Tuesday, September 24, 2013

Rent Control Referendum is Back on the Ballot.... Vote on November 5th




Rent control as it is today is not based on income.  It is not an affordable housing program.     That is, a Tenant who makes $200,000 can stay in a rent control unit where the rent may be well below market as well as someone making $30,000.  There is no way of knowing the income distribution of those who are in apartments where the rents are held below market by rent control.   I assume there are both affluent and average people in units where rents are artificially held down by rent control. Rent Control provides extra protections above and beyond what the state offers for all other civil matters, ie it's specifically for Tenants  to make it easier for them to defend themselves against 'unfair' rental increases.  I put 'unfair' in quotes because I believe the population is divided on whether or not market is fair way to allow prices to fluctuate when it comes to housing.    

Do Tenants need special protection beyond the Civil Court system?  Is there a public good that justifies curtailing someone's property rights?  Should property owners be allowed to negotiate rents at market?  What do these rent control restrictions do to the safety of properties whose rents are artificially held below market by rent control?  What do these restrictions do to someone's personal property value?


The question put to the public will be as follows:
"Shall the City of Hoboken continue annual 

rental increase protections for current residents of rent controlled properties but allow property owners to negotiate rents for vacant apartments and exempt buildings with one to four units and condominium units from the rent leveling ordinance by adopting the proposed amendment to Chapter 155 of the Code of the City of Hoboken?" 


Voting yes, will allow condo owners and owners of buildings that are 4 units or less to get out of rent control upon vacancy.  Rent control would still apply to buildings of 5 or more units.  



Voting No, will keep the rent control ordinance as is.



Historically, when Hoboken was gentrifying rapidly in the early 80's.  Long term tenants were being pushed (and I mean pushed) out of their homes to make way for Tenants who were willing to pay more.  The deceptive practices used included getting Tenants to sign an agreement that terminated their tenancy rights despite the 1974 law where tenants were given an undeniable right to renew.  These Tenants did not know enough to go get a lawyer and contest the eviction in court.  Raising rents beyond state standards, to a level where the long term Tenant had to move out. (State limit is limited up to a level that would be "unconscionable, generally 25% per year".  This limit pre-dates Hoboken's rent control ordinance.)  Again, the laws were in place for them to contest the rental increase in civil court.

Tenants have an undeniable right to renew their lease and a reasonable offer of renewal must be made by the Landlord as long as the property continues to be used as an investment.  That is, if the Landlord wants to sell the property to someone who wants to use it as an investment, the Landlord has to honor the leases.  If it's sold to someone who wants to owner occupy it, AND there are no leases in force ie the Tenants are on a month to month agreement, the buyer can evict with 60 days notice.  Many Tenants go onto a month arrangement because they want to avoid an annual increase but they don't necessarily realize they are giving up control in the event the owner wants to sell.  A Tenant can insist on having a lease and many should consider that to protect themselves.  


Owners are allowed to ask the Tenants to leave upon expiration of their lease if they are selling to someone who wants to occupy the unit or in the case of a 3 family if they want to use the space themselves.... again at the end of their lease with 60 days notice.  

Some of these laws are better enforced today.  If subject to rent control, it has to be within rent control guidelines.   The Tenant either has to sign that lease, leave or the Landlord has to agree to a month to month arrangement, but a reasonable offer has to be made.  Once they move in as a Tenant, tenancy rights cannot be terminated.



Without rent control the Tenant would have to file a claim with the County Civil Court rather than the Rent Leveling Board.


Regardless of rent control, any Tenant can take the Landlord to court to contest if an increase was "unconscionable" even if it's within local and state standards. 



Recent Court Ruling on rule 1862 presents liability for Landlords.  Many relied on this administrative rule that the rent leveling board put in, in 1997 and communicated to the public for years.

There are so many people that are at risk now because of the recent court decision that rule 1862 created by rent leveling board back in 1997 is unlawful. That is, the board did not have the authority to put that rule in. 

In case you don't know what I am talking about, in 1997 the City Council tried to change the rent control law so that it would not apply to condos and buildings 3 units or less.  There was a huge backlash among the long term Tenants.  Particularly, those that were elected were particularly dependent on this group.  The Council backed off.  

After the Council backed down, the rent leveling board passed a supposed administrative rule - rule 1862 that basically said that if you were living in a building when it was converted or sold to you, as the original buyer you could set a new base rent ie what you were paying as a tenant was irrelevant if you were the tenant when the building converted and you were the first buyer.  Conversions are very popular in this town.  

The case I am referencing is ongoing on a property in the south east section of town.  I don't believe the case started as a rent control dispute, however, the Tenant pulled that into the ongoing argument.  The Tenant claimed that he was overcharged per the RC Ordinance.  The property was vacant at the time of conversion and exclusively used by the owner at the time of conversion which per the Rent Leveling Office at the time, meant that rule 1862 applied.  It was then sold to the owner who is now in dispute with his Tenant charged a rent based on 1862.

The Tenant challenged the original rent based on rule 1862 and the judge deemed that the Rent Leveling Board did not have the authority to make such a rule and that such a rule had to be made by legislation.  There are literally thousands of landlords who relied on this rule when first renting a unit that they bought as Tenants and subsequently moved out and rented.  

Many of these people have legal rent calculations from the city based on rule 1862.  Others do not.  The city is indemnified against its errors yet people who relied on city provided information are not.  People who have been misled likely cannot hold the city accountable.  Even when given a legal rent calc provided by the city that relied on rule 1862, the owner, today, Landlords could still be expected to pay back thousands of dollars well after they spent that money. Anyone can file suit against anyone but when it comes to suing the city you have to demonstrate that the city deliberately tried to harm you ie like a city employee had a personal vendetta against you.  You can sue but you won't win and the city will not voluntarily take responsibility for what they've done.

So many people relied on 1862 rule when they went to rent a unit that they were living in for years.  Because the rule was documented and disseminated by the Rent Leveling office (RLO) many don't have any specific documentation eg a legal rent calc where the RLO told them they could set the rent at will.  

Condition:

Much of the housing stock that has artificially low rents because of rent control is in poor condition.  I have seen this in my practice.  I see a broad range of rentals and anecdotally, those with rents artificically held down by rent control are in, what appears to be, poorer condition.  



The Landlord has little incentive to maintain this housing stock to today's standards - they are not necessarily unsafe but in poorer condition.  I do not know if the rent leveling board takes into the time value of money or the value of the owner's time when considering an increase for an improvement.

I have seen apartments with 20 watts of amperage where they can't turn 2 appliances on at the same time.  The Tenant can report unsafe conditions to the Health Dept which will levy fines but if it's not unsafe ie just not modern, the city cannot force an upgrade. 



I witnessed a unit where the tenant almost fell through the floor because she was using a portable washing machine even though it was not permissible per her lease and the building policy.  She also continued to use a refrigerator that was leaking (the fridge was her property not the property of the landlord).  The combination of constant water on the floor and really old floor trusses, the floor gave way while she was in front of the refrigerator.  She was not hurt.  The Landlord did replace the floor but not before it failed.  I do not know if he asked for an increase.  The cost was around $10K.  The Tenant pays about $600/month in rent for something that would easily rent for $2,000 per month on the open market in it's current condition.  Her security deposit is from about 30 years ago and likely less than $200.  


What Rent Control does to the Market Value of a Property:


In my practice, I have seen investors offer far less for a 2-4 family row house or brownstones when compared to someone who wants to buy and occupy  the property regardless of the property class.  Investors look at the rent roll and the limitations thereof but those that want to buy and occupy the  entire building are less concerned with rents.  I have seen about a dozen of these situations.... enough to call it a pattern.

As part of the real estate licensing exam, we are taught how to evaluate a property based on comparable sales and based on Net Operating Income (NOI).  Simply, you get two different answers on properties that have rents held below market by rent control.  The NOI where the rents are below market have a net present value lower than someone that is looking at the property as a primary residence and is just looking at what others have paid for single family homes in the area.

As a result the homeowner who wants to buy, occupy but rent out the remaining units, has to accept the risk that rent control presents given the remaining units would be treated as investments ie the buyer didn't buy to occupy but to rent so the hardship claim process to bring units to profitability is not open to them.  As a result, many middle class families that could only stay in Hoboken if they could successfully rent out the remaining units can't stay here in the same proportion as wealthier families that can occupy the entire property (or have the means if the rentals become unprofitable without the ability to remedy).


Last year, my office sold a 3 family in the south east section of town that went to a buyer who wants to use it as a single family.  Initially, he had an investor who wanted to use it as a 3 family but could not after he received a legal rent calc.  The seller was retired for over 20 years, cancer survivor, taking care of his aging mother.  He had inherited the home from his mother.  She remained in one of the units and back in 1985 they registered her rent at about $175.  The building was consistently occupied by family yet that rent was the basis.  He said he was told he had to put something down and that was what his Mother contributed towards utilities and taxes.  This was the last large financial transaction of his life.  The last chance he would have to take care of himself financially as he went into his twilight years.  The difference between the rent roll price and the owner occupancy price was in the 6 figures.

I believe this ordinance is pushing out one population for the sake of another.  

Those that did not buy a unit as an investment ie they lived in it before renting it, can make a hardship claim to the rent leveling board, to bring the rent up to earn a profit of 3% above the passbook savings rate.  Given today's bank savings rates are essentially 0, it's essentially 3%.


Tax Increases can be Passed onto the Tenant:


Landlords under rent control can pass on tax increases which will be important now that Hoboken is going through a re-valuation.  Some of the longest term Landlords - the supposed B&Rs will pay the highest increases considering they have not be re-assessed since the last revaluation over 20 years ago.  Dominic Amato tried to run for City Council on this issue.  Many of these old timers are afraid they will get clobbered with increased taxes.  Someone needs to show them how they can pass the increases onto their Tenants.  All of us need to support the city budget.  Seniors can also apply for the Senior Freeze which is a state wide program to offset property taxes for Seniors.  Politicians love increasing the limit because the fund goes under utilized every year.  If you live near a senior reach out and help them find this program. 

Property Improvements - The cost of a necessary improvement over the life of that improvement as evaluated by the rent leveling board can also be passed as a rental increase.  It's the costs of the improvement, not the value in terms of what it would do for the demand of that rental.  For example if  kitchen cabinets need to be installed, and it costs $2500 and is expected to last 12 years, the landlord can petition the rent leveling board for a rental increase beyond the consumer price index.  $2500 divided by 12 years divided by 12 months per year would equal $17.36It's not an entitlement and the Landlord is not guaranteed anything will be granted for investment in the condition of the property.  It's a Board decision.

Besides tax increases and improvements, other types of expenses cannot be passed on to Tenants.  Recently, I witnessed a Landlord Tenant issue where the city issued a zoning ticket against a Landlord where the city thought the Landlord had added the unit illegally.  The city was mistaken as the unit was in existence per the city's own tax record since 1968, well before any density ordinance.  It cost the Landlord $45,000 to tell the city what it should have known itself.  The matter was cleared by the Zoning Board 9-0 but the Landlord could not pass any of that expense onto the Tenant in increased rent per the local rent control ordinance.  The expense was not a tax nor an improvement.  Home owners dues are not considered improvements and cannot be passed on.

The CPI is a politically controlled.  During the recession when it really should have been negative it was held at zero.  You have to remember certain things like social security cost of living adjustment payments are based on the CPI so to some degree the index is manipulated to stay within a range.   It also can be manipulated by which basket of goods is used in calculating the index.  Have the costs associated with housing grown at the same rate as the CPI?

Less the 5 units in JC (6 in other municipalities ) are exempt from rent control.  Rent control is typically reserved for "commercial rental buildings" - 5/6 or more.  Hoboken is unique in that it has a rent control ordinance that is applicable to both less and more than 5 units.

New construction and industrial to residential conversions can apply for an exemption from rent control but they must apply within 30 days of obtaining the Certificate of Occupancy.  There is list on my website www.hobokenrealestatemonitor.com.  Put "rent control" in the search this blog box on the lower right and all the articles written on this topic will come up including a list from the rent control department of buildings known to be exempt.  It is not a comprehensive list as these are just the ones the rent control department knows about.  The complete list can be obtained by OPRA'ing the Construction Code office which is far too expensive.  The Construction Code office does not maintain  a list and under OPRA we cannot compel them to compile one.  To compile a complete list, you would have to literally OPRA the Construction Code office to search every single building file in the city for the certificate of exemption.  They are allowed to charge a fee if the time needed to pull all those records is excessive and they surely would in this case.  It's cost prohibitive to compile the list from OPRA'able documents from the Construction Code office.

You would be surprised at how many developers failed to file for this exemption.   

In contrast, let's look at Jersey City...

This gives the small property owner in JC more flexibility and control over his/her property.  The idea of applying the Ordinance to larger rental buildings, is the notion that a larger property operator can absorb an unprofitable unit.  Also, when it comes to enforcement, cities like JC would have to enforce the ordinance with a relatively small set of commercial, professional property owners.

According to Joe Hottendorf, Executive Director of the Liberty Board of Realtors, Hoboken's Ordinance applicable to all rentals, was put in place as a result of political horse trading back in the 80's in order to garner enough votes to push a certain Councilman into office.  At the time, Hoboken had a handful of Landlords who operated the vast majority of rentals.  This made the Ordinance manageable from an administrative and enforcement perspective.

He also stated. "when taking action to resolve ...[issues between Landlords and Tenants], no one is addressing the negative impact their municipal legislator actions may have on the makeup of the City’s housing stock, or the effect it may have on the very people they are trying to help. One such example is that there are 18 percent fewer apartments available to rent today then there were in 2000 in buildings with three and four units. Today there are seven percent fewer apartments in two family buildings. Rent Control is not the main cause of the decline in apartments available in two through four-family buildings but it is an important factor in the decline." 

It would be great to see the empirical data on this.  The housing stock has grown tremendously since 1980.  It would be interesting to look at how many units were added by type.  I would not be surprised if rentals shrank both as % of total inventory and in absolute terms.  Maybe in the Summer when things are a little slower I will pull this data from the MLS.

I see many buildings that are condo'd that in my opinion shouldn't be.  They are too small.  They people who are willing to occupy them often lack the maturity or stability to properly manage the building.  See my article on "What can a basement tell you about condo financials".  The building referred to in that article was a small building, 8 unit condo building? where there was no one at the helm, no functioning board.  The building was not maintained by the board and the units were eventually sold for pennies on the dollar to a developer who rehabilitated the building as it should have been all along and then turned around and sold them.  The developer wanted nothing to do with renting them out.

I have pulled rent control files for my clients who were considering buying a rental building (the whole file - not a legal rent calc).  I can tell you from personal experience SOME of these files are, in fact, a hot mess.  I know this is a hot button but I believe calling a spade a spade is important.  I have seen files with registration forms that were not dated by the registrant AND you could not read the time stamp.  This is not what someone else told me but what I have seen first hand.

Given the recent court ruling, getting a legal rent calc does not protect the Landlord.  That is, if a Landlord gets a legal rent calc when buying a property, charges rents based on that and it's proven later by scrutinizing the file or other evidence that the legal rent calc was wrong, the Landlord is still liable.

It may protect the Landlord from trebble damages but not from having to pay back thousands of dollars of rent when he bought the property, in part, based on the city legal rent calc.

Get a legal rent calc when purchasing whether you are moving in immediately or buying it as an investment. In the attorney review process, demand the stamped OPRA form.  Make sure it's stamped and you can read it. Demand and keep the Legal rent calc.  Make sure it's stamped and you can read it. 


 Keep copies of all of your leases. I would make sure you have originals meaning you have a copy of the lease with original inked signatures. This paperwork is evidence if you ever have to go to court to prove that you had a right to raise the rent under the vacancy de-control rules. Original Leases can be valuable when you go to sell. This documentation is an asset that you can offer to prospective buyers that can help you garner a better price when you go to sell.

Since the Ordinance has been put in place, the number of Landlords has proliferated because multi-family rentals have been converted to condominium.  Once condo'd, many owners have decided to rent them out.  That means that there are many more landlords not necessarily more rentals.  The majority of which are those that own one or two rentals often times as the result of buying and not willing to sell when it's time to move.  This large group, of largely unaware (being unaware is not an excuse for not following the law) small Landlords, often don't register their properties and are often unaware that Hoboken has a rent control ordinance that applies to them.

Please be aware that a seller's agent or a transaction broker not only has no obligation to proactively warn buyers about rent control or any other local issue, the sellers' agent has a fiduciary responsibility to the seller to put the properties best foot forward..... They can't lie but they don't have to proactively raise anything.  A Transaction broker has no OBLIGATION to advocate for the seller or the buyer.  He is paid by the SELLER to bring prospective buyers to the sale and to facilitate the paperwork.  That's it.

In order to EXPECT a real estate agent to PROACTIVELY raise the existence of rent control or any other local matter (remediation, flooding issues, proximity to a hazardous site, etc), the buyer must sign a BUYER'S AGENCY AGREEMENT, in order to have a legally binding relationship with that agent.  Under agency law, the agent would then be LIABLE for representing and advocating for the buyer.  The rub typically is is that buyers' don't want to commit to a specific agent and don't want to have to pay fees in the off chance that the seller is not offering a commission to buyers agents or is offering less than what is agreed to in the Buyer's Agency Agreement.  If you want to EXPECT and DEMAND this type of representation from an agent you must hire them via this contract otherwise....caveat empter....When using a Transaction Broker there is an underlying assumption that the Buyer is doing his/her own due diligence.

See the Consumer Information Link at the top of my home page at www.hobokenrealestatemonitor.com

This has been added to the site and is now available on the right nav bar.  Whenever you want to refresh yourself, just scroll down until you see the JC Corporate Seal.

Other municipalities are considering the financial and safety impacts of having a rent control ordinance. Holding down rents generally encourages Landlords to do the bare minimum in terms of upkeep.

Bayonne's Ordinance passed in November 2011 but was challenged by petitioners.  They made an error early on in their filing and when they got to the petition deadline they were short 85 signatures to put a referendum on the ballot.  On April 5th 2012, the Clerk informed the petitioners that they failed to gather enough signatures by the deadline and they used their one opportunity to cure their petition so the battle was over.

Bayonne's ordinance now allows property owners to get off of the rent control list when their Tenants vacate and they voluntarily bring the units/buildings up to current codes.


Other articles on rent control:



Information Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832