Rent control continues to be headline news, with local legislation being enacted and national legislation being proposed. The rent control law in Prince George’s County was enacted yesterday and it appears that the rent control regulations proposed by DHCA in Montgomery County will soon be approved, triggering that rent control law. Further information about the effects of these developments and other important matters affecting regional real estate are discussed below.
President Biden Announces Major New Action Limiting Rent Increases. On July 16, 2024, President Biden called on Congress to pass legislation to require landlords to either cap rent increases on rental units at 5 percent or risk losing valuable federal tax breaks. The White House release stated that, “Some corporate landlords have taken advantage of the shortage of available units by raising rents by more than increases in their own costs—resulting in huge profits at a time when millions of Americans are struggling to cover rent each month. And recent analysis showed that the six largest publicly traded apartment companies reported large profits earlier this year, and many of these same landlords are named in pending litigation for their alleged use of proprietary algorithms to raise rents on tenants”. Under President Biden’s plan, beginning this year and for the next two years, landlords would only be able to take advantage of faster depreciation write-offs available to owners of rental housing if they keep annual rent increases to not more than 5 percent each year. The plan would only apply to landlords who own more than 50 units and would exempt new construction or properties that are substantially rehabilitated. In response to this proposal, Jason Furman, who served as a top economist in the Obama administration and is now a professor at Harvard, told the Washington Post that, "Rent control has been about as disgraced as any economic policy in the tool kit. The idea we'd be reviving and expanding it will ultimately make our housing supply problems worse, not better,". We will be monitoring this proposal for national rent control and will provide updates.
Prince George’s County Rent Control Bill. On July 16, 2024, the Prince George’s County Council (Council) passed CB 55-24, which includes many of the provisions and concepts included in the rent control law in Montgomery County. CB 55-24 replaces the current temporary rent cap of 3 percent with a permanent rent cap equal to the lesser of (i) 3 percent plus the Consumer Price Index for All Urban Consumers for the Washington-Arlington-Alexandria Area (CPI-U), or (ii) 6 percent. Rent increases for age-restricted senior housing properties are more restrictive. Senior housing properties are subject to a lower rent cap equal to the lesser of CPI-U or 4.5 percent. Thus, if CPI-U is 2 percent, the maximum increase for senior housing properties would be 2 percent, whereas, the cap for other rental housing properties would be 5 percent. New leases, renewals, and vacant units are subject to these new rent caps.
Similar to Montgomery County, if a landlord does not increase the rent by the full annual allowance, the landlord will be permitted to “bank” the difference and apply it to a new or renewed lease for the rental unit, but the total increase may not exceed 10 percent of the base rent. There are exemptions for renovations and new construction – rental units will be exempt from rent control if they were constructed after January 1, 2000 or if the building was substantially renovated after January 1, 2000. This is a permanent exemption for all properties constructed after January 1, 2000, rather than a floating 23 year exemption applicable in Montgomery County. Rent control in Prince George’s County becomes effective without the requirement for adoption of regulations, except that certain provisions (such as banking and the substantial renovation exemption) do not take effect until the regulations become effective; this will likely result in confusion and uncertainty. The initial rent caps will be in effect from October 17, 2024 until July 1, 2025. Adjustments to rent caps in subsequent years will be established by the Department of Permitting, Inspections, and Enforcement (DPIE) and become effective on July 1 of each year thereafter, with notice to the public of the new rent cap by May 1 of each year. CB 55-24 states that the Director of DPIE has until January 1, 2026 to adopt and publish rent control regulations, which would become effective 30 days after publication. Unlike the current temporary rent control law, there is no sunset provision applicable to CB 55-24. It will remain in effect unless amended or repealed.
Montgomery County Rent Control Regulations. On June 14, 2024, the Montgomery County Department of Housing and Community Affairs (DHCA) delivered proposed rent control regulations to the Montgomery County Council (Council) for review and consideration. As we have previously reported, the Council has the right to approve or reject the proposed regulations, but does not have the ability to amend them. We submitted a number of comments and suggested changes to the proposed regulations, but since the rent control law does not take effect until the regulations are adopted, we expect the Council will not be able to implement any of our recommendations and will proceed to approve the proposed rent control regulations in the form provided by DHCA before their last session on July 30. After that, the Council will be on recess from August 5 to September 6. Rent increase notices sent before the rent control law is effective will be required to comply with the rent caps, unless the rent increases becomes effective before the regulations are adopted. For rental units that were vacant before the regulations became effective, the landlord will be able to set the rent at the landlord’s discretion, but vacant units will thereafter have to comply with the rent cap. The rent control regulations include the following:
1. Troubled and At-Risk Properties
- If a property is designated as Troubled or At-Risk, landlords cannot increase rent without DHCA approval of a detailed Fair Return Application.
- The regulations do not permit banking of rent increases while properties are on the Troubled or At-Risk Properties list.
2. Capital Improvement Surcharge
- In addition to permitted rent increases, a landlord may impose a surcharge to cover costs of capital improvements, if the surcharge is approved by DHCA before the landlord performs the capital improvement.
- The regulations include a 30-day deadline for DHCA to perform an initial review of the landlord’s Capital Improvement Petition and to notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information within 10 business days may result in the denial of the Capital Improvement Petition.
- Once the Capital Improvement Petition is complete, DHCA has 60 days to issue a preliminary decision approving or denying the petition and identifying the amount of any permitted rent surcharge. When the capital improvements are complete, the landlord must file a final reconciliation package. DHCA has 30 days to review the reconciliation.
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If a landlord performs a capital improvement prior to DHCA’s approval of the Capital Improvement Petition, the landlord can only impose a surcharge if the capital improvement was necessary for the health, safety or security of the tenants and the Capital Improvement Petition is filed within 30 days after completion of the improvement.
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Equity funding of capital improvements is not eligible for a capital improvement rent surcharge. Funding of capital improvement must be structured as a loan to qualify for the surcharge.
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If a Capital Improvement Petition is denied, the landlord cannot file another Capital Improvement Petition for 6 months following the issuance of the denial.
3. Fair Return
- A landlord can apply to DHCA for approval to increase rent beyond the amount otherwise permitted under the rent control law. DHCA is required to grant such request if DHCA finds that such additional increase is necessary for the landlord to obtain a fair return. “Fair return” means a return on investment sufficient to offset operating expenses and commensurate with returns on investments in other enterprises with comparable risks.
- Similar to the process for approval of a Capital Improvement Petition, once a landlord submits a Fair Return Application, DHCA has 30 days to perform an initial review of the Fair Return Application and notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information within 10 business days may result in denial of the Fair Return Application. Once a Fair Return Application is complete, DHCA has 60 days to notify the landlord of its approval (with the amount of approved rent increase) or disapproval.
- During any period when a landlord can increase rent pursuant to a Fair Return Application, the landlord cannot implement any other rent increase. This means that the approved fair return increase should also include the annual increase otherwise permitted by law.
- Once a Fair Return Application is approved, the landlord cannot file another application for 24 months. If a Fair Return Application is denied, the landlord cannot file another application for 12 months from the date of the denial.
4. Substantial Renovation
- Buildings that are substantially renovated are exempt from rent control if DHCA approves the landlord’s application for a substantial improvement exemption (Substantial Renovation Application). “Substantial renovation” means permanent alterations to a building that enhance the value of the building and cost at least 40 percent of the assessed value.
- As with the Capital Improvement Petition and the Fair Return Application, once a landlord submits a Substantial Renovation Application, DHCA has 30 days to perform an initial review of the Substantial Renovation Application and notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information within 10 business days may result in denial of the Substantial Renovation Application.
- Once the Substantial Renovation Application is complete, DHCA has 30 days to notify the landlord of preliminary approval or disapproval. When the substantial renovations are complete, the landlord must file a final reconciliation package with DHCA identifying the actual costs of the completed substantial renovations. Upon receipt of the final reconciliation package, DHCA has 30 days to review and notify landlord of final approval of the Substantial Renovation Application together with the effective date of the exemption.
- Approval of the Substantial Renovation Application requires that DHCA determine that the proposed substantial renovations are intended to enhance the value of the building. The regulations identify several factors for DHCA to consider in making this determination—including whether the renovations are optional or cosmetic and whether deficiencies in the building’s physical condition could be corrected by improved maintenance or repair.
5. Limitations on Fees
- The regulations limit fees that can be levied on units that are subject to the rent control law. Unlike the balance of the regulation provisions, which take effect upon adoption of the regulations, the fee restrictions do not take effect until 90 days after the regulations take effect. Landlords for rent controlled units may only charge the following fees: (i) application fee (limited to landlord’s actual cost); (ii) late fees (per County law); (iii) pet fees (limited to $25/month and pet deposit limited to $300—both increase annually by CPI-U); (iv) lost key fee (limited to actual replacement cost plus $25); (v) lock out fee ($25 with annual CPI-U increase, or actual cost if landlord engages a third party); (vi) storage fee (only if exclusive to tenant and not associated with the residential unit); (vii) internet or cable television fee (must be optional and cannot exceed actual cost); (viii) parking fees (must be optional and annual increase limited to CPI-U), and (ix) bike fees (per County law). In addition, optional fees on unregulated services not otherwise addressed in the items enumerated above are not subject to the regulations.
Rockville Rent Control. As an incorporated municipality of Montgomery County, Rockville is not subject to the rent control law and regulations unless they elect to do so. On July 8, the Rockville City Council agreed to not implement rent control within the City of Rockville. Rockville joins Gaithersburg, another Montgomery County incorporated municipality, in rejecting rent control.
Montgomery County Expanded Right of First Refusal (ROFR) Regulations. The Montgomery County Council recently enacted Expedited Bill 38-23, which allows the Department of Housing and Community Affairs (DHCA) to assign ROFR rights to “qualified entities,” similar to the ROFR law in Prince George’s County. Previously, only DHCA or HOC had the right to exercise a ROFR. On June 14, 2024, DHCA provided proposed ROFR regulations to the Montgomery County Council for review and consideration. The proposed regulations establish the application process to become a “qualified entity,” and set the selection criteria for a qualified entity to become a DHCA assignee. Under the proposed regulations, a qualified entity applicant is required to (i) certify that it has complied with all housing laws, (ii) commit in writing to not disclose information received from DHCA, (iii) demonstrate expertise and experience in acquiring, owning, operating, managing, and developing rental and affordable housing, (iv) demonstrate a commitment to community engagement, (v) demonstrate other criteria DHCA may require, and (vi) be registered and licensed to do business in Maryland, and in good standing under Maryland law. In addition, ROFR assignees may only evict tenants for just cause and may only increase rents in accordance with the voluntary rent guidelines for 15 years, “unless the units are covered by other agreements that ensure long-term affordability of greater than 15 years or as otherwise required by law”. (The voluntary rent guidelines published by the County Executive in February 2024 limit rent increases to 2.6 percent per year). A designation as a “qualified entity” would only last three years before reapplication is necessary. The criteria to become a DHCA assignee includes, but is not limited to, (a) committing to preserve the current affordable housing units at or below 70 percent Area Median Income, (b) committing to create more affordable housing units, (c) funding amounts requested by the “qualified entity,” (d) funding availability, and (e) demonstrating that the “qualified entity” has expertise in acquiring, owning, managing, operating and developing rental and affordable housing. The Montgomery County Council has until August 13, 2024, to accept or reject the expanded ROFR regulations, but similar to the rent control regulations, it is likely they will adopt the ROFR regulations prior to going on recess on August 5.
Virginia Legislative Session. The 2024 Session of the Virginia General Assembly convened on January 10, 2024 and adjourned on March 9, 2024. This was a “long session” of the General Assembly, (60 days) during which much focus is consideration and adoption of the biennial budget. The reconvened session (more commonly referred to as the veto session) was held on April 17, 2024. The bill count returned to pre-Pandemic levels. The General Assembly considered 3,594 bills and resolutions (1,046 legislative bills excluding commending and memorializing resolutions). The legislation summaries set forth below are intended only to offer a brief description of the bills that passed the General Assembly. Some of the summaries are of bills as introduced, and others are summaries of the bills as amended by the Governor:
- House Bill 967 – Virginia Residential Landlord and Tenant Act; fee disclosure statement. Amends and reenacts §§36-139 and 55.1-1204 of the Code of Virginia. Requires landlords subject to the Virginia Residential Landlord and Tenant Act to include on the first page of a written rental agreement, in bold, 14-point type, a description of any rent and fees to be charged to the tenant. The bill requires that such rental agreement also contain, in bold, 14-point type: No fee shall be collected unless it is listed below;
- House Bill 1272 – Virginia Residential Landlord and Tenant Act; copy of rental agreement for tenant. Amends and reenacts §55.1-1204 of the Code of Virginia. Requires a landlord to provide a copy of the signed written rental agreement to the tenant within 10 business days of the effective date of the rental agreement and to provide additional hard copies of the rental agreement upon request or to maintain such rental agreement in an electronic format that can be easily accessed by or shared with the tenant upon request. The bill also prohibits a landlord from charging a tenant for any such additional copies of his rental agreement;
- House Bill 588 – Virginia Residential Landlord and Tenant Act; fire or casualty damage; termination by landlord. Amends and reenacts §55.1-1240 of the Code of Virginia. Requires a landlord, prior to giving a tenant 21 days' notice of his intention to terminate the rental agreement for a dwelling unit that has been damaged or destroyed by fire or casualty, to (i) make a reasonable effort to meet with the tenant to discuss reasonable alternatives and to offer the tenant a substantially similar unit, if one is available, or (ii) determine that the damage was caused by the tenant's failure to maintain the dwelling unit in accordance with certain provisions. Current law allows the landlord to terminate such agreement by giving the tenant 14 days' notice of his intention to terminate on the basis of the landlord's determination that such damage requires the removal of the tenant and that the use of the premises is substantially impaired. The bill requires the landlord, upon receiving a request from the tenant after the tenant has received such notice, to reevaluate the extent of damage and habitability of such unit unless the landlord has determined that the damage was caused by the tenant's failure to maintain the dwelling unit; and
- House Bill 597 – Virginia Residential Landlord and Tenant Act; enforcement by localities. Amends and reenacts §55.1-1259 of the Code of Virginia. Provides that if a condition exists in a rental dwelling unit that constitutes a material noncompliance by the landlord with the rental agreement or with any provision of law that, if not promptly corrected, constitutes a fire hazard or serious threat to the life, health, or safety of tenants or occupants of the premises, a locality may institute an action for injunction and damages to enforce the landlord's duty to maintain the rental dwelling unit in a fit and habitable condition, provided that (i) the property where the violation occurred is within the jurisdictional boundaries of the locality and (ii) the locality has notified the landlord who owns the property, either directly or through the managing agent, of the nature of the violation and the landlord has failed to remedy the violation to the satisfaction of the locality within a reasonable time after receiving such notice.
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