THE IMPACT OF HOUSING PROVIDER PETITIONS ON THE AFFORDABILITY OF RENT CONTROL UNITS IN THE DISTRICT OF COLUMBIA: A PRELIMINARY REPORT

D.C. Office of the Tenant Advocate Johanna Shreve, Chief Tenant Advocate Prepared at the request of: The Committee on Business Consumer and Regulatory Affairs, Council of the District of Columbia The Honorable Vincent B. Orange, Sr., Chairperson March 13, 2014

TABLE OF CONTENTS EXECUTIVE SUMMARY .......................................................................................................... 4 I. INTRODUCTION ................................................................................................................. 6 Context And Goals ................................................................................................................ 6 Housing Provider Petitions in Context ................................................................................ 7 II. HOUSING PROVIDER PETITIONS OVERALL TREND ANALYSIS ........................ 8 Overview................................................................................................................................. 8 Breakdown of the Types of Housing Provider Petition Filed by Ward ......................... 10 III. HOUSING PROVIDER PETITION ANALYSIS BY TYPE .......................................... 15 Voluntary Agreement Petitions .......................................................................................... 15 Overview of the Voluntary Agreement Statute and Regulations .......................................... 15 Summary of Data Reviewed .................................................................................................. 16 Policy Concerns ..................................................................................................................... 17 Hardship Petitions ............................................................................................................... 18 Overview of the Hardship Petition Statute and Regulations ................................................. 18 Summary of Data Reviewed .................................................................................................. 19 Illustrative Cases.................................................................................................................... 20 Policy Concerns ..................................................................................................................... 20 Capital Improvement Petitions .......................................................................................... 21 Overview of Capital Improvement Statute and Regulations ................................................. 21 Summary of Data Reviewed .................................................................................................. 22 Illustrative Case ..................................................................................................................... 23 Policy Concerns ..................................................................................................................... 23 Substantial Rehabilitation Petitions .................................................................................. 25 Overview of the Substantial Rehabilitation Petition Statute and Regulations ...................... 25 Summary of Data Reviewed .................................................................................................. 25 Policy Concerns ..................................................................................................................... 26 Services and Facilities Petitions ......................................................................................... 26 Overview of the Services and Facilities Petition Statute and Regulations ............................ 26 Summary of Data Reviewed .................................................................................................. 26
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Illustrative Case ..................................................................................................................... 27 Policy Concerns ..................................................................................................................... 28 IV. CONCLUSION .................................................................................................................... 29

THE IMPACT OF HOUSING PROVIDER PETITIONS ON THE AFFORDABILITY OF RENT CONTROL UNITS IN THE DISTRICT OF COLUMBIA: A PRELIMINARY REPORT D.C. Office of the Tenant Advocate Johanna Shreve, Chief Tenant Advocate Prepared at the request of: The Committee on Business Consumer and Regulatory Affairs, Council of the District of Columbia The Honorable Vincent B. Orange, Sr., Chairperson March 13, 2014

EXECUTIVE SUMMARY On February 19, 2014, the Committee on Business Consumer and Regulatory Affairs (Committee) asked the Office of the Tenant Advocate (OTA) to assess whether, under the Districts rent control statutes, the law itself is contributing to the loss of affordability in affected rental units. District law includes five mechanisms, styled as Housing Provider Petitions, by which housing providers may seek approval to increase rents beyond what is allowed by an adjustment of general applicability (commonly called the automatic increase under the Districts Rent Control scheme). These five housing provider petitions are: Voluntary Agreement (VA); Hardship Petition (HP); Capital Improvements Petition (CI); Substantial Rehabilitation Petition (SR); and Services and Facilities Petition (SF). Of these five Housing Provider Petitions, by far the two most commonly utilized are the VA and the HP. As the VA is currently practiced, the housing provider will generally create a new de facto rent ceiling, a practice the Council abolished in 2006, under which rents for all incoming tenants are raised to levels in excess of what the free market will bear. As a current tenant moves from the property, that tenants unit will also be subject to the new de facto rent ceiling. As a new tenant moves into the property, the rent level will be set according to what the market will bear. The tenants will no longer benefit from the protections traditionally accorded by District law. In contrast, the HP allows the rent level to be adjusted to such level as to provide the housing provider with a 12% return on equity, a level exponentially higher than the return
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provided through such vehicles as Certificate of Deposit. There is no limit to the percentage of increase that may result, and there is no mechanism to adjust rents beyond the initial increase in order to reflect changed circumstances at the property. In analyzing available data, the OTA has put forward 31 policy concerns, categorized by mechanism, that merit consideration by the Council. In conclusion, this Preliminary Report serves a critically important purpose to focus the Councils and the communitys attention on the affordability problems posed by Housing Provider Petitions. These Housing Provider Petitions are acting in direct opposition to, and causing stark imbalances in the implementation of, the Councils bookend first and fifth core purposes for enacting the Rental Housing Act of 1985: to protect low- and moderate-income tenants from the erosion of their income from increased housing costs and to prevent the erosion of moderately priced rental housing while providing housing providers and developers with a reasonable rate of return on their investments. D.C. Code 42-3502.02(1) and (5). The OTA urges the Council to consider the Policy Concerns described in this Preliminary Report as one component of a complete, global review of whether the Rental Housing Act of 1985, as amended, continues to fulfill the Councils purposes.

I.

INTRODUCTION

Context And Goals The D.C. Office of the Tenant Advocate (OTA) respectfully submits this preliminary report to the D.C. Councils Committee on Business Consumer and Regulatory Affairs, pursuant to the Committees request at the OTAs FY 2013-14 performance oversight hearing on February 19, 2014. At that hearing, Committee member Jim Graham requested that Chief Tenant Advocate Johanna Shreve conduct a survey of apartments to assess how -- under the Districts rent control program -- the law itself is contributing to the loss of affordability in affected rental units. During her testimony on February 19th, the Chief Tenant Advocate explained that certain rent control mechanisms are resulting in excessive rent increases to the detriment of D.C. renters and the Districts stock of affordable rental housing. That is why, in significant part, Council review and reform of the Districts rent control law has been and remains a high priority item for the agency. Given the context of this request, the OTA sought and received clarification from the Committee that a survey focused just on housing provider petitions would best fulfill immediate purposes. 1 Due to the short time-frame the agency was given to prepare this report,2 the OTA wishes to emphasize its limited nature and goals: 1. To report the number of housing provider petitions filed by type between FY 2007 and FY 2013 according to the Rent Administrators office; 2. To discuss general trends discerned from the Rental Accommodations Division (RAD) filings; 3. To explain the legal requirements for approval of each type of petition, and the procedure for government review and tenant challenges; 4. To highlight at least one case for each type of housing provider petition that may illustrate affordability and related policy concerns; 5. To enumerate policy concerns associated with each petition type; 6. To provide an initial building block for further research and analysis by appropriate District agencies and non-governmental organizations such as the DC Fiscal Policy Institute.

As the Chief Tenant Advocate discussed at the hearing, other rent increase mechanisms -- notably the vacancy increase -- are also being used in a way that contributes to the loss of affordable rent control units. D.C. Code 423502.13. 2 The OTA wishes to thank RAD, OAH, and RHC for providing documents for purposes of this report. We note however that RAD has not yet been able to provide the OTA with copies of case decisions and a status/disposition report for relevant cases, material that is essential to a more comprehensive study. Accordingly, it should be understood that data reviewed (as summarized in the sections for each petition type) refers only to documents available to the OTA during the preparation of this report.

Housing Provider Petitions in Context There are seven (7) ways for a housing provider to increase the rent under the Districts rent control law (Title II of the Rental Housing Act of 1985; D.C. Code 42-3502.01 et seq.). Two (2) of them -- the adjustment of general applicability (colloquially known as the standard annual increase) and the vacancy increase involve filing requirements at the Rental Accommodations Division (RAD), located at the Department of Housing and Community Development (DHCD).3 These two rent increase methods do not require government review and approval. Government review and approval are required for any of the other five (5) rent increase methods, the five (5) types of Housing Provider Petitions: Voluntary Agreement (VA); Hardship Petition (HP); Capital Improvement Petition (CI); Substantial Rehabilitation Petition (SR); and Services and Facilities Petition (SF). Three agencies may be involved in the review and approval process at the administrative level: (1) RAD; (2) D.C. Office of Administrative Hearings (OAH); and (3) the Rental Housing Commission (RHC). As explained in section III, RADs role varies considerably depending on the petition type. To summarize the review and approval process that is common for all petition types: 1. Housing provider filing: The housing provider files the rent increase petition at RAD using the relevant RAD form. 2. RAD disposition: RAD (headed by the Rent Administrator) conducts a sufficiency review and may reject any petition filing for insufficiency; renders a preliminary decision for some petition types; automatically transfers some petition types to OAH; and transfers any contested case to OAH. 3. OAH adjudication: Tenants may challenge any RAD final order at OAH. OAH is responsible for fully adjudicating the matter, including holding a hearing and issuing a final decision. 4. Administrative appeal: Any party may appeal an OAH decision to the D.C. Rental Housing Commission (RHC). 5. Judicial appeal: At the conclusion of the administrative process, any party may appeal a final RHC decision to the D.C. Court of Appeals.

It is important to note that the housing provider must certify substantial compliance with the housing code for the unit and common areas prior to implementing a rent increase. D.C. Code 42-3502.08(a).

II.

HOUSING PROVIDER PETITIONS OVERALL TREND ANALYSIS

Overview According to data provided by the RAD, the most commonly used Housing Provider Petition is the VA. As demonstrated in the graph below, from FY 2007-20134, there were more VAs filed (142) than all other types of petitions combined (121). Second to VAs are HPs at 87. VAs and HPs comprise over 87% of the Housing Provider Petitions filed during the relevant period (229 out of 263), compared to only a combined total of 34 CI, SR, and SF Petitions.

Petitions Types Filed FY 2007-2013

142

87

17

10

VA

HP

CI

SR

SF

It has been our experience that VAs and HPs result in the largest permanent increase in rents in the District. In contrast, CIs result in the implementation of a temporary surcharge (for 96 months or longer if necessary), while SFs often times result in a decrease in monthly rent (to offset tenants payment of utilities, after a conversion to individual metering).5 A review of the number of annual filings highlights significant trends in implementation.
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Although the RAD data included Housing Provider Petition filings from FY 2007-2014, the 2014 numbers were excluded from this report, as they included only the first quarter figures. 5 While an SR may result in a permanent increase in rent, adding an additional 125% to the rent, there is not enough data on SRs to make an empirical conclusion on their significance.

Total Housing Provider Petition Filings Trends Analysis FY 2007-2013

35 30 VA 25 20 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 HP CI SR SF

As indicated in the graph above, the RAD data demonstrates that the number of annual filings of CI, SR, and SF petitions have not changed significantly from 2007-2013.6 HPs increased dramatically from 2007-2009, before dropping sharply in 2010 and leveling off in the subsequent years. CIs were at their highest in 2007, decreasing to their low point in 2010, before beginning an incline.

While the OTA has compiled the RAD data provided, no professional statistical analysis was able to be completed in the time allotted for this report.

Breakdown of the Types of Housing Provider Petition Filed by Ward

Voluntary Agreements by Ward FY 2007-2013

Ward 7 12% Ward 6 13% Ward 5 10% Ward 2 17% Ward 4 12% Ward 8 8% Ward 1 24%

Ward 3 4%

Total: 142

Ward 1 had the highest percentage of VAs filed during the relevant time period, with 24%, followed by Wards 2 and 4 with 17% and 13% respectively. Wards 3 and 8 had the lowest percentage of VAs filed at 5% and 7% respectively.

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Hardship Petitions by Ward FY 2007-2013

Ward 8 15% Ward 7 11% Ward 6 9% Ward 5 24% Ward 1 23% Ward 2 6% Ward 4 12% Ward 3 0%

Total: 87

Wards 5 and 1 had the highest percentage of HPs filed during the relevant time period, with 24% and 23% respectively. During that same time period, no HPs were filed in Ward 3.

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Capital Improvement Petitions by Ward FY 2007-2013

Ward 7 Ward 6 0% 0% Ward 5 29% Ward 8 0% Ward 1 0% Ward 2 28%

Ward 4 0%

Ward 3 43%

Total: 7

From FY 2007 2013, CIs were filed in Wards 2, 3, and 5 only. Ward 3 made up 43% of the filings, while ward 2 and 5 comprised the remainder with 28% and 29% respectively.

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Substantial Rehabilitation Petitions by Ward FY 2007-2013

Ward 8 12% Ward 7 23%

Ward 1 23% Ward 2 6% Ward 4 18%

Ward 5 18% Ward 6 0%

Ward 3 0%

Total: 17

Wards 1 and 7 each had 23% of the SRs filed between FY 2007-2013, and Wards 4 and 5 each made up 18% of the filings. Wards 2 and 8 comprised 6% and 12% of the total SR filings respectively, while no SRs were filed in Wards 3 or 6.

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Services & Facilities Petitions by Ward FY 2007-2013

Ward 8 0% Ward 6 10% Ward 5 20% Ward 4 30% Ward 7 10% Ward 1 20% Ward 3 10% Ward 2 0%

Total: 10

Ward 4 experienced the highest percentage of SF filings at 30%, followed by Wards 1 and 5 with 20% each. Wards 2 and 8 did not have any SF filings during the relevant time period.

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III.

HOUSING PROVIDER PETITION ANALYSIS BY TYPE

Voluntary Agreement Petitions Overview of the Voluntary Agreement Statute and Regulations A Voluntary Agreement (VA) is a contract between a housing provider and the tenants in a rent controlled property. D.C. Code 42-3502.15; 14 DCMR 4213. The terms of the VA can (1) increase the amount of rent charged for each unit; (2) add or reduce the services and facilities provided (e.g., laundry facilities, parking, utilities, etc.); and (3) provide for repairs and capital improvements to the building. D.C. Code 42-3502.15(a). The VA process begins when either a Housing Provider or Tenants file a proposed VA with the Rent Administrator and distribute copies to all concerned parties. 14 DCMR 4213.3 and 4213.5. Whoever initiates the petition must allow the other parties at least two (2) weeks to consider the document before asking for their signatures. 14 DCMR 4213.4-4213.5 Before a VA can become binding on the housing provider and the tenants, it must be signed by the housing provider and at least 70% of the eligible tenants, and be filed with the Rent Administrator. D.C. Code 42-3502.15(b); 14 DCMR 4213.12-4213.13. To be eligible to sign the VA, a tenant must be the head of household and cannot be an employee of the housing provider. 14 DCMR 4213.12. The filed VA must include the signature of each tenant who supported the agreement, the number of each tenant's rental unit or apartment, the specific amount of increased rent each tenant will pay, if applicable, and a statement that the agreement was entered into voluntarily without any form of coercion on the part of the housing provider. D.C. Code 42-3502.15(b). Once a VA has been signed by the housing provider and 70% of the tenants, and has been submitted to the Rent Administrator, RAD reviews the petition for sufficiency. The Rent Administrator may reject the petition if it is technically deficient. If the petition is technically sufficient, the Rent Administrator must automatically approve the VA if the rent charged for all rental units in the housing accommodation [is] adjusted by [the same] specified percentage (i.e., automatic approval). D.C. Code 42-3501.02(c). Furthermore, some VAs can be approved passively. If the Rent Administrator does not approve or disapprove the VA within the 45 day time limit prescribed D.C. Municipal Regulations Title 14, 4213.13, then the VA shall be deemed approved (i.e., passive approval). 14 DCMR 4213.14. If the Rent Administrator disapproves the VA, then RAD must set forth the grounds for disapproval and transfer the case to OAH. The Rent Administrator may only disapprove the VA on the following grounds:

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(a) If all or part of the tenant approval has been induced by duress, harassment, intimidation or coercion; (b) If all or part of the tenant approval has been induced by fraud, deceit or misrepresentation of material facts; or (c) If the VA contradicts the provisions of 102 of the Act7 or results in inequitable treatment of the tenants. 14 DCMR 4213.19. If approved, the agreement shall be binding on the housing provider and on all tenants, including those tenants who did not sign the agreement. D.C. Code 42-3502.15(b); 14 DCMR 4213.17. Summary of Data Reviewed 142 VAs filed according to RAD for Fiscal Year 2007-2013; 20 VA final decisions reviewed: o 13 decided at RAD; o 7 decided at OAH; and o 0 decided at RHC. Disposition of each of those decisions (including relevant agency) o RAD: 8 approved; 2 disapproved on technical grounds; and 3 disapproved substantively. o OAH 5 approved; 1 voluntary dismissal; and 1 dismissal for lack of jurisdiction.

Section 102 of the Rental Housing Act, codified as D.C. Code 42-3501.02, states the Acts purpose: In enacting this chapter, the Council of the District of Columbia supports the following statutory purposes: (1) To protect low- and moderate-income tenants from the erosion of their income from increased housing costs; (2) To provide incentives for the construction of new rental units and the rehabilitation of vacant rental units in the District; (3) To continue to improve the administrative machinery for the resolution of disputes and controversies between housing providers and tenants; (4) To protect the existing supply of rental housing from conversion to other uses; and (5) To prevent the erosion of moderately priced rental housing while providing housing providers and developers with a reasonable rate of return on their investments.

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Illustrative case 1460 Irving St., NW The Housing Provider at 1460 Irving St., a 66 unit property in Ward 1, filed a VA with the Rent Administrator on October 7, 2011. The VA was signed by 59 of the eligible heads of household. In the VA, the Housing Provider promised $449,000 worth of maintenance and repairs and promised not to attempt to convert the building into condominiums for ten years in exchange for raising the rent. The terms of the VA raised legal rents from $416-$1,200 to a range of $949-$1,560 (in other words increases ranging from $219-$1,044 or 29%-202%). The VA stated that the proposed rent increases would not apply to current tenants and would only take effect when the apartments become vacant. The VA also proposed to limit increases for current tenants to the annual adjustment of general applicability for five years, but after five years the Housing Provider could file a substantial rehabilitation, capital improvement, or hardship petition to increase the rents for the current tenants. Initially, the Rent Administrator disapproved the petition because the proposed rent increases were not based on the legally correct rents and transferred the case to OAH for a hearing. In response to this order, the Housing Provider and the tenants who signed the VA filed a Joint Motion to Vacate the Rent Administrators Order and to Approve the VA. OAH granted the motion and approved the VA. In this case, OAH held that the arguably inequitable treatment between current and future tenants was not prohibited by the Act or regulations because future tenants are not tenants under the definition of tenant in the Act.8 The Court went on to say that provisions in the VA limiting increases on current tenants were sufficient to satisfy that Acts purpose of protecting low and moderate income tenants from the erosion of their income to increased housing costs, and that the provision prohibiting the conversion of the property to condominiums for ten years was sufficient to satisfy the Acts purpose of protecting the existing rental housing supply. Id. at 12-15. Policy Concerns 1. Development Agreements: Some VAs include or reference separate Development Agreements which describe all the key terms of the exchange, i.e., changes in services and facilities provided, promised maintenance and repairs, etc. Rent Concessions and Rent Ceilings: Many of the Development Agreements, have provisions that current tenants will not be subjected to the filed rent increases,

2.

citing Van Metre Irving Street Apartments, LLC v. Tenants of 1460 Irving Street, NW, 2012 DHCD VA 11,013 (OAH Aug. 22, 2012), p. 11.

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instead they will continue paying but their current rent only to be increased by the annual adjustment of general applicability for the duration of their tenancy. This practice was even formally condoned in an OAH opinion, In re: Petition for Rent Adjustment Base on 70% Voluntary Agreement, 2012 DHCD VA 11,016, p. 11 (OAH June 25, 2012) (Voluntary Agreements can increase rates charged for future tenants while providing current tenants with a rent concession.). However, this practice creates de facto rent ceilings, as housing providers take increases on the legal rent and raise the rent charged to the legal level after the current tenant vacates. 3. Lack of Checks and Balances: VAs are like Housing Provider Petitions because they can cover the same ground as a services and facilities petition, capital improvements petition, or substantial rehabilitation petition, and raise rents like a hardship petition. However, they do not have the oversight mechanisms built into the Housing Provider Petitions because the tenants must approve the rent increases. The tenants approval is supposed to act as a check on housing provider overreach. Loss of Affordability: VAs erode affordability as rents have been increased by over 100% for many units in areas all over the city. Passive Approval: Under the regulations, the VA is deemed approved if the Rent Administrator does not act on it within 45 days of its filing (14 DCMR 4213.14). We do not know how many VAs have been passively approved over the years. Timetable for Required Work: There is now no requirement of a timetable for work promised by the housing provider in exchange for the rent increase. Coercive Tactics: Tenants have been drawn into inequitable side deals, housing providers have used threats of possible hardship petitions, and housing providers have made tenants sign a VA as condition of moving into the building. In some cases existing tenants have been required to sign a VA to dictate the future of the building as a condition of receiving payment to vacate the building.

4.

5.

6.

7.

Hardship Petitions Overview of the Hardship Petition Statute and Regulations A Hardship Petition (HP) is a formal request by a housing provider of a property subject to rent stabilization (rent control) to raise the legal rent on a housing accommodation to an amount that will generate a rate of return of twelve percent (12%) on equity. D.C. Code 423502.12(a). The rate of return is equal to net income divided by the housing providers investment in the housing accommodation. D.C. Code 42-3502.12(b); 14 DCMR 4209.6 4209.8.

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A HP is first submitted to the Rental Accommodations Division (RAD), which reviews the petition for filing sufficiency and may reject the petition if insufficient. If the petition is sufficient, RAD must turn over a copy of the petition to the affected tenants along with an explanation of the approval process. 14 DCMR 4209.20(a). Within 30 days of the date of the notice of the petition sent by RAD, affected tenants must inform RAD and the housing provider in writing as to who they have designated as their representative or whether they have formed a Tenant Association. 14 DCMR 4209.20(b). Furthermore, if the petition is deemed sufficient, RAD must perform preliminary work, including conducting an Audit Report of the figures submitted with the petition and determining what level of rent increases is allowable. 14 DCMR 4209.20(d). Regulations require RAD to complete the Audit Report within 20 days following the filing of the petition. Id. RAD then issues a decision either denying the requested rent increase or granting it in whole or in part. If tenants do not object to RADs Audit Report or decision, the increases become final and permissible within 45 days of the report. 14 DCMR 4209.20 (f)(2). If tenants object to RADs Audit Report or decision, tenants must file and serve written exceptions and/or objections. RAD then determines whether the tenants challenge is based on a technicality or a clear rule of law. In all other instances, the matter is referred to the Office of Administrative Hearings (OAH) for a hearing and a decision. 14 DCMR 4209.20 (f)(1). Tenants may challenge a petition on the bases of inaccurate or unverifiable income-expense data, substantial violations of the Housing Code, and/or if another rent increase was implemented within the previous twelve (12) months. 14 DCMR 4209.1; 14 DCMR 4209.11. If exceptions or objections are filed, regulations require a hearing within 45 days after issuance of the audit report. 14 DCMR 4209.20(f)(3). If a decision isnt made on a HP within 90 days of the filing of the petition, the housing provider may ask RAD to approve of conditional rent increases to the amounts requested in the petition. D.C. Code 42-3502.12(c); 14 DCMR 4209.20(h). Summary of Data Reviewed 88 Hardship Petitions filed according to RAD; 13 Hardship Petition decisions reviewed: o 3 decided at RAD; o 9 decided at OAH; and o 1 decided at the Rental Housing Commission (RHC). Disposition of each of those decisions (including relevant agency) o RAD: 1 rejected on procedural grounds; and
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2 approved after a percentage reduction by RAD pursuant to the Audit Report.

o OAH: 1 rejected substantively; 3 rejected on procedural grounds; 4 settled with unknown outcomes; and 1 remanded to RAD. o RHC: 1 settled with unknown outcome. Illustrative Cases 2911 Newark Street, NW Affordability problems can arise even when a HP is ultimately denied. In the case of 2911 Newark Street, NW, a conditional 36% rent increase was legally implemented 90 days after the HP was filed, despite RADs audit report recommendation that the petition be rejected. Although OAH eventually denied the petition nearly five (5) years after it was filed (and ordered the conditional increases refunded), untold numbers of tenants were likely priced out of the housing accommodation while the petition was under consideration. 2724 11th Street, NW Affordability has also suffered because of procedural mistakes. In this case, the tenants of 2724 11th Street, NW, had no notice of a filed HP until after RAD approved the petition and informed the tenants of a 31.5% rent increase. It took nearly two (2) years for the tenants to successfully obtain an OAH finding that RAD never properly initially served the petition, that all improperly implemented increases should be refunded, and that the petition should be remanded to RAD for re-consideration. C.C. Dudleys Properties Affordability has been stymied by the failure to timely reject incomplete petitions. In recent years, OAH has rejected numerous incomplete HPs filed by housing provider C.C. Dudley, affecting the rents of at least five (5) separate housing accommodations. Since it took nearly two (2) years to reject these facially incomplete HPs, Dudleys tenants were likely forced to endure excessive periods of improper conditional increases despite the relative ease of verifying petitions for completeness. Policy Concerns 1. 90-day Conditional Increase: RAD and OAH rarely decide a HP within 90 days of filing, therefore typically permitting the implementation of conditional increases as a
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matter of course. In many cases, it takes years to reject, or downwardly revise, a HP thereby driving out tenants who are eventually vindicated but cant afford the conditional increase in the interim. 2. Excessive Rate of Return: It is unclear whether the twelve (12%) rate of return on equity is based on any objective formula or other contemporary considerations. Short Basis Period: Any twelve (12) months over the prior fifteen (15) month period is too short and permits hardship filings on the basis of anomalous revenue periods. Termination of Hardship: There is no mechanism to roll-back increases if the hardship is no longer present. Definition of Equity: Including assessed value basis puts tenants at the mercy of swings in market valuations. Furthermore, subtracting encumbrances from assessed value favors larger landlords who are not heavily mortgaged. Deferred Maintenance Rewarded: If the landlord has to suddenly undertake major repairs due to deferred maintenance, an additional hardship could be triggered. Interest as Operating Expense: Case law stating that a loan does not have to be reinvested in the property, but must be an arms-length transaction, is not yet codified.

3.

4.

5.

6.

7.

Capital Improvement Petitions Overview of Capital Improvement Statute and Regulations A housing provider can petition the Rental Accommodations Division to request the implementation of a rent surcharge to cover the cost of capital improvements. D.C. Code 423502.10; 14 DCMR 4210. Capital improvement is defined as an improvement or renovation other than ordinary repair, replacement, or maintenance if the improvement or renovation is deemed depreciable under the Internal Revenue Code. D.C. Code 42-3501.3(6). To be approved the capital improvement must (1) protect or enhance the health, safety, or security of the affected tenants; (2) protect or enhance the habitability of the housing accommodation; or (3) produce an energy savings, which must then be passed on to the tenants. D.C. Code 423502.10(a). Additionally, the housing provider has the burden to establish the costs of the work, including interest and service charges, and that all governmental permits and approvals for the improvements have been secured. D.C. Code 42-3502.10(b); 14 DCMR 4210.8(b). The statute requires that a decision on a Capital Improvement Petition (CI) must be rendered by the Rent Administrator within 60 days of the petition being filed. If no decision is rendered within 60 days, the housing provider may proceed with the work subject to later Rent Administrator decision. D.C. Code 42-3502.10(e); 14 DCMR 4210.10, 4210.11.
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Procedurally, the Rent administrator reviews the petition for filing sufficiency and may reject the petition if insufficient; then transfers the petition if deemed sufficient to OAH for a hearing, whether or not a tenant challenges the petition. Upon approval, the calculation of the surcharge depends on whether the improvement is building-wide or for a part of the building. If the improvement is building-wide the total cost is divided over a 96-month amortization period then divided by the number of rental units to establish the surcharge per unit. However, the increase may not exceed 20% of the current rent charged for any particular unit. D.C. Code 42-3502.10(c)(1); 14 DCMR 4210.19. For partial building improvements, the total cost is divided over a 64-month amortization period then divided by the number of affected units to establish the surcharge per unit; however, the increase may not exceed 15% of the current rent charged for any particular unit. D.C. Code 423502.10(c)(2); 14 DCMR 4210.21. If the recoupment period for the capital improvement is not sufficient to recover all of the costs related to the capital improvement, the housing provider is allowed to temporarily continue the surcharge to recoup the total cost of the capital improvement, including interest and service charges. 14 DCMR 4210.30. The housing provider must file a Certificate of Continuation with the Rental Accommodations Division and conspicuously place said certificate in the housing accommodation if the extension is to last more than 30 days. 14 DCMR 4210.31. If the extension in the surcharge is to last more than ten (10) months after the originally approved surcharge period, the Certificate of Continuation will be subject to an audit by the Rent Administrator on which a decision will be rendered within 60 days of the filed Certificate of Continuation. 14 DCMR 4210.33. Upon full repayment of cost, the housing provider must file a form reflecting the abatement of the surcharge and the recalculation of the rent charged within 30 days of full recovery. 14 DCMR 4210.28. Summary of Data Reviewed 10 CI's have been filed since 2006, all of which have been forwarded to and heard by OAH. Of those: o 6 have had final decisions at OAH. 2 have been approved by OAH. 2 were denied after OAH hearings. 2 had settlements approved at OAH (both with unknown terms). o 4 currently have open OAH proceedings. As of March 2014, none of the CIs filed after 2006 have had final decisions issued from the Rental Housing Commission.

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Illustrative Case 2700 Connecticut Avenue, NW A CI filed on February 11, 2011, for 2700 Connecticut Ave. NW, requested a rent surcharge of $142.00 per unit per month on each of the 96 rental units in the building. The housing provider filed the petition for elevator and fire alarm replacement that would cost $1,326,401.28, including interest and service charges. The rent surcharge was approved by OAH in its entirety on June 21, 2012. Implementation of the $142.00 monthly surcharge will cost each unit an extra $13,632 over the 96-month implementation period. (This $13,632 figure does not include CPI-W increases that will also occur during the implementation period.) Tenants may have to pay more than $13,632 because the housing provider can extend the surcharge past 96 months if the cost of the capital improvement is not fully recouped. While OTA does not have the rent schedule for the building to determine the specific percentage this increase represents, a $142.00 monthly surcharge would almost certainly threaten the affordability of some, if not all, of the 96 rental units in the building. Policy Concerns 1. Lack of Proactive Review: There is no requirement for proactive review by the Rent Administrator to ensure the housing provider either removes the surcharge after 96 months or seeks Rent Administrator approval to extend the recoupment period.

2. Reserve Accounts: The disincentive for the housing provider to reinvest rental revenue in the property, and the failure to have replacement reserve accounts. (Replacement reserve accounts are required in all HUD properties as well as in all condominium buildings in the District. Because housing providers are neither required to pay for the capital improvements costs nor the associated interest and service fees, they have no incentive to reinvest in the property or to maintain replacement reserve accounts). 3. Energy Savings: The disincentive for the housing provider to use the CI petition to improve energy efficiency because, if applied honestly, energy savings must be passed through to the tenants and deducted from the petitions request.. 4. Selective Implementation: The housing provider practice of exempting higher rent units from the surcharge and shifting the total cost of the CI onto lower rent units. Thus, the owner defeats the statutory pro rata surcharge calculation.

5. No penalty for lack of disclosure: If a housing provider fails to provide disclosure of a pending or approved CI petition to a new tenant in accordance with D.C. Code 4223

3502.22, the landlord incurs no penalty. While D.C. Code 42-3502.22 forbids imposing the surcharge on those tenants who did not receive proper notice, the landlord can simply extend the recoupment period until all of the costs related to the capital improvement are recovered. Thus, already existing tenants will be required to pay the rent surcharge for an extended period due to the housing providers failure to disclose the CI petition.

6.

Smurfing: Capital improvement rent increases are capped at 20% for building-wide improvements and 15% for unit-specific improvements. Landlords are filing separate CI petitions describing separate scopes of work for the same project. In one instance, an owner reportedly filed two (2) CI petitions for a total of $500 in rent increases for electricity. Rent Increase Calculation: Annual rent increases are routinely done on basis of total rent payment including surcharge, but the surcharge is legally separate from the rent charged and should not be part of rent basis for purposes of calculating any rent increase.

7.

8. Imputed 4% Interest Even if No Loan Is Used: When a housing provider does not take out a loan to cover the costs of a capital improvement, they are allowed to include an imputed interest when calculating costs. The imputed interest is at a rate of the current seven (7) year United States Treasury constant maturities plus 4%. Housing providers can exploit this provision because the imputed rate is higher than the actual interest rate for a construction loan. 9. No Set-Off Where Actual Costs are Lower than Projected Costs: Contingency fees are routinely granted at levels of approximately 10% to cover anticipated cost overruns, but there is no follow up procedure to ensure these costs are actually expended. Additionally, many owners use their own management company, but are still able to assess cost of a typical management fee.

10. Competitive Bidding Is Not Required: The CI regulations do not require a competitive bidding process. Therefore, a landlord is not required to seek the lowest price possible to minimize the burden to the tenants. 11. Certification That There are No Other Offsets: The landlord is not required to certify that there no other means of cost recovery, such as an existing warranty, appliance insurance, or tax depreciation. These offset benefits are never transferred to the tenants, who bear the financial burden of the capital improvement.

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Substantial Rehabilitation Petitions Overview of the Substantial Rehabilitation Petition Statute and Regulations The purpose of the Substantial Rehabilitation Petition (SR) is to allow the housing provider to substantially rehabilitate a rental unit and increase the rent level beyond the CPI-W, provided the rehabilitation is in the best interest of the tenant and the increase is no greater than 125% of the rent charged for the applicable unit. D.C. Code 42-3502.14. The petition must be submitted on a form provided by the Rent Administrator and include, (1) detailed plans, specifications and projected costs of the proposed rehabilitation; (2) documentation of the assessed value of the housing accommodation; and (3) a schedule showing all rental units and whether they are occupied or vacant and if vacant the date and cause of the vacancy. 14 DCMR 4212.2. If all of the units are vacant the petition is reviewed and acted on by the Rent Administrator. 14 DCMR 4212.5. If the property is partially occupied the SR is reviewed by the Rent Administrator and then forwarded to the Office of Administrative Hearings, which will conduct a hearing at which the affected tenant(s) may submit evidence in opposition to the petition. The petition is granted if there is a finding that the proposed rehabilitation is in the best interest of the tenant(s) and the costs exceed 50% of the assessed value of the unit. 14 DCMR 4212.8. In determining the best interest of the tenant, OAH shall consider, (1) the existing conditions; (2) whether or not the existing conditions impair the health, safety and welfare of any tenant; (3) whether or not the physical conditions can be corrected by improved maintenance, repair or capital improvement; (4) and the impact on the tenant in terms of proposed financial costs, inconvenience and relocation. 14 DCMR 4212.9. A key provision of the regulations is that the housing provider cannot begin the rehabilitation without prior approval of the SR. 14 DCMR 4212.3. If the tenant is forced to relocate during the rehabilitation process he or she must be provided with relocation assistance and a 120-day notice to vacate. Another key provision is the tenants right to return to the unit, at the approved rent level, once rehabilitation is completed. Summary of Data Reviewed According to RAD, 17 SRs have been filed since 2007. 5 decisions were reviewed. There is no available information on the other twelve (12) petitions. o 1 petition was granted with unknown information on the rent increases. o 1 petition was denied substantively.
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o 1 petition was denied on procedural grounds. o 2 petitions were dismissed voluntarily or by consent. Policy Concerns 1. Definition of Substantial Rehabilitation: Statutory provision that the costs of the rehabilitation must exceed 50% of the assessed value of the unit. More than Doubling of Rent: Statutory provision allowing a rent increase up to 125% of the rent charged for the applicable unit. Reserve Accounts: The disincentive for the housing provider to reinvest rental revenue in the property and the failure to have replacement reserve accounts.

2.

3.

Services and Facilities Petitions Overview of the Services and Facilities Petition Statute and Regulations If the Rent Administrator determines that the related services or related facilities supplied by a housing provider for a housing accommodation or for any rental unit in the housing accommodation are substantially increased or decreased, the Rent Administrator may increase or decrease the rent charged, as applicable, to reflect proportionally the value of the change in services or facilities. D.C. Code 42-3502.11. The Rent Administer shall approve a Related Services or Related Facilities Petition (SF) only if the Rent Administrator finds the following: (a) The change shall not adversely affect the health, safety, and security of the tenants; (b) The change shall not directly result in a substantial violation of the Housing Code; (c) The change shall not be retaliatory, as defined in 502 of the Act; and (d) The change shall not be intended to cause displacement of tenants from the housing accommodation. 14 DCMR 4211.2 Summary of Data Reviewed According to RAD Data, eleven (11) SFs were filed from FY 2007-2013. Of those petitions, four decisions were available to OTA for review: o 4 decided by OAH; o 1 (of the 4 OAH decisions) appealed to RHC; o OAH: 1 dismissed without prejudice;
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1 denied; 2 approved after hearing.

o RHC: Settled prior to hearing. Illustrative Case Dorchester House Associates, LLC v. Tenants of 2480 16th Street, NW Housing Provider made approximately $10,000,000 of renovations to the housing accommodation, including renovation of the electrical, heating, cooling, and ventilation systems. Housing Provider paid for the entirety of the renovations, and did not attempt to pass on those costs to the tenants. Housing Provider then filed a SF, requesting a reduction of $1/month for efficiencies and 1-BR units, and $3/month for 2-BR units. The amounts reflect a request to increase the rents because of the added value of having a superior utilities system and an air conditioning service, balanced by a requested decrease because tenants would have to pay their own electric and heating costs. The court denied Housing Providers request to increase the rents, but did grant the request to decrease the rents. In making its determination, the court considered expert testimony by both Housing Provider and tenants. Tenants expert asserted that the estimated costs for heating and general electric would be as follows: Efficiency: $57/month, 1-BR units: $80/month, 2-BR units: $95/month. HPs expert found an increase in the following amounts: Efficiency: $32/month, 1-BR units: $46/month, 2-BR units: $68/month. After considering the credentials and methodology of both experts, the court found that Housing Providers expert was better qualified to given an expert opinion on the issues at hand, and his methodology was more appropriate to the calculations required in this case. Housing Provider also proved to the satisfaction of the court (through the use of expert testimony) that the water-source-heat-pump system would result in a significant reduction in energy use and utility costs (potentially down to 25% of the previous usage).The court therefore allowed Housing Providers requested decreases. The OAH decision in this case does not seem unreasonable given that: (1) both sides were able to provide expert testimony as to the reduction calculation; (2) the judge sided with the tenants in denying the landlords request for a discount for improvements which seemed to benefit the tenants; and (3) the judge increased the amount of the rent reduction from $2, as requested by the landlord, to $30+ to reflect the tenants utility costs due to individual metering. Nevertheless, the concern remains that the utility cost offset may be less even significantly less -- than the actual increase in the tenants total housing costs. This concern is raised at least anecdotally whenever the subject of individual metering in the SF petition context is raised.

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Policy Concerns 1. Inadequacy of SF Rent Reduction to offset Tenants Utility Costs : As discussed above, the SF rent reduction/utility cost offset may be significantly less than the actual increase in the tenants total housing costs after utility bills are included. This is a common concern for tenants regarding SF petitions in individual metering cases. 2. Vague Standard for Determining SF Increases: When a new service or facility is added, the relevant standard in determining the amount of the SF rent increase is the value of the change in services or facilities. This is a vague standard compared to the formula for calculating a CI surcharge (total approved cost divided by the number of units divided by the cost recovery period in months). By contrast, the SF rent increase is permanent rather than temporary, and there is no statutory formula for determining the value of the change for each unit. Thus except, for example, where monthly utility costs can be established the calculation of SF rent increases and decreases may appear to be arbitrary. 3. Tenants Ability to Contest the SF: Due to the vagueness of the standard, expert testimony may be all the more necessary for tenants to contest the petition. The cost of expert testimony like the cost of legal representation represents an obstacle to a meaningful challenge.

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IV.

CONCLUSION

The OTA wishes to thank the Committee, Chairperson Orange, and Councilmember Graham for the request for this report. It serves an important purpose to focus the Councils and the communitys attention on the critical need for Council review and reform of the Districts rent control law. As the Chief Tenant Advocate stated in her oversight testimony, the rent control program is one of the Districts essential affordable housing tools. It is one that costs District taxpayers relatively little and serves to stabilize communities as well as rents. Over time, certain practices inevitably start to undermine the programs core purposes, and competing interests once thought to be balanced become imbalanced. Thus, periodic review and revision of the law is imperative to ensure the continued vitality and relevance of rent control as an affordable housing tool. The OTA notes that two bills one pertaining to VAs and another pertaining to HPs are pending at the Council. Both merit prompt action. Bill 20-52, the Rent Control Voluntary Agreement Procedure Amendment Act of 2013, would improve the VA procedurally by giving dissenting tenants their day in court prior to VA approval, but substantive VA reforms are also needed. Bill 20-113, the Rent Control Hardship Petition Limitation Amendment Act of 2013, would cap conditional hardship rent increases, but reforms regarding permanent hardship rent increases are also needed. It is the OTAs understanding that a hearing on Bill 20-113 will be held on or around April 10th. Accordingly, the OTA urges the Council and relevant committees to implement a rent control review process, so that deliberation may start as soon as possible regarding all relevant policy concerns, including the 31 raised in this report. The OTA suggests that the successful rent control reform effort in 2006 could serve as good procedural model. A series of roundtables could be convened to include all interested parties. The OTA believes it would be more productive to do so, however, on the basis of more complete data and a more comprehensive review and analysis of that data. Thus, we respectfully recommend (1) that RAD provide the OTA with all its case decisions and a status/disposition spreadsheet for all relevant petitions; and (2) that the OTA, in partnership with District agencies and non-governmental organizations9, be given sufficient time to conduct a review and analysis of the complete data, and to refine and develop the policy concerns bulleted in this report. In conclusion, the OTA again thanks the Committee, Chairperson Orange, and Councilmember Graham for this opportunity to provide some preliminary insight into such an important aspect of the Districts affordable housing crisis.

The DC Fiscal Policy Institute is one such non-governmental organization, and indeed has taken an active interest in relevant policy concerns.

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