord, in this instance, could be entitled to an AGI of up to 2.43%.
As per administrative protocol, the tenants were notified of the landlord’s desire to increase the rent over and above the annual guideline amount of 1.8% to an aggregate of 3.23% (1.8 + 2.43). A Case Management Hearing (CMH) was scheduled, whereby the tenants could question the landlord’s case, ask for the landlord to reduce the allowable AGI from 2.43% to an amount lower than 2.43%, or possibly discover that the landlord’s case lacked merit and, thereby, demand that the matter go to a merits hearing. The purpose of a merits hearing would be to determine if the expenditure met the legal test as such. Questions pertaining to the financing of the project are not allowed. That is, the tenants had the right to demand a hearing, whereby they would, in principle, substantively challenge the landlord’s case and, hopefully, disqualify any AGI for the landlord. Of course, if they failed, the LTB would grant the landlord the maximum allowable AGI, in this case 2.43%.
In this case, the landlord wisely presented a single capital expenditure and it was virtually certain that an old elevator would meet the legal test as a legitimate capital expenditure. The tenants realized that it was not in their interest to demand a merits hearing because the result would be, probably, the maximum AGI increase. After 40 minutes of discussion between tenants and landlord, the landlord compromised and the two sides agreed to a 2.25% AGI.
The question is: would the landlord be fairly compensated for costs incurred to improve the facility or would the landlord also become wealthy by this process?
The LTB determined that the useful life of the new elevator was 15 years. Therefore, the 2.25% AGI would apply to 88 specific tenants for 15 years.
The AGI required to yield replacement cost of $510,000.00 and, thereby, pay for the financed elevators over 15 years would be 0.4%. A 2.25% AGI would pay the landlord, over 15 years, $3,100,000.00, or $2,590,000.00 above replacement cost. Any of the 88 tenants still residing in the facility after 15 years would be entitled to a rent reduction commensurate with the AGI increase but it would be unlikely that all, or most, of those tenants would be residing in the building in 15 years time for a variety of mundane reasons. Tenants replaced during the 15 years would be subject to rent increases of any amount the market would bear. Therefore, for all intents and purposes, the landlord would have the elevator expenditure paid for and garner a $2,590,000.00 windfall over 15 years.
Hence the landlord became wealthy – the landlord became a wealthy landlord.
The moral of the story is that, if you want to be a landlord, “going big” can harbour lawful opportunities to be the best landlord you can be.