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SAN FRANCISCO-A would-be class-action lawsuit has been filed on behalf of a tenant of Villas Parkmerced, the city’s largest apartment development with 3,456 units. The suit alleges that the operator of the 115-acre, 13-tower development “routinely imposes rent increases that violate San Francisco’s Rent Control Ordinance” and asks for tenants’ rents to be restored to their legal maximums and for restitution of all monies unlawfully obtained. Attorneys for the current owner of the property tell GlobeSt.com their client is not engaging in any illegal activity and that Parkmerced’s incentive program is under review by the Rent Control Board, with a decision excpected later this month.

San Francisco’s Rent Control Ordinance allows a landlord to raise the rent on a unit to market rate after the unit is vacated. Once this new rent is set, however, the rent is again controlled during this tenant’s occupancy, allowing the owner to raise rents based on 60% of the CPI, with a maximum annual increase of 7%.

The complaint alleges that Villas Parkmerced management uses rebate coupons “to obscure the true base rent charged tenants upon initial occupancy.” An example in the filing states that “when tenants agree to rent a unit for $1325 per month, the rental agreement states a monthly rent of $1675 per month subject to a contemporaneous addendum that issues coupons that deduct $350 per month. At the end of the lease term, however, the rent is raised by the amount allowed by the Rent Control Ordinance (which was 1.7% this year) based on the $1675 ostensible base rent (as opposed to the $1375 actual base rent) and without the issuance of corresponding rebate coupons,” which in this example results in an actual rent increase of 28%.

“I don’t think you can contract around rent control like that,” the lawyer behind the lawsuit, Peter Fredman of Brayton Purcell, tells GlobeSt.com. “I believe if you look at the definition of rent and rent increases in the ordinances you will see that if one uses the plain meaning of the language, I win.”

The owner of Parkmerced, a joint venture of New York City-based Stellar Management and Rockpoint Group, a Boston-based investment and management firm, inherited the rebate coupon incentive practice when it acquired the development one year ago from a joint venture of locally based Carmel Partners and JP Morgan of Boston for a price believed to be approximately $650 million. Alliance Residential is the property manager.

Stellar management principal Robert Rosania tells GlobeSt.com that the practice of using rebate coupons–which he describes as no different than other free-rent incentives handed out by other apartment operators to attract tenants in a highly competitive marketplace–is under review by the Rent Control Board of Commissioners and that a hearing is scheduled for next week to decide the issue. “It is true that individual tenants have filed complaints with the Rent Control Board over the issue. It is true that a case has been lost. It is also true that we are appealing that case and that we expect to win on appeal,” Rosania says.

Stellar Management’s attorneys David Wasserman and Daniel Stern of Wasserman Stern tell GlobeSt.com that a petition was filed with the Rent Control Board by 12 individual tenants alleging unlawful rent increases. The petition precipitated a hearing in front of an administrative law judge and the judge sided with the petitioners.

The appeal of the administrative law judge’s decision will be heard and decided by Rent Control Board commissioners the evening of Oct. 17 at the Rent Control Board’s offices. The Board’s commissioners include representitives of the interests of landlords, tenants and a neutral parties.Fredman tells GlobeSt.com he was unaware that there is an ongoing case related to the rebate coupons wending its way through the Rent Control Board’s petition process. “If the rent control board decides it’s legal, I don’t know what affect that would have on our case,” he says.

A press release sent out by Fredman calls the rebate coupon incentives “illegal” and a “scheme” and Fredman is quoted as saying the practice is “a blatant attempt to subvert the basic legal rights of San Francisco rentors.” Contradicting that statement, Wasserman says the administrative law judge made clear that there was “no fraud or any other type of funny business” that occurred when tenants signed leases.

Stern adds that it is “somewhat egregious” for Fredman to be making claims with conclusions about the actions of a particular entities when the issue it still being litigated. “These types of statements shouldn’t be made about our clients until we get a determination.”

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