September 30, 1975 Page 3. I appeared before a Hearing Examiner with regard to both of my buildings, and in one instance, tenants appeared and castigated me (not because they had documents indicating that my request for an increase in the rents was unjustified but because they believed that I did not manage the building properly. The Examiner (without making any apparent use of the tenants' testimony) accepted my projected costs for 1975 and then rejected my petition, explaining that my principal payments could not be considered an expense and that, therefore, despite an annual income deficit of over $3,000.00, my "rate of return" would be 27.9. Desperate, I requested a review by the full Commission, and my request was denied. I then obtained legal counsel and filed a suit in the Superior Court of the District of Columbia, a suite that I could ill-afford but one that was essential to my very existence as a landlord in the District of Columbia. After a hearing, the Court ordered the Commission to grant me a hearing. At that heari I was subjected to more verbal abuse by the tenants than I have ever experienced in my life and to a series of questions by the "tenant representatives" which were specifically and solely designed to elicit answers that would be damaging to me. Ultimately, the one impartial judge, the chairman, displaying unusual intelligence and commendable integrity, voted with the "landlord representatives" and my petition was granted. My other petition is still pending in the Superior Court I chose to appear before the committee of the City Council that was holding hearings on the second rent control bill, and I believe that I was rejected completely as a landlord. Despite my limited success in my hearing before the Housing Rent Commission, my status as a landlord in Washington, D. C. is still extremely precarious. Now, I cannot properly manage my buildings becaus of the current restrictions on landlords; and I know that the increase in rent that I was granted will not be sufficient indefinitely. Actua I am not even certain that it is adequate now because I submitted my petition almost one year ago. Now I appear before you with the fervent request that the necessa action be taken to produce a rent control law that will be in the best interests of all of the citizens of the District of Columbia, a law th will not restrict or demean a landlord or tenant, a law that will prevent exorbitant rents, and a law that does nothing else. Thank you. MOM/cgf Yours truly, Milton O. McGinty September 29, 1975 Throughout the discussions of the last twenty-one months from the initial hearings held by the D. C. City Council on whether there was a need for rent control to the actual enactment of a rent control law (August, 1974) and from that point thereon, it is apparent that not much thought has been given to a very important group in the community that will certainly be very much affected by the recent rent control legislation that was enacted. This group is caught up in the middle of the tug-o-war between the landlord and tenant dispute on rent control. This group is made up of the on-site personnel of the properties, the employees in the management firm which includes property managers, rental clerks, bookkeepers, etc., whose jobs directly depend on the fiscal and physical well-being of the properties in the management property portfolio. They number conservatively around 8,000 persons. This is not an insignificant number, and the persons I am speaking of are real flesh and blood individuals who have the same problems with living today as anyone else including landlords and tenants. They have made sacrifices and adjustments in their daily lives, as everyone else has, to deal with the pressures of a deteriorating economy and yet watch fearfully as even more is demanded from them as the innocent victims of this latest piece of irresponsible legislation goes into effect. on a property As an employee that either would or would not qualify for the unrealistic 5% rental increase, he faces a crippling blow to his ability to stay economically stable. This blow could come in the guise of a substantial salary decrease, freeze on salary increases for the next year or two, or worse yet, loss of job because the property can no longer afford him or her. Another unpleasant possibility is the acquiring of extra duties with no increase in compensation. You might suggest that in any of these cases, the person should be about finding other employment when confronted with such unpleasant realities. There are two major problems when this is attempted. They are as follows: A. B. Jobs are not plentiful for those with college In most cases, the employees have become mem- It appears that though everyone is aware of the severe economic worked too hard, etc., etc., etc." seems to be the philosophy of today. It is grossly unfair for any one faction of the community to be asked to subsidize another without at least some extensive research into cause and effect and far reaching consequences to all involved. It is apparent that the current legislation was not developed within this concept at all! The Apartment Industri Employees Council would like to see the landlords, tenants and legislators work out a solution that would benefit themselves equitably, the community as a whole, and certainly one which would help to keep our members as stable, productive and important community components in the District of Columbia. Submitted by My name is Patricia R. Schwartz. My husband and I own, rehabilitate and manage residential and commercial property in the District of Columbia. We have been in the restoration business for approximately six years. We own 50% of Potomac Development Corporation, our operating company. This corporation and associated investment partnerships of which we are a part own and manage 128 residential units in the Capitol Hill area of the District of Columbia. These units are contained in ten apartment buildings and four two-family flats. Monthly rentals on our occupied restored apartment house units range from $175 to $385 per month. Townhouse type rentals range from $350 to $560 per month. Tenants pay for utilities in all of our buildings. All of our residential properties are located on Capitol Hill. The small, concentrated nature of our business makes us vulnerable to sudden changes in the market. We feel that the Rental Accomodations Act now before Congress will make it impossible for us to continue to renovate residential property and will seriously diminish the value of our existing properties. The Act affects our ability to function successfully in the areas of purchasing and renovating, financing, and managing properties. THE DECISION TO PURCHASE The purchase of buildings for renovation involves insurmountable risks under the Act. If you contemplate the purchase of an occupied building, it is at the discretion of the rent administrator as to whether or not: 1) the building should be substantially renovated; 2) the building can be vacated so that renovation can be done; and 3) it is in the interest of the tenants for the developer to rehabilitate his property. If the building to be purchased is unoccupied, you are faced with the question of what rents you will be able to charge upon completion of the renovation. Such an increase must, by law, Chairman, Subcommittee on Commerce, Housing and Transportation September 30, 1975 page 2 be tied to rentals received and services provided when the building was last occupied. Units produced through renovation may bear no resemblance whatever to the previous units. The costs involved may be far greater than the 50% minimum of purchase price specified by the law. Our own experience includes expenditures of from two to three times the purchase price to effect renovation. Obviously, in such a situation, the new unit is more comparable to new construction, which is exempted under the Act for one year, than to substantial renovation. It is impossible to have an economically successful project if the rental increases are limited to 125% of those received in previously occupied units. ATTRACTING AND SECURITY FINANCING Assuming that an owner-developer has residential property in need of substantial renovation, he faces new obstacles in order to raise the necessary financing to effect renovation under the Rental Accomodation Act. Available bank or savings and loan financing will be in short supply or non-existant due to the inability to project accurately the rental income which will be available when a project is completed. Rapid increases in construction cost due to inflation make such projections difficult even in a free market environment. If such rentals must be approved in advance by the Rent Administrator and again after construction, it may be impossible to satisfy the lender's requirement for predictably secure investment. For the same reasons, equity investment money, essential for the development of the city's housing stock, will be almost impossible to attract. Risk factors in construction have always been high as reflected in the substantial percentage return traditionally received by real estate investors. This Act not only limits the return available immediately after completion, it effectively destroys any potential for future capital appreciation. Existing market interest rates for investment properties are currently at or in excess of 10%. Certainly, with high interest yields currently available from United States Treasury obligations, only an unsophisticated investor will put new money in residential housing. Not only does the law deter new investment, it penalizes existing investors. Since the rate of return allowed by the law must fall to 8% or less before a landlord can increase rents, investors will be forced to make up the difference between their rate of return and the costs of borrowed funds. On a property financed to the extent of 80% of assessed market value, if the interest rate paid for borrowed funds exceeds the rate of return received on the project by 2% or more, the investor would receive no return on his equity. Additionally, because he must make principle repayments, the investor would be in a negative cash flow position. |