AGI – Eventually You Have to Give it Back!

For those of you who invest in multi-family properties, you likely know what an Above Guideline Increase (AGI) is and the steps involved.

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Each year, the Government of Ontario announces what the “Guideline” rent increase will be in the following year.  This amount, expressed as a percentage, is based on the Consumer Price Index (CPI).   For example, the guideline for 2010 was 2.1%.  The guideline for 2011 is only 0.7%.  Applying for an AGI, allows the landlord to raise the rent further than this guideline.

All landlords can apply for an AGI for the following reasons:

1. If the cost of taxes or utilities have gone up by more than the guideline plus 50%.
2. Operating costs related to security services have increased.
3. The landlord has gone through with eligible capital expenditures.

The process for applying for an AGI is fairly straightforward, however it can be very time consuming, as landlords must submit every single receipt proving that taxes increased and/or capital expenditures took place.  Obviously you have to be very organized to apply!!  And while I won’t get into great detail, this can be very lucrative for landlords if they have put a significant amount of cash into a building. 

Once the application is submitted, if everything is legitimate and documented, the AGI usually goes ahead as planned.  In sum, if the numbers are there, the AGI is a go…….the tenants may wish to dispute the AGI, and sometimes this will take place during a long court hearing, however most cases are usually mediated and the landlord settles for an amount that is just slightly lower than the total……I just went through one where we had applied for 1.35% and we settled for 1.3%. 

Now the part they don’t tell you about…..if your application is based on capital expenditures – YOU HAVE TO GIVE IT BACK!!!!

Yes, that’s right, you have to give it back…eventually.

As of 2007, the Landlord and Tenant Board began associating a “useful life” with the work being done on buildings.  For example, a roof will be given a useful life of 20 years; a boiler will have a useful life of 15 years, etc.  Based on the cost of each item in the AGI, they will associate a “blended useful life” – say 15.4 years for all items on average. 

If the AGI is for 2.0% above guideline, after 15.4 years, all tenants who were still in the building at the time of the original application must have their rent REDUCED by 2.0%!! 

Please re-read that last sentence!

The onus is also on the landlord to know when to reduce the rent….. If a landlord is caught not complying with this law in the future, they will face penalties and/or fines.

Now, some landlords say that this does not matter, as most tenants will not live in a rental building for 15 years.  This might be true, but what if you have long-term tenants? 

Please share your questions and comments!

Lesson 1: AGIs can be very lucrative when used for multifamily properties.

Lesson 2: Be aware that you have to give back an AGI in the future, depending on the circumstances.

Lesson 3:  If you are thinking about buying a multi-family property, make sure to get a hold of any AGI paper work that was processed in the past 4 years.  You don’t want unknowingly have to reduce rents in the future!

For more information, visit the Landlord and Tenant Board website.