d.c. office of the tenant advocate preliminary report on rent control and affordable housing

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

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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


Illustrative Cases.................................................................................................................... 20

Policy Concerns ..................................................................................................................... 20

Capital Improvement Petitions .......................................................................................... 21

Overview of Capital Improvement Statute and Regulations ................................................. 21


Illustrative Case ..................................................................................................................... 23

Policy Concerns ..................................................................................................................... 23

Substantial Rehabilitation Petitions .................................................................................. 25

Overview of the Substantial Rehabilitation Petition Statute and Regulations ...................... 25


Policy Concerns ..................................................................................................................... 26

Services and Facilities Petitions ......................................................................................... 26

Overview of the Services and Facilities Petition Statute and Regulations ............................ 26


3

Illustrative Case ..................................................................................................................... 27

Policy Concerns ..................................................................................................................... 28

IV. CONCLUSION .................................................................................................................... 29

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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

District’s 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 District’s 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 tenant’s 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

5

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

Council’s and the community’s 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 Council’s “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 Council’s purposes.

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I. INTRODUCTION

Context And Goals

The D.C. Office of the Tenant Advocate (OTA) respectfully submits this preliminary

report to the D.C. Council’s Committee on Business Consumer and Regulatory Affairs, pursuant

to the Committee’s request at the OTA’s 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

District’s 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 District’s stock of affordable rental housing. That is why, in significant part,

Council review and reform of the District’s 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 Administrator’s 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.

1 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 § 42-

3502.13. 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.

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Housing Provider Petitions in Context

There are seven (7) ways for a housing provider to increase the rent under the District’s

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, RAD’s 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.

3 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).

8

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

VA’s filed (142) than all other types of petitions combined (121). Second to VA’s are HP’s at

87. VA’s and HP’s 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.

It has been our experience that VA’s and HP’s result in the largest permanent increase in rents in

the District. In contrast, CI’s result in the implementation of a temporary surcharge (for 96

months or longer if necessary), while SF’s 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.

4 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 SR’s to make an empirical conclusion on their significance.

VA HP CI SR SF

142

87

7 17

10

Petitions Types Filed FY 2007-2013

9

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 HP’s increased

dramatically from 2007-2009, before dropping sharply in 2010 and leveling off in the subsequent

years. CI’s were at their highest in 2007, decreasing to their low point in 2010, before beginning

an incline.

6 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.

0

5

10

15

20

25

30

35

2007 2008 2009 2010 2011 2012 2013

VA

HP

CI

SR

SF

Total Housing Provider Petition Filings Total Housing Provider Petition Filings Trends Analysis FY 2007-2013

10

Breakdown of the Types of Housing Provider Petition Filed by Ward

Ward 1 had the highest percentage of VA’s 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 VA’s filed at 5% and 7% respectively.

Ward 1 24%

Ward 2 17%

Ward 3 4%

Ward 4 12%

Ward 5 10%

Ward 6 13%

Ward 7 12%

Ward 8 8%

Voluntary Agreements by Ward FY 2007-2013

Total: 142

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Wards 5 and 1 had the highest percentage of HP’s filed during the relevant time period, with

24% and 23% respectively. During that same time period, no HP’s were filed in Ward 3.

Ward 1 23%

Ward 2 6%

Ward 3 0%

Ward 4 12%

Ward 5 24%

Ward 6 9%

Ward 7 11%

Ward 8 15%

Hardship Petitions by Ward FY 2007-2013

Total: 87

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From FY 2007 – 2013, CI’s 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.

Ward 1 0%

Ward 2 28%

Ward 3 43%

Ward 4 0%

Ward 5 29%

Ward 6 0%

Ward 7 0%

Ward 8 0%

Capital Improvement Petitions by Ward FY 2007-2013

Total: 7

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Wards 1 and 7 each had 23% of the SR’s 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 SR’s were filed in Wards 3 or 6.

Ward 1 23%

Ward 2 6%

Ward 3 0%

Ward 4 18% Ward 5

18%

Ward 6 0%

Ward 7 23%

Ward 8 12%

Substantial Rehabilitation Petitions by Ward FY 2007-2013

Total: 17

14

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.

Ward 1 20% Ward 2

0%

Ward 3 10%

Ward 4 30%

Ward 5 20%

Ward 6 10%

Ward 7 10%

Ward 8 0%

Services & Facilities Petitions by Ward FY 2007-2013

Total: 10

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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 VA’s 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 VA’s 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.

7 Section 102 of the Rental Housing Act, codified as D.C. Code § 42-3501.02, states the Act’s 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 Administrator’s 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 Act’s 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 Act’s purpose of protecting the existing rental housing supply. Id. at

12-15.

Policy Concerns

1. Development Agreements: Some VA’s 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.

2. Rent Concessions and Rent Ceilings: Many of the Development Agreements, have

provisions that current tenants will not be subjected to the filed rent increases,

8 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: VA’s 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.

4. Loss of Affordability: VA’s erode affordability as rents have been increased by over

100% for many units in areas all over the city.

5. 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 VA’s have been passively approved over the years.

6. 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.

7. 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.

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 § 42-

3502.12(a). The rate of return is equal to net income divided by the housing provider’s

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 RAD’s 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

RAD’s 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 isn’t 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).


• 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 RAD’s 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. Dudley’s 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, Dudley’s 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 can’t 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.

3. 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.

4. Termination of Hardship: There is no mechanism to roll-back increases if the

hardship is no longer present.

5. 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.

6. Deferred Maintenance Rewarded: If the landlord has to suddenly undertake major

repairs due to deferred maintenance, an additional hardship could be triggered.

7. 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.

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 § 42-

3502.10; 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 § 42-

3502.10(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 § 42-

3502.10(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.


• 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 CI’s 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 petition’s 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 § 42-

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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 provider’s 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.

7. 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.

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 tenant’s right to return to the unit, at

the approved rent level, once rehabilitation is completed.


• According to RAD, 17 SR’s 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.

2. More than Doubling of Rent: Statutory provision allowing a rent increase up to

125% of the rent charged for the applicable unit.

3. Reserve Accounts: The disincentive for the housing provider to reinvest rental

revenue in the property and the failure to have replacement reserve accounts.

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


• According to RAD Data, eleven (11) SF’s 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 Provider’s 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. HP’s 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 Provider’s 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 Provider’s 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 landlord’s 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 Council’s

and the community’s attention on the critical need for Council review and reform of the

District’s rent control law. As the Chief Tenant Advocate stated in her oversight testimony, the

rent control program is one of the District’s 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 program’s 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 VA’s and another pertaining to HP’s –

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 OTA’s 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 District’s affordable housing crisis.

9 The DC Fiscal Policy Institute is one such non-governmental organization, and indeed has taken an active interest

in relevant policy concerns.

d.c. office of the tenant advocate preliminary report on rent control and affordable housing

Documents