Monday, June 23, 2014

Understand Hoboken's Rent Control Ordinance before Buying an Investment Property

Donna antonucci

Rent Control is a hot topic these days and summer is big time for grads looking for housing, students coming back from school.

I want to provide some basic information that as a buyer you should be aware of. I am not an attorney. Please consult your attorney when it comes to these matters. Hopefully, this article will give you an idea of what you should ask when buying an investment property.

Hoboken has a rent control ordinance:

Rent Control Ordinance

Rent Control Ordinance

When buying a property as an investment or even if you are buying it to live in you should consider what rent you are allowed to charge. In very basic terms, Hoboken's rent control ordinance says that all Landlords must register rents they charge with the city each year. They are allowed to increase the base rent based on the Consumer Price Index (CPI) schedule that can be obtained from the Hoboken Rent Leveling Board via an Open Public Records Act Request (OPRA) form.


Read More on How Rents can Be Maintained after the jump.

Provided by Donna Antonucci 
Prudential Castle Point Realty

How rents can be increased:

CPI Schedule - Rents can be increased annually by a specific schedule by adding the CPI percentage to the rent. Again, consult the Ordinance and the CPI schedule.

Vacancy Decontrol - The rent can also be increased by 25% for something called vacancy decontrol. That's when the owner or Tenant who was occupying the unit, moves out and rents the property. This 25% increase can only be done once in any 3 year period.

Other reasons for increasing the rent that require application are:

Tax Surcharge - A tax increase can be passed onto the Tenants. It's basically the difference between the base year annual property tax and the current property tax amount divided by 12. See the Ordinance document above for the calculation. An application is required in order to be able to pass this added expense onto the Tenant.

Capital Improvements - You have to appeal to the Board and demonstrate that you have made an improvement and then the board may grant you the right to increase the rent. You have to demonstrate what you did and how much you spent to improve the property and the Board grants the increase in rent. The amount granted is subjective and is based on how much utility the improvement provides to Tenant.

Hardship - I have many clients who had to move out of Hoboken and could not sell their apartment for an amount that would payoff their mortgage. Many don't have the cash to pay the difference and have opted to rent. In this scenario, the Landlord can make an appeal based on hardship. The concept is that the owner is entitled to a positive return.

Here is the Hardship Application form.

A hardship application assumes the buyer bought the property using "prudent judgement". This basically means the owner cannot buy a rental property knowing that the rents were not at market and expect to raise the rents based on a hardship appeal. When a property has below market rents, the property is typically worth less then it would otherwise.

Sometimes, buyers buy a property on speculation of property value increases rather than from an income producing point of view.  At times, this means the sale price is at a level where the legal rents don't generate a profit. When a buyer does this knowingly, they cannot make a hardship claim.

However, if a buyer buys a property to live in it and has to move out and rent it, and discovers that the legal rent for the unit is below market, i.e., has a negative return, he/she can make a hardship appeal. They bought at the prevailing value, as a owner occupied unit using prudent judgement and then tried to rent it.

In the Ordinance, the reasonable rate of return is defined as 6% above the passbook savings rate available in Hoboken. Since banks are offering a savings account interest rate of about 1% these days, you can count of 7% but the bottom line is the return has to be positive.

Other ways of maintaining the rent:

In these poor economic times, I have seen rents go down. Many Landlord's want to maintain the legal rent at 2006 and 2007 levels. I have seen this accomplished by keeping the rent constant or even increased based on the CPI index and then using rental rebates to bring the effective rent down to current market levels. This way when the market bounces back, the owner will have the right to adjust the rent upwards very quickly in lieu of being constrained by a dip in the base rent + CPI increases.

I have also seen a similar application using a discount on parking. For example, if an apartment in 2007 garnered $2,500 in rent + $200 in parking. I have seen the Landlord offer the same apartment in 2009 for $2,500 and provide the parking for free. Parking, if not part of the same parcel along with the apartment is not subject to the Ordinance. Makes sense.... parking is a luxury.

Again, I am not a lawyer.  Just because I have seen this done, doesn't mean it's legal.  I believe these structures are but always consult your attorney. 

Caveat Emptor. . .

Ask the seller for a legal rent calculation whether you intend to occupy the unit or not. This has to be requested during the attorney review period. If you buy a property with below market rents and you live in it, remember the CPI for each year you lived in it + the vacancy decontrol of 25%.

If you are the first buyer after a property was converted from a rental building to condominium, make sure you apply for a capital improvement rent increase. You cannot go back and put in for it after a period of time. You have to evidence the improvement and often the improvements were made by the Sponsor of the conversion. You need the bills and description of what was done to the property by the Sponsor to win a capital improvement appeal.

If you do this when you first move in, you will get the CPI increases on top of the Capital Improvement increase plus the vacancy de-control when you leave to rent it.

The same applies if you buy the place and then renovate it yourself. Save your receipts and make the appeal right away.

This process also takes time so it's easier if you do it while you are living in it rather than waiting until the point you decide to rent out your unit.

The same with tax surcharge case. Put in for it right when your taxes have increased. Don't wait until you are about to rent the unit. It takes time and you might find yourself in a position where you have to rent the unit for less that it's worth and less than you would have been allowed just because you are about to have a vacancy. (When faced with a month or two of vacancy while you make a tax surcharge appeal, the vacancy may be worth more money, at least in the short term, than waiting for the appeal and the ability to increase the rent).

Talk to a LOCAL real estate attorney who is familiar with the Ordinance and the class action suit. Be informed when you buy.

I also recommend that you hire a real estate agent using a Buyer's Agency agreement. This is not a popular form of hiring an agent here in Hudson County. Some of the resistance is just because it's not customary here. Or, many buyers are afraid of making a commitment to a particular agent for a typical 6 month contract period. But when you hire an agent using a Buyer's Agency agreement, the agent has a greater responsibility to forewarn you of these things.

Under a Transaction Broker arrangement, they are only being hired to assist you with completing a Contract of Sale and providing access to potential properties. There is an underlying assumption you are doing your own due diligence. A Buyer's Agency Agreement often results in higher insurance premium costs to the agent as well as more research and due diligence. An agent cannot take on the added time and expense without a commitment from the buyer that he/she will guarantee he/she will use his services.

Here is the Consumer Information Statement that describes the difference between a seller's agent, buyer's agent, transaction broker and a dual disclosed broker.

Here is the Consumer Information Stmt

Information Provided by Donna Antonucci
Weichert Realtors

Donna Antonucci Hoboken Real Estate

Donna Antonucci Hoboken Real Estate

Donna Antonucci