Landlords’ Takings Clause Victory; Rent Control Updates for Montgomery County and Prince George’s County; Condo Conversion Considerations; TOPA Updates

As summer 2024 winds down, the implementation of new rent control laws has attracted much attention. Providing some respite from the summer’s rent control heat is a recent win for the multifamily industry coming from the Court of Appeals for the Federal Circuit. This court ruled in favor of landlords who claimed that the COVID-19 eviction moratorium constituted a compensable taking. Rent control continues to be the tool of choice for legislators, despite being “as disgraced as any economic policy in the tool kit,” according to Jason Furman, a top economist in the Obama administration and professor at Harvard, speaking to the Washington Post (paywall). In addition to numerous state and local rent control laws and proposals¹, on July 16, Vice President Kamala Harris endorsed President Joe Biden’s proposal to impose rent control nationwide by seeking federal legislation that would raise taxes on housing providers who do not adhere to rent control requirements. For multifamily property owners in Prince George’s County and Montgomery County, there remains much confusion about the new rent control laws and how they will be interpreted and implemented. We address these and other relevant topics below.

Darby Development Company, Inc. v. United States. From September 2020 through October 2021, the Centers for Disease Control (CDC) issued multiple nationwide orders preventing the eviction of tenants during the COVID-19 pandemic. The Supreme Court of the United States (SCOTUS) struck down the nationwide eviction moratorium. This was followed by multiple landlords suing the United States claiming their property had been physically taken by the government and they were owed compensation. After the Court of Federal Claims dismissed the landlords’ claims, the landlords appealed to the Court of Appeals for the Federal Circuit. On August 7, 2024, the Federal Circuit held that the CDC eviction moratorium was indeed a physical taking of landlords’ property that required compensation under the Fifth Amendment’s Takings Clause. To receive compensation under the Takings Clause, the government action must be both authorized and a taking. The Federal Circuit held that, for purposes of the Takings Clause, the CDC’s action was authorized and it did not matter that the action was later found to be beyond the CDC’s statutory authority. According to the Federal Circuit, the CDC had acted under a “good faith implementation of” the CDC’s statutory authority, which the government defended against legal challenges and Congress appeared to support. Most significantly, the Federal Circuit proceeded to hold that the action was a “physical taking” because the landlords could not exclude defaulting tenants from their property and that the right to exclude is “one of the most fundamental elements of property ownership.” The Court of Appeals did distinguish the case from decisions upholding rent control laws on the ground that an eviction moratorium goes far beyond economic regulation of the landlord-tenant relationship. It is unclear if the United States will appeal the case; however, if this ruling stands, the government could owe landlords a lot of money in claims. Additionally, if the ruling stands, U.S. government agencies could be more cautious when enacting regulations impacting landlord property rights. We will continue to monitor this case for further developments.

SCOTUS Rent Control Update. SCOTUS has yet to act on either of the pending petitions for certiorari challenging New York’s Rent Control regime. This is unsurprising given that SCOTUS is on summer recess. Earlier this year, Justice Clarence Thomas issued a short statement saying that the "constitutionality of regimes like New York City's is an important and pressing question." Ultimately, Thomas agreed with the Court's denial of cert, in the 74 Pinehurst LLC v. New York and 335-7 LLC v. City of New York cases, saying that petitioners' claims in their lawsuits "primarily contained generalized allegation." In order to evaluate their "as-applied" challenges, the Court would need to see more specific arguments about the circumstances of individual landlords. We will continue to monitor both petitions as SCOTUS comes back into session in the fall, and we will update you if there is any action on either petition.

Prince George’s County Permanent Rent Control. On August 1, 2024, the Prince George’s County Executive signed the Permanent Rent Stabilization and Protection Act of 2024 (CB 55-24) into law, which sets the stage for permanent rent control in the County. The permanent rent control law replaces the previous temporary rent control law (which imposed a rent increase cap of 3 percent) with a new rent increase cap equal to the lesser of the Consumer Price Index for Urban Consumers (CPI-U) plus 3 percent or 6 percent, with a separate rent increase cap for age-restricted senior housing equal to the lessor of CPI-U or 4.5 percent. Although the County has yet to provide formal guidance on the implementation of this law, here is what we know at this time:

• CB 55-24 states that the new rent increase cap will become effective October 17, 2024, which is when the temporary rent control law expires. On August 16, 2024, the Department of Permitting, Inspections and Enforcement (DPIE) published a Notice to Prince George’s County Landlords confirming a CPI-U of 3.3 percent from October 17, 2024 until June 30, 2025, when the CPI-U for the next year will be published. From now until October 17, 2024, the temporary rent increase cap of 3 percent appears to remain in effect.
• With a CPI-U of 3.3 percent, this means that from October 17, 2024, rent increases for non-exempt units cannot exceed 6 percent or, for age-restricted senior housing, 3.3 percent. Vacant units are also subject to these same limitations on rent increases.
• Units at properties completed on or after January 1, 2000, are exempt from rent control.
• Units substantially renovated on or after January 1, 2000, are also exempt from rent control. To be considered substantial, the renovations must be intended to enhance the value of the building and exceed 40 percent of the total assessed value of the building. However, units within substantially renovated properties are not automatically exempt—DPIE must approve the substantial renovations based on requirements in the rent control regulations, and CB 55-24 does not require regulations to become effective until February 1, 2026. Until rent control regulations are adopted, it is unclear whether DPIE will accept or approve any substantial renovation exemption applications.
• Landlords may seek rent increases beyond the rent cap if necessary to achieve fair returns. If a landlord can demonstrate that the return on investment is not sufficient to offset operating expenses and is commensurate with returns on investments with comparable risks, it may be provided a temporary relief from the rent control cap. However, similar to substantial renovations exemptions applications, approval requirements for fair return applications are to be established by the rent control regulations, so it is unclear whether DPIE will accept or approve any fair returns applications.
• Landlords can also apply for rent increases beyond the rent cap for capital improvement surcharges, if the capital improvements include permanent alterations intended to enhance the value of the unit. However, similar to applications for substantial renovations exemptions and fair returns, it is unclear whether DPIE will accept or approve applications for capital improvements surcharges prior to the approval of rent control regulations.
• CB 55-24 also contemplates limitations on fee increases and new fees, separate and apart from the rent increase cap, but these limitations will also be established by rent control regulations.

Notably, CB 55-24 is similar to the rent control law recently enacted in Montgomery County. As a result, we expect Prince George’s County will encounter similar issues with implementation. Based on our ongoing dialogue with County officials, we understand that DPIE and the Department of Housing and Community Development are working on a Frequently Asked Questions (FAQ) guide that will attempt to clarify some of these issues. If you have any questions relating to implementation of permanent rent control requirements in the County, we are happy to discuss them with you and to seek answers.

Montgomery County Rent Control. On July 23, 2024, the Montgomery County Council approved rent control regulations, thereby allowing the County’s rent control law to go into effect. For non-exempt properties, any rent increase taking effect on or after July 23, 2024, cannot exceed the lesser of CPI-U plus 3 percent or 6 percent. The law includes exemptions for (i) new construction and (ii) substantial renovations within the last 23 years—these properties will lose their exempt status over time. Compare this with Prince George’s County where properties completed or with approved substantial renovations after January 1, 2000, are indefinitely exempt. The Department of Housing and Community Affairs (DHCA) may also approve rent increases beyond the rent cap for capital improvements and fair returns. On August 7, 2024, DHCA held a webinar for landlords to discuss the new rent control law and regulations; the presentation slides can be found here. We have previously discussed the rent control law and regulations in past Alerts (July 17 | June 28) DHCA has since provided additional information into how it plans to implement the new rent control law and regulations:

• DHCA has stated that rent increases for multi-year leases must be based upon the permissible rent for the first year and not in subsequent years. This interpretation is based on the language in the rent control law that provides for rent increases “upon lease renewal or new lease agreement” and the fact that the rent control law is silent as to increases during the lease term. DHCA agreed that any unused rent increase for the subsequent years of a multi-year lease can be banked and used with lease renewals or new leases.
• Banked rent amounts are specific to the rental unit and cannot be transferred to other rental units and rent increases plus banked amounts must not exceed 10 percent of the base rent.
• Substantial renovation exemption applications may be submitted for previously completed renovations, however, these applications must include the same evidence as an application for approval of a new substantial renovation and units are not considered exempt until the application is approved.
• Capital improvements that occurred before a capital improvement surcharge was approved cannot be recovered unless the improvements were necessary for the health and safety of the residents.
• Applications for substantial renovations exemptions, fair returns, and capital improvements surcharges must be submitted using a form published by DHCA. However, DHCA has not provided a timeline as to when these application forms will be available for landlords to complete and submit.
• Landlords can set the base rent at their discretion for the initial lease up of rental units that were vacant on or before July 23, 2024. However, these units will be subject to the rent control cap for all subsequent rent increases. Rental units that became vacant after July 23, 2024, are subject to the rent increase cap.
• If prior to July 23, 2024, a landlord provided a tenant with notice of a rent increase that takes effect on or after July 23, 2024, which is in excess of the amount permitted by the rent control law, the landlord must modify (or void) the increase to comply with the law and provide tenants with notice of the same.
• Fee restrictions will go into place on October 21, 2024, at which point all fees regulated by the rent control law must be in compliance with the regulations, even if they were previously negotiated in the lease. Fees can be increased yearly, even with multi-year leases, as long as the increase is compliant with the rent control regulations and a 90-day notice is provided.
• Properties on the County’s Troubled Properties or At-Risk list may not impose any rent increases until they are removed from this list. DHCA has indicated that it plans to publish an updated Troubled or At-Risk Properties list in September 2024.

There were literally hundreds of questions asked during the DHCA webinar, and although DHCA did not provide answers to many questions, they indicated answers would be forthcoming with additional review and guidance from the County Attorney. DHCA also said that they planned to use the questions asked to update the FAQ section of the DHCA rent control website.

Condo Conversion Considerations. Understanding and trying to comply with new and proposed rent control laws can be a bit dizzying, not to mention costly. Some clients are considering redeveloping their naturally occurring affordable properties with new apartments as a means of obtaining rent control exemptions and achieving a fair return on their investment. Another option being considered is converting these properties to condominiums. The process for converting to condominium differs somewhat in Virginia, DC, and Maryland, but it may be a viable option in certain circumstances. Please contact us if you would like to evaluate the condo conversion process for your properties.

TOPA Update. Although DC has not enacted any new rent control laws, TOPA continues to impact many multifamily sales in DC. One “trend” we have noticed with recent TOPA transactions is that unlike in prior years, the transfer of TOPA rights to third parties has rarely occurred and TOPA settlement timing and terms are generously less onerous than in prior years. As has always been the case, strategic TOPA planning at the onset of a transaction is often an effective way to mitigate TOPA costs and risks.

If you have any questions or comments to any of the forgoing, please reach out to us at CondoMultifamilyTeam@ballardspahr.com.

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1. Currently, Oregon and California have rent control at the state level, while DC, Maine, Maryland, Minnesota, New Jersey, and New York allow rent control at the local level. Colorado, Georgia, Massachusetts, Michigan, New Mexico, North Carolina, Virginia, and Washington have seen recent attempts to enact rent control legislation.

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