On the multifamily front, transactions are picking up. The benefits of the interest rate cut by the Fed are offset somewhat by the increasingly complex legal and regulatory environment impacting multifamily properties, although the market seems to be finding ways to adapt to rent control. As a follow-up to our most recent Alert, below are some updates on recent developments affecting the multifamily industry.
Montgomery County Rent Control Portal. The Montgomery County Department of Housing and Community Affairs (DHCA) recently launched the “Rental Housing Portal”, which is intended to provide access to rental housing information, including information about rent control, Troubled and At-Risk properties, and current limitations on rents and fees. Here is the link to the Portal. A few items to note:
- All landlords in the County are required to register their rents and fees, regardless of whether the units are regulated or exempt from rent control. There is no specified deadline for landlords to register.
- The Portal includes a publicly accessible database that will allow tenants to view historical rent information by unit.
- Application forms for substantial renovation exemptions, as well as fair returns and capital improvements surcharges, may now be completed and submitted through the Portal and are available to landlords upon registration.
Montgomery County Rent Control Fee Limitations. The Montgomery County rent control regulations established limitations on certain fees that landlords can charge tenants. By October 21, 2024, all fees regulated by the rent control law must comply with the regulations, even if they were previously negotiated in the lease.
Under the current rent control law and regulations, the following fees are subject to limitations: (i) application fee (limited to landlord’s actual cost); (ii) late fees (per existing County law); (iii) pet fees (limited to $25/month and pet deposit limited to $300—both increase annually by the Consumer Price Index for Urban Consumers (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 (storage fees can only be charged if optional and the storage is exclusive to the 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 (for regulated units that previously did not charge for parking, no new parking fees can be added without DHCA approval; and upon lease renewal or a new lease agreement for regulated units that already have optional parking fees, the fee for the parking space cannot exceed the current fee plus CPI-U.); and (ix) bike fees (per existing County law, either (1) one-sixth of the fee charged for renting a motor vehicle parking space for a fully enclosed bicycle locker; or (2) one-tenth of the fee charged for renting a motor vehicle parking space for any other bicycle parking space).
Prince George’s County Rent Control. As we have reported in our past Alerts (July 17 | August 26), Prince George’s County passed a new rent control bill on July 16, 2024. While the Prince George’s rent control law is similar to the Montgomery County rent control law, one key difference is that the Prince George’s County rent control law becomes effective without regulations being adopted. Starting October 17, 2024, the rent control law caps rent at the lesser of the CPI-U plus 3% or 6%, with a separate rent increase cap for age-restricted senior housing equal to the lessor of CPI-U or 4.5%. As in Montgomery County, the law stipulates exemptions and the ability to increase rents about the caps; but without regulations, Prince George’s County landlords may not be able to seek a substantial renovation exemption, or apply for fair return or capital improvement relief. As the rent control law does not require regulations until 2026, landlords appear to face an uncertain future for these matters.
Prince George’s County Rent Gouging Bill. On September 24, 2024, a new bill (CB-97-2024) designed to cap rent increases for properties otherwise exempt from rent control was introduced to the County Council. CB-97-2024 would limit rent increases for units otherwise exempt from rent control to a maximum rent increase of 15% from the previous base rent, including fees, during any twelve-month period. CB-97-2024 was referred to the Committee of the Whole (COW) for further review. The COW is currently scheduled to take up discussion on CB-97-2024 on October 8, 2024, at 11 am.
Anne Arundel Moderately Priced Dwelling Unit (MPDU) Bill. The Anne Arundel County Council is revisiting a bill that would require developers of properties with 20 units or more to set aside a percentage of the units as MPDUs. Developers of for-sale properties would be required to set aside 10% of the units as MPDUs and developers of rental properties would be required to set aside 15% of units. In some cases, developers of properties with 10 to 19 units would have the option to make a fee-in-lieu payment to the Housing Trust Special Revenue Fund instead. Unlike the MPDU bill that failed last year (see prior Alert), the new MPDU bill provides a density bonus in certain situations and expands upon the types of housing that can be built.
Condominium Conversion Considerations. Understanding and trying to comply with new and proposed rent control laws can be a daunting task, not to mention the significant financial costs and impacts on property valuations and marketability. Some clients are now evaluating the feasibility of converting their properties to condominiums. The process and requirements for converting to condominium differ somewhat in Virginia, DC, and Maryland, but it may be a viable option depending on the owner’s circumstances. As noted below, properties with existing shelf condominiums may be good candidates for conversion.
Shelf Condominiums for New Rental Properties. We often assist multifamily developers in establishing “shelf” condominiums for their new rental projects. A shelf condominium entails recording or registering a condominium regime prior to the leasing of units. A shelf condominium potentially increases the value and marketability of the property because it may significantly facilitate the future sale of condominium units by avoiding onerous conversion restrictions such as conversion taxes, extended tenancies that may be subject to rent control, and tenant elections.
Building Energy Performance Standards (BEPS). On September 6, 2024, the Maryland Department of Energy (MDE) proposed new BEPS regulations after a provision in the Maryland State budget for Fiscal Year 2025 required MDE to withdraw the previously proposed BEPS regulations. Specifically, the budget provision restricted MDE’s use of funding for Site Energy Use Intensity (EUI) standards regulations. This budget provision effectively blocks the use of Site EUI as a performance standard until the MDE complies with the new requirements to access the funds. The new regulations do not require EUI as a performance standard. Instead buildings greater than 35,000 square feet must meet the net direct emissions score determined by building type in the proposed BEPS regulations. The comment period for the proposed regulations ends on October 9, 2024, and comments can be submitted here or by attending the public hearing on October 9, 2024. The budget amendment does not change the requirements of the Climate Solutions Now Act, (See past Alert) and requires buildings to achieve net-zero emissions by 2040. Building owners will also be required to measure and report direct emissions data to the MDE annually, starting in 2025.
As noted in a prior Alert, Montgomery County issued proposed regulations for County BEPS on November 1, 2023, which would establish minimum energy and performance thresholds for many existing buildings. In addition, the County Executive introduced a proposal to establish the use of Site EUI for setting energy performance targets by major building use types, define how renewable energy will be incorporated into the BEPS performance metric, and provide for an alternative compliance approach where meeting the Site EUI is economically infeasible. Currently, the Transportation and Environment Committee is reviewing Regulation 17-23, and the most recent work session #6 staff report from can be found here. On September 17, 2024, Montgomery County passed Resolution 20-607, which allows the County to continue to review the proposed County BEPS regulations until February 28, 2025. We recently met with Montgomery County Councilmember Evan Glass and many multifamily stakeholders to discuss BEPS. Several attendees expressed their significant concerns about the significant costs of BEPS compliance, and the impact on affordable housing. Councilmember Glass acknowledged this issue and said that he and others were exploring several options, including pursuing financial assistance programs. We are also meeting with Senator Jeff Waldstreicher next week. He is on the Administrative, Executive & Legislative Review committee which reviews regulations relating to BEPS. He was instrumental in getting the regulations delayed during the 2024 General Assembly session.
Vacancy Control and Just Cause Evictions. During our meeting with Councilmember Glass, attendees expressed their significant concerns with the vacancy control provisions in the Montgomery County rent control law (Prince George’s County has similar vacancy control). Councilmember Glass noted that vacancy control was a last minute amendment to the rent control law and he said that he believed that the only means to eliminate vacancy control is for laws to be enacted that would mandate “just-cause” evictions. He anticipates that enabling legislation for just cause evictions will be introduced by the Maryland General Assembly in January. Attendees at the meeting noted that if just cause evictions were mandated, it could be very difficult, time consuming, and costly to evict tenants who violate their lease because the burden shifts to the landlord to prove just-cause.
Political Considerations. Although the upcoming election does not include any council seats in Montgomery or Prince George’s Counties, potential pro-housing candidates for the 2026 local elections are starting to emerge. One important matter on the November 5th ballot in Montgomery County is a referendum to place a two-term limit on the county executive. If approved by voters, the current county executive would be ineligible to run for re-election in 2026. We understand that some groups have organized to try to defeat this ballot initiative by encouraging voters to vote No on Referendum Question A.
DC Eviction Reform Bill. In an attempt to provide renters with relief in the wake of COVID, DC made changes to the Emergency Rental Assistance Program (ERAP) in 2022. As modified, landlords cannot evict any tenant that has a pending application for ERAP funds, regardless of the likelihood that such tenant would receive any assistance or whether it would actually cover their debt. According to the DC government, more ERAP applications were filed in the last 6 months than in all of 2022. In response, DC Council Chairman Phil Mendelson is seeking co-sponsors for draft legislation that would reform ERAP. The bill is expected to be introduced in the coming weeks and would limit stays to one per case for pending ERAP applications and require a tenant to show that ERAP could cover their outstanding debt or that they have a payment plan agreement with the landlord.
DC 20-Year Tax Abatement and 10-Year TOPA Exemption. For DC property owners seeking to convert their non-residential properties into rental apartments or condominiums, the Housing In Downtown (HID) Tax Abatement Law provides three incentives: (i) a 20-year tax abatement; (ii) limited exemptions from the Tenant Opportunity to Purchase Act (TOPA); and (iii) relief from First Source Agreement requirements. Eligible properties must yield a minimum of 10 housing units during the abatement period and be located in portions of DuPont Circle, West End, Foggy Bottom, Penn Quarter, Chinatown and East End. Additionally, for the duration of the abatement period, eligible properties must make either 10% of the housing units affordable to families earning not more than 60% of the median family income (MFI), or 18% of the housing units affordable to families earning not more than 80% MFI. The total amount of tax abatements that the Mayor can approve is subject to the availability of appropriated funding as well as specified caps. Property owners who apply for and receive the tax abatement will be exempt from TOPA for the first sale of the property within 10 years after issuance of the certificate of occupancy for the development, and exempt from the First Source Agreement requirement for conversion related construction of the property. The HID Tax Abatement Law applies to conversions of non-residential properties to rental apartments as well as to for-sale condominiums. DC began accepting applications in March of 2024; however, applications continue to be accepted on a rolling basis and property owners can apply at any time by uploading their application forms here.
DC Tenant Opportunity to Purchase Act (TOPA). 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.
Corporate Transparency ACT Filing Deadline. The federal Corporate Transparency Act (CTA), which became effective January 1, 2024, requires many entities to file beneficial ownership information reports with the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). The deadline to make an initial filing for entities formed before January 1, 2024 is December 31, 2024. As a majority of multifamily properties appear to be owned by entities that do not qualify for CTA exemptions, it is important to confirm CTA compliance with enough time to compile all required information and complete requisite filings before the end of the year. For more information on the CTA, please see our prior Alert.
Freddie Mac and Fannie Mae Multifamily Lease Requirements. Freddie Mac and Fannie Mae recently announced new minimum lease standards for multifamily properties with a new Freddie or Fannie loan. The new minimum lease standards require (i) written notice be given to a tenant at least 30 calendar days prior to a rent increase, (ii) written notice be given to a tenant at least 30 calendar days prior to the scheduled expiration of a lease, and (iii) a grace period of at least 5 calendar days be given to a tenant before late fees or other penalties can be charged. These minimum lease standards will take effect in February 2025, but the standards will not retroactively apply to any loans that previously closed or to loans for which an application was signed on or before February 28, 2025.
What Can We Learn from Argentina? As reported in the Wall Street Journal, (Argentina Scrapped Its Rent Controls. Now the Market Is Thriving) (paywall) for years, Argentina imposed one of the world’s strictest rent-control laws. It was intended to keep housing affordable, but instead, rents soared. Now, the country’s new president, Javier Milei, has scrapped the rental law, along with most government price controls, seeking to revive South America’s second-biggest economy. The result: Buenos Aires is undergoing a rental-market boom. Landlords are rushing to put their properties back on the market, with Buenos Aires’ rental supplies increasing by over 170%. While rents are still up in nominal terms, many renters are getting better deals than ever, with a 40% decline in the real price of rental properties when adjusted for inflation. As rent control laws and proposals in the United States continue to proliferate at local, state and federal levels1, will our elected officials take notice of Argentina’s reversal on rent control? In the United States, 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).
If you have missed any of our most recent Alerts, they can be found below:
• Landlords’ Taking Clause Victory
• Multifamily Update: Rent Control Coalition Analysis
Should you have any questions or wish to provide input on any of these matters, please contact 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. At the national level, President Biden previously proposed a 5% cap on rent increases and Vice President Harris recently pledged to “take on corporate landlords and cap unfair rent increases.
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