Board Members, Deja and Dinah:
You'll recall at the last meeting the Board had to decide whether a tenant could proceed with a complaint that his or her landlord had charged a rent in excess of that allowed under Sec. 260-3. For reasons I did not understand the issue before the Board was not whether the tenant had been overcharged but whether the landlord could get the tenant's complaint dismissed on the ground that (1) the tenant had paid the "illegal rent for two consecutive years" and (2) the landlord had served the tenant with a "rental statement" which, among other information, included "the base rental as of the date of the inception of the tenancy; and the rent of the prior tenant and notification of the rent registration law." See Sec. 260-7C and -7D (requiring the tenant to file within two years and the landlord to serve a "rental statement) and Sec. 260-1 (definition of "rental statement").
Of the four landlords against whom tenant had alleged overcharges, two offered no evidence of having served a "rental statement, one claimed the rental increases were in compliance with Sec. 260-3 and one, Mr. Silvestri, offered a rental statement with a missing page--the page listing the rents.
The Board directed the RLA to allow the complaining tenants to proceed with all four cases. In all four cases, the tenants would have to show the rents charged by their landlords exceeded those allowed under Sec. 260-3., that is the tenants would have the burden of proving they were overcharged. In three of the cases, the Board found that the landlords could not sustain their burden of proving a defense under Sec. 260-7, that is, the landlords could not prove that the tenants had knowingly paid the illegal rents for two years after receiving a "rental statement." In the fourth case, the Board directed the RLA to consider Silvestri's defense that he served a rental statement.
From: Tom Fodice
Sent: Friday, December 21, 2018 10:39 AM
To: Sullivan_Johnson@cable.comcast.com; Alcupo4@aol.com; Secman01@gmail.com; firstname.lastname@example.org; email@example.com; Blombardozzicr@aim.com
Cc: Deja Anderson; Dinah E. Hendon; John Hallanan; Tom Fodice; Maneza Mohammad Ali
Subject: 27 Concord Street hardship application
To the members of the Jersey City Rent Control Board
From Tom Fodice, Ass’t Corporation Counsel
This email is within the attorney-client privilege, since it represents advice to the members of the Board on a pending application to the Board. I have sent it before the holidays on the assumption that there will be a meeting on December 27th at which the Board must be prepared to address the important and complex issues raised by at least one of the cases on the agenda. (I’ve not yet seen the materials on the other matters, nor have I received any details about the case addressed in this email other than those included in briefs sent to me by attorneys representing both parties.)
On the agenda of the next Board meeting is a hardship application by the owner of 27 Concord Street that presents the same issue as the 821 Bergen Avenue case decided by the Board at its November meeting.
I have received legal briefs from attorneys representing the owner and tenants.
As I understand it, the hearing officer has filed a report and recommendation which finds that the owner is not earning a ”fair return” because its net income is less than 6% of the tax assessor’s appraised value of the property
The tenants, represented by Legal Services, have filed a brief urging the Board to reject appraised value as a basis to calculate fair return. The legal brief of the owner argues that the City uses appraised value to compute real estate taxes, so the Board should allow the owner to use market value to compute its own fair return. This is equivalent to an argument that a regulated utility such as PSE & G may claim a hardship rate increase whenever its net income fell below 6% (or some other statutory percentage) of the market value of its stock.)
At its November meeting the Board rejected the use of “appraised value” of property as equivalent to “equity” in the definition of “fair return in Sec. 260-1. The Board sent the hardship application by 821 Bergen Avenue back to the Bureau of Rent Leveling (in legal jargon “remanded”). In remanding the application, the Board directed the Bureau to look into the owner’s income and expenses to determine whether the owner’s expenses, particularly increased taxes resulting from the city-wide revaluation had diminished its net operating income (NOI) from a base year NOI before the revaluation. In effect, the Board directed the Bureau to determine whether, and how much, increased expenses had diminished the owner’s NOI from the NOI earned in a prior suitable base year—presumably a base year before the revaluation. The formula used in that case to preserve the owner’s income is:
gross rent = base period rent + (current expenses - base period operating expenses)
Under this formula for determining “hardship, owners may obtain rent increases adequate to cover increases in operating expenses. It’s the formula used under federal rent controls starting in 1944 and in New York City and in Boston. Its advantage is that it does not make “hardship” a function of the ups and downs of investment markets such as the “appraised value” formula. A value-based formula leads to a counter-intuitive definition of “hardship,” since an owner can claim a greater hardship when an asset (property) has increased in value (e.g., 6% x (increased) value of property).
The preservation-of-net-operating income formula is not explicitly authorized by the Chapter 260, but I think it represents a fair and reasonable interpretation of the text of Sec 260-10, the section authorizing the Board to grant “hardship” rental increases. That section authorizes the Board to grant a hardship rental increase when an owner is not earning a “fair return” on investment (the 6% [plus passbook rate] return on equity) and (my emphasis) when an owner “cannot meet his or her mortgage payments or operating expenses.” (Emphasis mine.) I think Sec. 260-10 must be interpreted by the Board consistently with the purpose of rent control. Certainly, the main purpose is to protect tenants from arbitrary and unconscionable rent, increases. But a subsidiary purpose is to preserve the net operating income of efficient and conscientious owners.
Rent control cannot be so strict that it results in an unconstitutional confiscation or erosion of income. Nor does it serve the interests of owners or the interest of tenants if an ordinance does not grant a regulatory agency, such as this Board, the discretion to authorize hardship rental increases to encourage investment in rental property and to allow owners, if necessary, to increase expenses to provide adequate services and maintenance when necessary. Moreover, the NOI formula for hardship does not discriminate against a long-term owner whose investment (that is, “equity”) is much less than that of owners who purchased properties in today’s (inflated?) real-estate market. Recent purchasers, especially all-cash purchasers, will continue to seek “hardship” rental increases based on their equity.
I have attached below a first draft of a suggested opinion, which the Board can issue at the close of the hearing. It does not include numbers because I do not have them.
Of course, my draft is only my recommendation as an attorney. The decision is that of the Board.
If any of you have the time and inclination to comment, please do.
If Deja or Dinah have the email addresses of the new members of the Board, this message should be sent to them.
Proposed Draft of Decision in the Matter of the Hardship Application of 27 Concord Street
This is an application for a hardship rental increase under Sec. 260-10 allowing a owner to apply for “increase rentals [sic]” if the owner “cannot meet…mortgage or operating expenses” or “does not make a fair return on investment.” Fair return is defined in Sec. 260-1 as 6% plus the current passbook rate on an owner’s equity. “Equity” is defined as an owner’s “cash contribution” plus “principal payment” to any mortgage on the property. See Sec. 260-1 (definitions of “fair return” and “equity).
According to the hearing officer’s report, the owner purchased the property in [year] for $147,000 and has paid the mortgage in full. In recommending an increase in annual rental income of $ , the hearing officer based the 6% return not on the owner’s cash contribution but on the current appraised value of the property, $ .
In a decision issue by this Board last month in response to the hardship application by the owners of 821 Bergen Avenue, the Board rejected the use of appraised value as the basis for determining a hardship under Sec. 260-3 on two grounds. First, as an issue of legislative interpretation, the definition of “fair return” in Sec. 260-1 requires the use of “equity” not “appraised value” as the basis for calculating a fair return. Appraised value is not “equity” and thus not authorized by Sec. 260-1. The Board must apply Sec. 260-1 in accordance with the intent of the governing body. The use of appraised value as equity converts guarantees an owner a return not on what he or she has invested but on the current value of the asset. It thus treats a rental property not as a business whose profits depend on the efforts of its managers, but as a passive investment asset such as a stockholding whose profits depend on the vagaries of the investment market. Thus an owner whose asset (property) rises is value can claim a greater “hardship” if he or she is not receiving 6% or more of the value of the appreciated asset as net income. The use of such a return-on-value standard is conceptually unsound in a rent control context and is not constitutionally required. Troy Hills Village v. Parsippany-Troy Hills, 68 N.J. 604 (1975). In addition, it runs counter to the purpose of rent control: protecting tenants from arbitrarily large rental increases while assuring the preservation of an efficient owner’s net operating income.
In the 821 Bergen Avenue decision, the Board offered the owner two options. If it wishes to use return on equity to seek 6% or more of equity as a fair return, it must demonstrate its present equity as the basis for a fair return by a suitable index for inflation since the date of purchase.
Sec. 260-10 offers an alternative approach. It authorizes the Board to adjust rents if a “landlord cannot meet his operating expenses.” This is an alternative to the “fair-return” standard. It does not guarantee 6% return on equity, but it does allow a property owner to obtain a rental increase to cover increases in operating expenses from a suitable base year.
If the owner intends to seek a rental increase based on decreased net operating income, it shall notify the rent-leveling administrator and the tenants in accordance with Sec. 260-10B and provide evidence of income and expenses from a suitable base year acceptable to the Rent Leveling Administrator. The rent-leveling administrator shall examine the records of the applicant in accordance with the procedures and guidelines under Sec. 260-10D through 260-10H and provide the Board with her report and recommendations for a rental that preserves the net operating income of the owner earned in the base year.
In conducting her examination into the income and expenses, the administrator may use the services of an independent financial professional with the costs of such professional to be paid by the applicant.
According to Furneaux's commentary, "Manus ' is used figuratively for practical ability or force."