Proposed Rent Control Regulations Under Review by the Montgomery County Council

On Friday, June 14, 2024, the Montgomery County Department of Housing and Community Affairs (DHCA) delivered proposed regulations to the Montgomery County Council (Council) for review and consideration. The proposed regulations incorporate several of the recommendations from our stakeholder coalition – including providing clarity regarding application and review procedures, the fair return formula, and exempting certain fees from restrictions. Unfortunately, many of our recommendations were not incorporated, including: self-certification of compliance or deemed approval if DHCA fails to timely respond; allowing nominal rent increases for troubled or at-risk properties and permitting the banking of rent increases not captured while properties were on the troubled or at-risk properties list; allowing landlords to recover a capital improvement surcharge for capital improvements performed prior to rent control; exemptions for properties substantially renovated prior to rent control; and grandfathering of existing fees. Although the Council has up to 60 days (from June 14, 2024) to act on the revised regulations, we understand that the Council intends to take action before its six week recess begins in early August. It is our understanding that the Council’s Planning, Housing, and Parks (PHP) Committee, chaired by Councilmember Andrew Friedson, will hold a work session to review the proposed regulations on July 18, 2024. 

We continue to coordinate our efforts with industry groups regarding these revised regulations and have scheduled a meeting with Andrew Friedson. Below is a summary of some of the issues with the proposed regulations we plan to bring to the attention of the Council.

Troubled and At-Risk Properties

• If a property is designated as troubled or at-risk, landlords cannot increase rent without DHCA approval of a detailed Fair Return Application. Because there is no deadline for approval of the Fair Return Application, landlords could have their rents frozen for an indeterminate period of time.
• The proposed regulations do not permit banking of rent increases while properties are on the troubled or at-risk properties list. Unless this is changed, properties that come off the list may perpetually have rents below other comparable properties. 

Capital Improvement Surcharge

• In addition to permitted rent increases, a landlord may impose a surcharge to cover costs of capital improvements, if the surcharge is approved by DHCA before the landlord performs the capital improvement. 
• The proposed regulations include a 30-day deadline for DHCA to perform an initial review of the landlord’s Capital Improvement Petition and to notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information results in the denial of the Capital Improvement Petition; however, there is no “deemed complete” requirement in connection with DHCA’s failure to meet the 30-day deadline.
• Once the Capital Improvement Petition is complete, DHCA has 60 days to issue a preliminary decision approving or denying the petition and identifying the amount of the permitted surcharge, if applicable. When the capital improvements are complete, the landlord must file a final reconciliation package. DHCA has 30 days to review the reconciliation and notify the landlord of the approved surcharge.
• If a landlord performs a capital improvement prior to DHCA’s approval of the Capital Improvement Petition, the landlord can only impose a surcharge if the capital improvement was necessary for the health, safety, or security of the tenants and the Capital Improvement Petition is filed within 30 days after completion of the improvement.
• Equity funding of capital improvements is not eligible for a capital improvement surcharge. Funding of capital improvement must be structured as a loan to qualify for the surcharge.
• If a Capital Improvement Petition is denied, the landlord cannot file another Capital Improvement Petition for six months following the issuance of the denial (which is already 120 days following the initial filing of the Capital Improvement Petition).

Fair Return

• A landlord can apply to DHCA for approval to increase rent beyond the amount otherwise permitted under rent control. DHCA is required to grant such request if DHCA finds that such additional increase is necessary for the landlord to obtain a fair return. “Fair return” means a return on investment sufficient to offset operating expenses and commensurate with returns on investments in other enterprises with comparable risks.

Similar to the process for approval of a Capital Improvement Petition, once a landlord submits a Fair Return Application, DHCA has 30 days to perform an initial review of the Fair Return Application and notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information results in denial of the Fair Return Application; however, there is no “deemed complete” requirement in connection with DHCA’s failure to meet the 30-day deadline. Once a Fair Return Application is complete, DHCA has 60 days to notify the landlord of its approval (with the amount of approved rent increase) or disapproval.

• During any period when a landlord can increase rent pursuant to a Fair Return Application, the landlord cannot implement any other rent increase. This means that the approved fair return increase should also include the annual increase otherwise permitted by law.
• Once a Fair Return Application is approved, the landlord cannot file another application for 24 months. If a Fair Return Application is denied, the landlord cannot file another application for 12 months from the date of the denial.

Substantial Renovation

• Buildings that are substantially renovated are exempt from rent control if DHCA approves the landlord’s application for a substantial improvement exemption (Substantial Renovation Application). “Substantial renovation” means permanent alterations to a building that enhance the value of the building and cost at least 40 percent of the assessed value.
• As with the Capital Improvement Petition and the Fair Return Application, once a landlord submits a Substantial Renovation Application, DHCA has 30 days to perform an initial review of the Substantial Renovation Application and notify the landlord whether it is complete or if additional information is required. A landlord’s failure to timely submit missing information results in denial of the Substantial Renovation Application; however, there is no “deemed complete” requirement in connection with DHCA’s failure to meet the 30-day deadline.
• Once the Substantial Renovation Application is complete, DHCA has 30 days to notify the landlord of preliminary approval or disapproval. When the substantial renovations are complete, landlord must file a final reconciliation package with DHCA identifying the actual costs of the completed substantial renovations. Upon receipt of the final reconciliation package, DHCA has 30 days to review and notify landlord of final approval of the Substantial Renovation Application together with the effective date of the exemption.
• Approval of the Substantial Renovation Application requires that DHCA determine that the proposed substantial renovations are intended to enhance the value of the building. The proposed regulations identify several factors for DHCA to consider in making this determination—including whether the renovations are optional or cosmetic and whether deficiencies in the building’s physical condition could be corrected by improved maintenance or repair. Since these factors are not correlated to building value, their inclusion on this list suggests that DHCA’s scope of review extends beyond objectively determining if building value will be enhanced to include a subjective analysis of whether the improvements should be made. This appears to broaden DHCA’s role as gatekeeper for decisions regarding multifamily operations.
• Although the law expressly provides an exemption for properties substantially renovated during the past 23 years, the proposed regulations focus on the process for approving proposed renovations. They do not clearly address the process for a landlord to secure exemption for a property that was substantially renovated during the prior 23 years. 
• In the absence of obtaining a substantial renovation exemption, a landlord may file a Fair Return Application.

Fees

• The proposed regulations limit fees that can be levied on units that are subject to rent control. Unlike the balance of the regulation provisions, which take effect upon adoption of the regulations, the fee restrictions do not take effect until 90 days after the regulations take effect. Landlords for rent controlled units can only charge the following fees: (i) application fee (limited to landlord’s actual cost); (ii) late fees (per County law); (iii) pet fees (limited to $25/month and pet deposit limited to $300—both increase annually by CPI-U); (iv) lost key fee (limited to actual replacement cost plus $25); (v) lock out fee ($25 with annual CPI-U increase, or actual cost if landlord engages a third party); (vi) storage fee (only if exclusive to tenant and not associated with the residential unit); (vii) internet or cable television fee (must be optional and cannot exceed actual cost); (viii) parking fees (must be optional and annual increase limited to CPI-U), and (ix) bike fees (per County law). In addition, optional fees on unregulated services not otherwise addressed in the items enumerated above are not subject to the regulations.

We will continue to work with industry groups and consult with the Council to seek to address the issues noted above. If you have any questions, please let us know.

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