MD/DC Multifamily Update

With Election Day fast approaching, market indicators appear more promising, notwithstanding regulatory hurdles. As a follow-up to our most recent Alert, below are some updates on recent multifamily legislative and legal activities:

Montgomery County Publishes New Troubled Properties Report. Among many other requirements, Montgomery County’s new rent control law prohibits any rent increases for units within properties designated by the Department of Housing and Community Affairs (DHCA) as “troubled” or “at risk” – except as necessary to cover costs required to improve habitability (e.g., to allow for “fair returns”). On October 1, 2024, DHCA published the FY 2024 Troubled Properties Report, which includes a list of all properties currently designated as “troubled” or “at risk”. In order to get a property removed from this list, a landlord must: (i) correct of all violations identified during the initial inspection; (ii) submit a corrective action plan approved by DHCA; (iii) submit at least two quarters of maintenance logs; and (iv) complete a re-inspection that does not result in a designation as “troubled” or “at risk”. Landlords can submit information demonstrating compliance with the foregoing removal requirements and fair returns applications through the Rental Housing Portal. Once all requirements are satisfied, DHCA will remove the property from the list and the landlord may increase rents in accordance with applicable law.

DC and Montgomery County Gas Appliance Ban Lawsuit. On October 17, 2024, a coalition of trade associations, impacted companies, and unions (Plaintiffs) filed a lawsuit against Montgomery County, Maryland in the U.S. District Court for the District of Maryland (Case No. 24-3024). Plaintiffs are seeking relief from provisions of CB 13-22 that bans the use of gas appliances in new construction, claiming those provisions are expressly preempted by the federal Energy Policy and Conservation Act (EPCA). Plaintiffs claim the EPCA does not allow states to regulate consumer and industrial appliances, except in limited circumstances and that Montgomery County does not qualify for these limited exceptions. A similar lawsuit was filed in the U.S. District Court of the District of Columbia (Case No. 24-2492), on October 17, 2024, challenging the Clean Energy DC Building Code Amendment Act of 2022, which also prohibits the use of gas appliances in new construction. As noted in our recent Alert, Montgomery County is considering Building Energy Performance Standard (BEPS) regulations, which regulations would eventually require replacing gas appliances in existing buildings with electric appliances. The BEPS laws in DC, which have already been enacted, as noted in a prior Alert, would also eventually require replacing gas appliances with electric appliances. While the BEPS laws are not a part of the current litigation, it is possible that the success of these lawsuits could lead to challenges of the BEPS requirements in DC and influence the proposed regulations in Montgomery County.

Montgomery County Expanded Right of First Refusal (ROFR) Regulations. The Montgomery County Council recently enacted Expedited Bill 38-23, which allows DHCA to assign ROFR rights to “qualified entities,” similar to the ROFR law in Prince George’s County. Previously, only DHCA or HOC had the right to exercise a ROFR. DHCA provided proposed ROFR regulations which the Montgomery County Council adopted. The regulations became effective July 30, 2024 and establish the application process to become a “qualified entity,” and set the selection criteria for a qualified entity to become a DHCA assignee. Under the regulations, a qualified entity applicant is required to (i) certify that it has complied with all housing laws, (ii) commit in writing to not disclose information received from DHCA, (iii) demonstrate expertise and experience in acquiring, owning, operating, managing, and developing rental and affordable housing, (iv) demonstrate a commitment to community engagement, (v) demonstrate other criteria DHCA may require, and (vi) be registered and licensed to do business in Maryland, and in good standing under Maryland law. In addition, ROFR assignees may only evict tenants for “just cause” and may only increase rents in accordance with the voluntary rent guidelines (which are generally lower than the rent control caps) for 15 years, “unless the units are covered by other agreements that ensure long-term affordability of greater than 15 years or as otherwise required by law”. (The voluntary rent guidelines published by the County Executive in February 2024 limit rent increases to 2.6% per year). A designation as a “qualified entity” is for three years. The criteria to become a DHCA assignee includes, but is not limited to, (a) committing to preserve the current affordable housing units at or below 70% Area Median Income, (b) committing to create more affordable housing units, (c) funding amounts requested by the “qualified entity,” (d) funding availability, and (e) demonstrating that the “qualified entity” has expertise in acquiring, owning, managing, operating and developing rental and affordable housing.

Montgomery County Term Limits. Montgomery County voters casting ballots for the November 5 election will be asked to decide whether the county executive should be limited to serving a two consecutive terms. The current term limit is three consecutive four-year terms. If the referendum passes, the county charter would be amended to reflect the term-limit change. Ballot Question A appears on the ballot with the following wording: “Amend Section 202 of the County Charter to decrease the term limit that applies to the County Executive from the current three consecutive terms to two consecutive terms”. The decreased limit would apply to the current county executive. A “Yes” vote indicates support for term limits, and a “No” vote indicates opposition.

DC Passes Eviction Reform Bill. On October 1, 2024, the DC Council unanimously approved Bill 25-969 to reform DC’s Emergency Rental Assistance Program (ERAP). Originally adopted in an attempt to provide renters with relief during COVID, ERAP led to a backlog of unpaid rent and delayed eviction cases. The new law will give judges more discretion over when to delay eviction cases, as it limits stays to one per case for pending ERAP applications and requires a tenant to show that ERAP could cover their outstanding debt or that they have a payment plan agreement with the landlord. Although the bill was passed as a temporary emergency measure, Council Chairman Phil Mendelson said that he plans to advance permanent legislation in the coming months. Mayor Muriel Bowser has publicly supported ERAP reform and said that the reform represents a significant “first step” toward addressing the affordable housing situation in DC.

DC TOPA Reform Discussions and Data. In the wake of successful ERAP reform, Councilmembers, DC agency leadership, and affordable housing providers are also discussing potential changes to the much-maligned DC Tenant Opportunity to Purchase Act (TOPA). Among other things, TOPA significantly impacts the time required for multifamily property transactions. TOPA beneficiaries are afforded up to 420 days to close, and if there is a dispute, closing may be even further delayed. In addition, it is very rare for TOPA beneficiaries to exercise their purchase rights – and almost unheard of for newer, high-end residential developments. Some recent TOPA reform proposals shared with DC agency leaders focus on creating exemptions for sales of properties completed since 2000. According to CoStar, there have been 559 sales of multifamily properties of all vintages totaling $42.8 billion in the DMV since 2020, of which 68 sales totaling $4.1 billion (9.6%) took place in DC. This compares to 332 sales / $22.2 billion (59%) and 159 sales / $16.5 billion (28%) in Maryland and Virginia, respectively. According to CoStar and CBRE, 20% of the buildings built after 2000 in DC have sold during this same period, as compared to 30% in Maryland and 33% in Virginia. These sales generated approximately $85.7 million in revenue for the District in transfer and recordation taxes. According to CBRE, if the sales volume in DC increased from 20% to 30% (to mirror that of Maryland and Virginia), DC would have generated $128.6 million in revenue since 2020. This equates to an increase of $42.9 million to the tax base, a fact that will no doubt be relevant to FY2025 budget discussions. We met recently with representatives of the DC Policy Center, a non-partisan think tank, which is also working on a report about potential TOPA reforms and stakeholder experiences in dealing with TOPA.

DC Utilities Fees Proposal. On October 2, 2024, the DC Council introduced B25-991, the Fair Housing Practices Amendment Act of 2024, which would prevent landlords from separately charging a fee for common area utilities to tenants. Instead, the cost of common area utilities would need to be factored into a tenants rent. B25-991 also included additional notice requirements that landlords would need to comply with when a tenant vacates a unit. Within 45 days of the tenant vacating the unit, landlords would be required to notify tenants of any unpaid amounts in writing through personal delivery or certified mail to the tenant’s last known address. The notice for unpaid amounts may include rent arrearages, damages to the rental unit, cleaning fees, and charges for removing furnishings after the tenant vacated the rental unit. Additionally, the notice would need to include photographs or other evidence supporting the claim for the unpaid amount and the landlord would have to obtain evidence that the tenant was served with the notice 60 days before sending the unpaid amount to a debt collector. B25-991 was referred to the Committee on Housing for further review on October 15, 2024.

Prince George’s County Permanent Rent Control. Prince George’s County’s temporary rent control law expired and its permanent rent control law became effective on October 17, 2024, as recently reported by the local news station Fox News 5 here; this includes an interview with Roger Winston about the significant constraints rent control imposes on the availability and production of affordable housing. 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 became effective without regulations. The rent control law caps rent increases to 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 provides certain exemptions as well as the ability to increase rents above the caps under certain circumstances. However, without regulations, Prince George’s County landlords may be unable to seek an exemption, or otherwise apply for relief contemplated by the law. As the rent control law does not require regulations to be in effect until February 1, 2026, this situation may be unresolved for some time.

Prince George’s County Anti-Gouging Bill. On September 24, 2024, a bill (CB-97-2024) designed to cap rent increases for units otherwise exempt under the just enacted rent control law was introduced to the County Council. CB-97-2024 would limit rent increases for units that are 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. On October 22, 2024, the COW met to discuss CB-97-2024, where the Prince George’s County Office of Law discussed the memorandum it had circulated, which noted the possibility of legal challenges to CB-97-2024 for the potential violation of constitutional rights. Further it was noted that the Department of Housing and Community Development and Department of Permitting, Inspections and Enforcement did not support CB-97-2024 in its current form. After these discussions, the Council voted to hold off on further consideration of CB-97-2024 at this time.

Prince George’s County Security Camera Mandate Modifications. On October 15, 2024, the Prince George’s County Council introduced Bill 71-24, with the goal of reducing security camera requirements for garden style apartments and to delay the effective date of the security camera law from June 1, 2024 to November 30, 2024. As noted in our previous Alert, Prince George’s County currently requires 24 hour security cameras in multifamily buildings of 100 or more units. Additional requirements include installing cameras that have a minimum 1080p resolution and a 180 degree field of view at all entrances, exits, and common areas, such as parking lots. Bill 71-24 would allow one camera to cover multiple entrances and exits at garden style apartments and allow the Department of Permitting, Inspections and Enforcement to create regulations addressing security camera angles and placement in garden style apartments.

Hyattsville Rent Control Proposal. On September 6, 2024, the City Council of Hyattsville proposed HCC-65-FY25, which would impose stricter limits than the Prince George’s County rent control law. The proposal would cap annual rent increases at the CPI-U for non-exempt units. Rental properties built within the last 15 years would be exempt from rent control. Currently, the proposal includes a fair returns petition process, which would allow landlords to increase rent annually by up to 15% of base rent. Unlike the Montgomery County and Prince George’s County rent control laws, the HCC-65-FY25 does not include an exemption for substantial improvements, although the related costs may be included in petitions for fair returns. The City Council is also debating the significant cost of enforcing its own rent control program or whether the City Council should lobby Prince George’s County for changes to the County rent control law.

Anne Arundel County Passes Moderately Priced Dwelling Unit (MPDU) Bill. On October 7, 2024, the Anne Arundel County Council approved Bill 72-24 by a vote of 4-3. The new MPDU bill requires developers of properties with 20 units or more to set aside a percentage of the units as MPDUs. For-sale projects must set aside 10% of the units as MPDUs and rental projects must set aside 15% of units. In certain cases, projects with 10 to 19 units have the option to make a fee-in-lieu payment to the Housing Trust Special Revenue Fund instead of providing MPDUs. Unlike the MPDU bill that failed last year (see prior Alert), the new MPDU bill provides a density bonus in certain situations. The new MPDU bill also expands the County’s zoning ordinance to include new housing configurations, such as duplex, multiplex, and stacked townhomes. County Executive Steuart Pittman has signed the bill into law, which will go into effect in July 2025.

Energy Tax Credits. The Inflation Reduction Act of 2022 (see prior Alert) revitalized the “new energy efficient home credit” under Internal Revenue Code (Code) Section 45L (45L Credits). Developers are eligible to claim federal income tax credits of up to $5,000 per residential unit in a multifamily or residential-home development which meets certain energy efficiency standards established by the Environmental Protection Agency’s (EPA) Energy Star Program and Department of Energy’s (DOE) Zero Energy Ready Home (ZEHR) Program. 45L Credits are available for residential units that sold or leased after December 31, 2022, and prior to January 1, 2033. Multifamily or residential-home developments that do not meet the requirements of the DOE’s ZEHR Program may still be eligible for up to a $2,500 federal income tax credit per unit if certain requirements are satisfied under the EPA’s Energy Star Program.

Multifamily developments generally must meet prevailing wage (PW) requirements to be eligible for the $5,000 or $2,500 credits. However, multifamily developments which began construction prior to January 29, 2023, may be eligible for the $5,000 or $2,500 credits even if the PW requirements were not satisfied. Development of single-family residential homes and manufactured homes are not subject to PW requirements and may still be eligible for the $5,000 or $2,500 credits if PW requirements are not satisfied. If the PW requirements are not satisfied in a multi-family development which began construction on or after January 30, 2023, 45L Credits are limited to a $1,000 maximum tax credit per residential unit in such development even if EPA and DOE requirements are satisfied.

If you have any questions or wish to discuss any of these matters, please do not hesitate to contact us at CondoMultifamilyTeam@ballardspahr.com.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.