- Hello, everyone. And welcome to an introduction to rent control in New Jersey. My name is Tom Major. I am an attorney admitted to practice in New York and New Jersey, and I'm a principal and attorney with the firm, Offit Kurman. And today we are going to talk about the basics of rent control in New Jersey. This is a subject that's near and dear to my heart, because my practice is almost comprised entirely of real estate development and management, the acquisition, the financing, the construction, and ultimately the management of the building. And in Northern New Jersey especially, rent control is a hot button topic. And so it's my pleasure today to share with you the basics of rent control. And hopefully at the end of this discussion you'll walk away with a more nuanced understanding of how rent control functions in New Jersey and how you might advise your clients should you confront a rent control issue. To begin we're going to start with a colloquial discussion of rent control. We'll just talk in simple terms, what it is, what it does and where you might find these ordinances, then we'll address important constitutional questions. We'll talk about New Jersey and the home rule, which is a creature of the New Jersey State Constitution. We'll talk about the federal constitution, and the state constitution, and address the issues of takings. And a phrase we're gonna hear over and over again today, which is just and reasonable return. So, if you're looking for one phrase to memorize when it comes to rent control and takings jurisprudence, just and reasonable return is gonna be the key phrase for today. And then we'll talk about equal protection. Once we dispose of the constitutional elements, we'll go into how rents are controlled. And to do this, we will use Jersey City as an example. Jersey City up in Northern New Jersey, right across the Hudson River from Manhattan, has a fairly robust rent control ordinance. And its administration is also pretty robust. And so, although this ordinance isn't without its nuances, this is a good place to look at a bird's eye view of rent control. Then we'll talk about rent control compliance. We'll talk about rent control overcharges and the New Jersey Consumer Fraud Act. And we'll learn about how you can go, you can end up hurting for certain on game day if you are a landlord and you overcharge a tenant in a rent control jurisdiction, or in a property that's subject to rent control. And then we'll take a couple of minutes at the end to put it all together. And then by the end of this presentation you'll walk away being a lean, mean, rent control knowing machine. With that said, let's dive in. One of the things that comes up all the time is, and this happens mostly dealing with, let's say pro se litigants, or just in common parlance, is the question of whether rent control is constitutional at all. You know, you hear stories or you'll see stories in the newspapers or online about tenants who are getting massive buyouts from rent controlled jurisdictions, or you'll hear stories of somebody lives in an apartment for 30 years and their rent is $400. Or they live in a five bedroom, three bedroom apartment, and the rent is $200 and they inherited it from their great-great grandmother. You know, and these kinds of outlier examples tend to drive people's opinion about rent control. People hear these things, and they think there's no way this is constitutional. How could this be? Well, that's not the only reason why one might question the constitutionality of rent control. The purpose of rent control, you know, essentially by definition is to affect the return of property a owner will realize. By limiting the property owner's increases, rent increases, or the amount of rent that can be set, and excluding certain charges, rent control ordinances limit the ability of a landlord to do what they see fit with a property. And they insulate tenants from market conditions. Now, there are many schools of thought about whether this is an effective thing to do for maintaining and growing a housing supply, but we're not going to talk about that today. Today we're going to talk mostly about acknowledging that rent control exists and how we can function in a universe where rent control is a reality. So, when you consider that rent control by its stated purpose is going to limit a landlord's return, and sometimes dramatically so, the question becomes, is this unconstitutional? Why would a law allow potentially 564 unique rent control ordinances? There are over 500 municipalities in New Jersey, and under the state constitution, conceivably each one could have its own unique rent control ordinance. Worse, an unconstitutional ordinance could operate as a taking, or it could violate due process by treating landlords differently. These are the big ticket items that we'll discuss first and are the primary constitutional considerations in evaluating a rent control ordinance. First though, let's talk about how we get here. New Jersey as a principal follows the home rule. Now, under the home rule or the home rule principle, the police power of a state can be invested or delegated to local governments to enable that local government to discharge its role as an arm or agency of the state to meet the needs of the community. The authority for home rule comes from the New Jersey Constitution. and the New Jersey Constitution says, "The powers of counties and municipal corporations shall include not only those granted in express terms, but those of necessary or fair implication or incident to the powers expressly conferred." So from, that's a paraphrase, but from this section of the constitution, we get this principle of home rule, which is a municipal government is almost entirely free to do as it sees fit for the general welfare of its community within its geographic boundaries. There is a Supreme Court holding that addresses specifically and grants local governments the power to deal with matters of local concern. Unless of course the state government supersedes. And this case is cited in the materials, it's Inganamort v. Borough of Fort Lee. So, now we know that we have that each municipality in New Jersey is free to enact its own rent control ordinance. And this is different than a lot of other jurisdictions. because there are, in other jurisdictions you may have a statewide rent control ordinance or a statewide rent control principle in some way, or there may be state, other state controls on rent increases and rent charges. In New Jersey though it's a strictly municipal concern. And so the key takeaway here is, there is no statewide rent control. Rent control varies from municipality to municipality. Some municipalities may have no rent control, others may have very robust rent control, but there is no state rent control. Amateurs in this area make that mistake all of the time. But since you are listening to this today, you're not an amateur. And if you are, you won't be by the time we're done. So, we've got our municipalities and we've got our individual rent control ordinances. But how do we determine if a rent control ordinance operates as an unconstitutional taking? Well, for that we need the standard. And the standard is, a rent control ordinance is constitutional if it allows an economically efficient operator to obtain a just and reasonable return on his investment. And there's our phrase from earlier in the discussion, a just and reasonable return. Even if a rent control law does allow for a just and reasonable return, the manner it does so must not be wholly arbitrary and unreasonable. This is from a case called, Hutton Pk. Gardens v. the town of West Orange. It's a case from the '70s, the 1970s, where the State Supreme Court and the New Jersey Appellate Division spent a lot of time addressing rent control ordinances. So, let's restate that one more time. A rent control ordinance is constitutional if it allows an economically efficient operator to attain a just and reasonable return and does not do so in a manner that is wholly arbitrary and unreasonable. Let's talk about Hutton Park and how we ended up in this spot. The West Orange rent control ordinance limited a landlord to rent increases of 5%. And then it limited hardship increases in capital, improvement increases, which we'll discuss later in the presentation. It limited those other types of rent increases to 10%. The problem according to landlords at the time was that the operating costs in this jurisdiction would increase 15% on an annual basis, while rents only increased 5%. And so in this case the landlord's position was, "I'm doomed to failure under this ordinance because my operating costs will increase 15%. My increases are limited to five or 10, and I can't make money." They alleged that this was a taking and the Supreme Court said it's not. The Supreme Court went on to describe the circumstances that would ultimately lead to a taking, but found none of them in the West Orange case. The way to think about this is, how do we know a case isn't a taking? Or how do we know a rent control ordinance isn't a taking? We know it's not a taking if it just provides a lower rate of return. A lower rate of return by itself is not sufficient to find a taking. Lower rates of return for inefficient operators are not takings. So for example, if you have high expenses, you can't allege that simply because you can't make a lot of money on this particular property that you are subject to a taking. A rent control ordinance does not cause a taking if you have a low return because of a high purchase price. For example, if you buy in a real estate boom, but your rents are low, so you're at a three or four or two, or God forbid, 1% cap rate based on your purchase price, according to the Supreme Court, that's your problem. And finally, atypical results for landlords in unusual situations do not indict or do not mean that the ordinance itself is confiscatory taking. We know now that just a lower rate of return by itself, lower returns for inefficient operators, low returns 'cause of high purchase prices and atypical results are not indicia of takings. And these examples in the Hutton Park Gardens case shows that it's very hard to prove that a rent control ordinance is confiscatory. The court expects that rent control will lower returns, even for efficient landlords. But these lower returns are considered a fair price to pay for the promotion of the general welfare, which is advanced by each municipality using its police power. Now that we know that our return is gonna be low, we can live with that. We can live with low returns, but our low returns still has to be just and reasonable, and here's that phrase again. The question becomes then, how do we know that a return is just and reasonable? And a rent control ordinance needs to allow a just and reasonable return to survive a constitutional challenge. The courts use a number of methods to calculate a just and reasonable return on a rent control property. Now, these methods can be a little complicated and they involve a somewhat sophisticated understanding of real estate finance. But I do want to spend some time talking about them generally, because understanding how the courts view these things is, will be useful to you in your practice. So, the three most common ways for measuring return on a rent controlled property are, return on equity, return on gross rent, and percentage of net operating income. These three methods are used by the courts to determine to what degree a return to a landlord may be just and reasonable. Let's start first with the return on equity. The return on equity method measures the landlord's return based on his equity in the property. This return though does not account for debt. So a landlord who owns a building free and clear will realize a greater return than a landlord that's highly leveraged. Think about it this way. If we have a property that is worth $1 million, the purchase price is $1 million and I buy the property financed, let's say 90% loan to value. That means I've taken out a mortgage for $900,000. And my equity in the property is a $100,000, 10% of my purchase price. My just and reasonable return is going to be measured against my equity only, my equity only. That means my just and reasonable return is measured against a $100,000, but the property is worth a million. Compare that to somebody else. Let's call him Mr. Or Mrs. Other Purchaser. If they buy the property with a million dollars, let's say they're flush with cash, and they just write a check, their just and reasonable return is gonna be based on equity of a million dollars, way better than mine, 10 times better than mine. But this differing method of reasonable return calculation is permitted under the ordinance for reasons, rent control ordinances for reasons we'll see later. One note though, if you're thinking about this, you might be, a voice in your head might be saying, "But wait a minute, doesn't the debt service on Tom's $900,000 mortgage, doesn't that factor into his operating expenses?" And the answer is yes, it does. There is a slightly more complex way to back in debt service and calculating a return. But the strictly speaking return on equity method is looking at your equity in the property and your return measured to that equity. In another CLE maybe we can get into the weeds with this, but for now think about return on equity as just what you own, irrespective of debt service. Return on gross rent is similar. It measures the landlord's return based on a percentage of gross rent. The percentage of net operating income is an outgrowth or a variation on gross rent. The reference point for the percentage of net operating income method is the net operating income, not gross rent. There are some great cases kicking around out there that explain which of these may be fairer or more tethered to traditional notions of real estate finance. And we can add them in the notes in case you're interested in a more complex discussion. But keep in mind, you're most likely to encounter a return on equity method, a return on gross rent, or a percentage of net operating income. And the return is measured against any one of those three. We just talked about the return on equity example and how my property, which is highly leveraged, may not ultimately be worth the, my return may be less than someone who buys a property all cash. Even though both of our properties are worth the same thing and I'm levered up with debt. So though the ordinance is treatment of me, versus the other purchaser in that example is necessarily different, the other purchaser's going to make more money. His four, five, 6% return is calculated against a million dollars, while mine is measured against a $100,000. How is that not a violation of the equal protection clauses of the State and Federal Constitution? How is it not? After all, it's the same law. It affects me differently because the township is choosing not to acknowledge outright my debt service, while the person who pays with cash gets a better return. Well, although a rent control ordinance produces different outcomes for different landlords, those different outcomes do not necessarily mean the ordinance violates equal protection. This is especially interesting when you consider the near infinite variation of buildings and rent performances. You know, given the size of some of these municipalities, we could almost guarantee that a rent control ordinance is going to treat similarly situated landlords differently. But when an a rent control ordinance produces different outcomes for different landlords, even if they have common circumstances, is the rent control ordinance unconstitutional? The answer is almost always, no. The answer is almost always, no. And this is something that rubs landlords, especially landlords the wrong way, and for good reason. But we can't change the law for now. And the law is that if a rent control ordinance treats different landlords differently, or produces different outcomes for landlords, that, we'll call it discriminatory outcome, is not by itself unconstitutional. The 14th Amendment, according to the New Jersey Supreme Court, only forbids "invidious discrimination." I'm quoting here from a case called David v. Vesta Company. This is a New Jersey Supreme Court case from 1965. And in this case the Supreme court held a classification, "A classification having some reasonable basis is not invalid merely because it is not made with mathematical nicety or because in practice it produces some inequality. And the classification must be upheld if any set of facts can reasonably be conceived to support it." That's some pretty rough language, think about that. "If any set of facts can be reasonably conceived to support it." Well, any set of facts can be reasonably conceived to support a rent control ordinance that treats landlords differently, because the near infinite variation between landlords would invite near infinite variation for treating them differently, or justifications for treating them differently. For example, let's stick with the property of, my property that's highly leveraged at a 90% loan to value. A municipality may say, for example, "Well, we wanna encourage cash buyers in our municipality, because our belief is all cash buyers with sufficient stake in the property, maintain the property better, or they're more likely to be responsive to tenant concerns, or there's less risk of foreclosure and abandonment of the property, or walking away from it if it's not revenue generating. And so we want to give a greater return to landlords with more equity, because our position is that those landlords would be more invested in the community and more invested in their tenants. And since this rent control ordinance is designed to further the general welfare of the citizens in our municipality, we think that's a perfectly fine reason to treat these two landlords differently." Now, I'm not suggesting that that is the rationale for the return on equity method, but you can see how that's one reason that can be conceived to support the different classifications. And that's why I mentioned earlier that the answer to equal protection violations under a rent control ordinance is almost always no. If the classification is to be upheld because any set of facts can reasonably be conceived to support it, you can see the court's gonna give this ordinance a lot of wiggle room to survive a constitutional challenge. The takeaway here is, a rent control ordinance is constitutional, is likely constitutional, even if it causes different impacts among different landlords. Now that we know equal protection isn't necessarily going to invalidate a rent control ordinance, and as long as a rent control ordinance, as long as it allows a just and reasonable return, it's not a taking, now let's talk about how we're gonna deal with a real-life rent control ordinance. We'll call this how rents are controlled, the Jersey City example. In Jersey City, well, before we discuss Jersey City specifically, let's go back to our most basic level. At its most basic level, a rent control ordinance protects units covered by rent control from market forces, by constraining the reasons why a landlord may increase the rent, and if increased at all, by how much. Jersey City's rent control ordinance contains many more common, many of the most common elements of types of rental controls, and has a pretty robust administrative process to support it. So, this one is going to be a, in my opinion, a useful example, because it's a good model for how rent control is applied and how it's enforced at the municipal level. Jersey City's rent control ordinance is codified in chapter 260 of the municipal code. And after defining the applicable terms, the code begins with rent leveling. Now, you may have heard the phrase rent leveling in your practice before. Sometimes rent control boards are called rent leveling boards or rent leveling and control boards. And that may make one wonder, "Well, what is rent leveling?" Rent leveling is the establishment of a base rent as of a certain year. And that year where we level the rents, that year leveling the rents becomes the starting point for the control of the rent going forward. So, think about it this way visually. First we're gonna pick a year and we're gonna level the rents. And once we flatten them all to this level, let's say 1973 is our year, as it is in Jersey City, once our rents are leveled, then we're gonna control from there. And so from 1973 forward, only certain types of increases are allowed. And both the type and amount of the increase are controlled. Now that we know that these, the rents and the increases are controlled, let's talk about the types of increases. So, a rent control ordinance won't survive a constitutional challenge if it doesn't allow any increase at all. Because prohibiting any increase at all is necessarily going to wipe out a landlord's just and reasonable return. We can see this because inflation is real, and price changes are real. And so one of the most common, one of the most common and arguably constitutionally required increase is a rent increase to keep pace with inflation. And this is called a consumer price index increase or a CPI increase. And this increase is measured by the consumer price increases published by the Department of Labor. Jersey City allows a landlord to increase the base rent of an apartment by a consumer price index base percentage once a year. But the ordinance has a 4% cap on consumer price index increases. And so even in times of raging inflation, a landlord can only increase on the basis of a consumer price index increase up to 4% in a given year. Now, in describing this, I mentioned that a CPI is an increase in the base rent of an apartment. Why would we use that term base rent? Well, base rent is important, because base rent is the rent that all other increases are measured off of. So, remember we leveled the rent in 1973. So from 1973 we have to increase, the ordinance is going to allow us to increase our base rent from there. So, 1974 rent increased from '73, '74 is our new base, and '75 will increase from '74. So CPIs become, a CPI increase changes the base rent of an apartment. This is different than a capital improvement increase for reasons we'll discuss later. But the takeaway here is base rent tied to a consumer price index increase is an increase in the base rent of an apartment. A capital improvement increase is slightly different. A capital improvement increase is an increase in the base rent based on the proportional cost of a capital improvement to the rental property, measured over the life of an improvement. Now, this gets a little tricky, a little tricky. So let's take it piece by piece. Imagine we have a rent control building with rents leveled from 1973. Well, even though our rents may be low compared to market forces, the Jersey City municipal code and other state law is going to require that this property be maintained to certain habitable conditions. So, if we have an apartment building that's full of boilers, it may be time to retire boiler heat. It may be that these radiators are nonfunctioning, or that they don't function properly, and so we have to move to some other kind of heating system. Or a building may have a dire need for other repair, let's say the roof or some other central system. And a landlord is gonna be required to spend money to make these repairs or make these improvements to ensure that the building is aligned with the property maintenance code and the general standards of habitability. But in this context, we have low rents. So, we're being asked to replace roofs, to replace heating systems and these kinds of things, but we have low rents. So how would an ordinance reconcile this reality? An ordinance would reconcile this reality by allowing a landlord to capture the cost of their capital improvements over the life of that improvement. Importantly though, it's not dollar for dollar. It's not dollar for dollar. This is another thing that's going to drive landlords crazy. Because you'll have people who will say, "I put $50,000 into this apartment or into this building. I wanna spread this money around across each tenant or across one specific tenant where I made all these repairs. My $50,000 I should be able to capture back fairly quickly. Unfortunately, the answer to that is no. In Jersey City, for example, a landlord is only entitled to capture $1.35 for every $100 of improvements where the total improvement is less than 5,000. Where improvements are greater than $5,000, the ordinance allows the landlord to capture a $1.55 increase per every $100 of improvement. Now we know that even though we're making improvements, a landlord is going to make improvements to a property, we can't capture those improvements dollar for dollar. We're gonna get a $1.35 on a $100 improvement for improvements less than 5,000, and a $1.55 cents for every improvement greater than 5,000. There's an interesting variation though about vacant space. If a property is improved via capital improvement increase and that a property, or excuse me, more precisely, that apartment is vacant, well, then the resultant increased rent for that apartment after the capital improvement increase is changed. The base rent is changed. The capital improvement increase becomes part of the base rent. And this is a big deal, because prior to this, in our discussion, we've only been able to increase base rents via consumer price index increases. But now with a capital improvement increase in a vacant apartment, in a vacant apartment, that's a major variation. In a vacant apartment we can spend 10, 20, $30,000, capture $1.55 per every 100 invested and then increase the base rent. Future CPI increases will be measured against our capital improvement increased or enhanced base rent. And that is probably a landlord's best method for capturing rent increases via capital improvement, at least in Jersey City. Vacancy capital improvements tend to provide the most opportunity to capture an investment. Now, let's talk about takings again, because constitutional principles are gonna hang over all of this. And every time we encounter an irate client, they're gonna say, "How can this be? This is unconstitutional, I can't handle this." So, it's good to have these kind of talking points ready. Interestingly, there is no constitutional requirement that an ordinance have a capital improvement mechanism. The Supreme Court and the Appellate Division aren't going to get into the business of forcing every municipality to have some sort of robust capital improvement mechanism, but they are going to enforce the just and reasonable return method. In 1997 the Appellate Division addressed this issue in a case called Main Union Associates v. Township of Little Falls Rent Leveling Board. The court held that because Little Falls Rent Control Ordinance allowed for hardship increases, and more on that in a bit, that the cost of building maintenance and improvement could be captured via hardship increased application, thus ensuring a just and reasonable return. So the Appellate Division concluded that even though the ordinance didn't have a specific thing called a capital improvement increase mechanism, it didn't matter, because you can accomplish functionally the same thing with a hardship application. What's interesting about Main Union Associates is that in that case the property owners didn't bother applying for a hardship increase. Instead, what they did was, they said the ordinance was unconstitutional because it did not specifically allow for capital improvement increases. And that's largely why they lost. The property owners took the position that the ordinance needed to have this mechanism for capital improvements to survive a constitutional challenge. And the court held, "No, it doesn't, because your capital improvement increase is just, could be just styled as a hardship increase and you'll ultimately end up in the same place." And so even if an ordinance doesn't have a capital improvement mechanism, as long as it has some way of capturing a landlord's investment in the property and sticking to that just and reasonable return, based on the landlord's investment, it'll survive a constitutional challenge, whether or not we call the improvement, the application of hardship increase or a capital improvement increase. We mentioned hardship increases. So let's take a couple of minutes to go through them, or go through it. A hardship increase is an increase in base rent that allows the landlord to reach a just and reasonable return. And a hardship increase is an ordinance's best way to avoid a constitutional challenge. Why? Because it acts as a safety valve. If I level the rents, if I'm Mr. Municipality and I level the rents and I control the rents and you say, "Oh my God, I replaced the roof. I replaced the boiler. I had to replace the siding. And then I had a tenant who lit the apartment on fire. And then I had to repair that one and all the other ones. And I'm only making 4%, and your ordinance doesn't have a capital improvement increased method. I can't figure out if I'm gonna get a $1.55 or $1.35, I'm up S Creek without a paddle. What do I do?" Well, if Mr. Ordinance has a hardship increase, the answer's simple. "I understand, this is terrible. You have increased expenses, you've suffered losses, no problem. Why don't you bring a hardship increase application before the rent control administrator or the lowest level of the administration, and then ultimately before the board." Why, why would this work as a safety valve? Because no matter what, if an ordinance allows for a hardship increase, there is always an opportunity for a landlord to seek a just and reasonable return based on their unique circumstances. So, the case law shows that as long as a reasonable mechanism exists for a landlord to get to that just and reasonable return, a rent control ordinance is constitutional. Jersey City's Rent Control Ordinance allows a landlord to seek a hardship increase in the base rent, remember base rent again, when the landlord, one, cannot meet mortgage payments, two, cannot meet operating expenses, and or does not make a fair return on his or her investment. This is very interesting. This is very interesting because, you know, earlier we discussed the return on equity method. And the return on equity does not measure your, does not measure a landlord's return inclusive of the mortgaged equity. Remember my $900,000 loan, which I'm increasingly nervous about as this presentation goes on. Under my $900,000 loan I'm not making a return on 900,000, I'm making it only on my a $100,000 investment. But Jersey City will allow me to increase my base rent when I can't meet my mortgage payments. And so this is how the return on equity method isn't exactly, ends up ultimately producing similar outcomes, despite the first layer, obviously different circumstances between the two landlords. If I can't meet my high mortgage payments because the base rent is too low, I can seek a hardship increase to get to that level. I can also do that if I can't meet my operating expenses. And I can do it if I don't make a fair and reasonable return on my investment. And these are safety valves for an ordinance. If operating expenses increase and my operating income, my gross rent won't get me there and my net operating income won't get me there, I can seek an increase. The process for securing, oh, excuse me, one more point. That hardship increase changes the base rent, changes the base rent. A capital improvement increase like we discussed earlier is going to fall off after the useful life of the improvement, but a hardship increase increases the base rent. This is most likely to avoid boards and administrators having to constantly hear applications based on changes in economic circumstances, you know, on a year in year out basis. Now, the process for securing a hardship increase is fairly uniform. A landlord itemizes its expenses, inclusive of debt service in the Jersey City example, because cannot, the inability to meet a mortgage payment is a criteria that entitles a hardship increase. So we're gonna itemize our expenses if we're representing landlords, inclusive of debt service, and we're gonna contrast these expenses with the income generated by our rent controlled rents. The first way point in the analysis is the extent to which the rent role meets the expenses at all. And keep in mind, there is a limit on what expenditures qualify as expenses. In a Hoboken case from 1981, one court noted, "As with all expenses claimed in an application for a rent increase, the rent control board has an obligation to consider not only whether the expense exists in truth, but whether it is reasonable." Now, a lot of what I've said so far in this presentation, and what we've been discussing is from a landlord perspective. So let's take a little detour to talk about how a tenant may evaluate the relative strength or weakness of a landlord's hardship claim. Well, the number one way to do this is with receipts. We need to see if a landlord is going to say, "I've made improvements that are affecting my return, or I have operating expenses. I have utility service that's too expensive, or I have water and sewer bills that are expensive." If you're a tenant, you need to verify this, or representing a tenant. This should be verified with actual receipts. And we want to see if these increases are in line with prior years. For example, anomalous water and sewer bills. An anomalous water and sewer bill, either because of a wasteful tenant, or a break, or a facility in need of repair, that anomaly may not be by itself a justification for a hardship increase, even though it affects the landlord's operating expenses. And that's why we need to make sure that the expense is reasonable and that it exists in truth. The truth aligns with our need for receipts, and whether it's reasonable or not is going to be a factor of whether the increase sought or the stated reason is something that is actually affecting the bottom line of the building and not some idiosyncrasy or, you know, one off event. Oftentimes what you'll see is one thing to consider also on the tenant side is closely held construction companies. It is a not so dirty secret in this business that landlords often have affiliated construction companies. And so a property that's improved or work that is done, presumably is at arms length, and invoices are generated as if it's arms length. But to the extent that landlord is in control of that construction company, or the construction company is wholly captured, the expenses may not be on their face what they seem. And so that is an important distinction to chase down if you're representing tenants. We want to make sure that to the extent our expenses in truth exist and are reasonable, that they are not captured. One note real quick on the reason, the whether an expense is reasonable. It's useful to think about these expenses to align with market conditions. So, it would not be reasonable for a landlord who got a great deal on Viking kitchen appliances to install those in a rent control department in Jersey City somewhere, and then seek an increase based on the value of the Viking kitchen equipment installed in the property. It's just not a reasonable expense. So in the context of a hardship increase, a court is going to keep in mind, a court is gonna look at the truth of the matter, that is whether the expense actually exists, and whether it's reasonable, Let's take a detour back to just and reasonable returns just for a minute, because this is one of our, one of the most important aspects of the presentation. In Jersey City fair return means the percentage of return on equity of a real property investment. The amount of the return shall be measured by the net income before depreciation. A fair return on equity investment in real properties shall be considered to be 2.5% above the maximum pass book demand deposit savings account interest rate available in the municipality. Whoa, there's a lot there. Let's break it up into little pieces so we can digest it more easily. So Jersey City says, "A fair return is the percentage of return on equity of a real property investment." Aha. Okay, we've heard this before. This is the return on equity method. So now my $900,000 mortgage that's been making me nervous for the last 40 minutes we've been talking about this, I'm sweating even more. "And the amount of the return shall be measured by net income before depreciation." Yikes. We can ask our accountant friends what we, how depreciation plays in real estate investment, but it plays, and in a big way. Take that together now, a fair return is, shall be considered 2.5% above savings account interest rates. So, we have our return on equity. So now we're gonna use a $100,000. We're gonna measure the return on income before depreciation, and as long as we're at 2.5%, plus whatever the savings account rate is, today is, we're in June of 2022. And I think the highest savings account rate I've seen on a online savings account is one. If we add that to 2.5%, we're at a 3.5% return. And in Jersey City that 3.5% return is going to be a just and reasonable return. Note that the ordinance calculates return on equity and that it defines equity as equity in a real property investment. The ordinance goes on to say, "Equity is the actual cash contribution of the purchaser at the time of closing of title. And any principle payments to outstanding mortgages, subsequent to the acquisition of title by the purchaser." This is very interesting to me because, and I don't know that this has been challenged, but it's something to keep in mind if you encounter it in your practice. In the Jersey City Ordinance equity is considered the cash contribution plus principle payments. But equity does not include changes in capital appreciation. That is very interesting, because to the extent a capital appreciation exists across time, now, I don't mean to suggest, you know, during boom real estate cycle properties double in value or something like that, and then crash. But to the extent the property appreciates across time, I wonder how a court might handle the definition of equity when it is excluding from a landlord's investment capital appreciation that's essentially locked in. Obviously the court isn't going to look kindly on an application that says, "My equity is 2 million, 'cause my property doubled in the last year." There's a serious question to which that's sustainable across time. But certainly for a long held investment, one would think that an increase, a capital appreciation increase in the equity of the, in the price of the property is equity that should be able to be banked. I don't know specifically if it can be, but I know that when you encounter in your practice definitions of equity, this is something to consider. But to wrap up our discussion in just and reasonable return in Jersey City, we're gonna walk away with two and a half points plus the past book savings rate. So in today's day, let's say 3.5%. I'd like to just spend a couple seconds to consider an example of two different landlords in two different circumstances, just so we can see in real life, in real numbers what we're dealing with here. Landlord A has a purchase price of a million dollars, a mortgage of 800,000 and equity of two. Bayonne Community Bank is I'm sure a lovely institution in Hudson County. I just chose it because it's in Hudson County. When I prepared this part of the presentation, Bayonne Community Bank was offering money market savings rates of a whopping 0.3%. If we take 2.5%, add a whopping 0.3 to it, we get a return on 2.8%. We're gonna measure our fair return against our equity. Our equity's 200,000, 2.8% of 200,000 is $5,600. Yikes. Now what about my friend who wrote the million dollar check? Same analysis, except at 2.8% that person's return is $28,000. And so this is just one down and dirty, real quick back of the napkin calculation of how a, one example of how a rent control ordinance may treat landlords differently. Well, now that we know that this is how an ordinance functions, and we've been through the constitutional elements and we're familiar with our increases and we're ready to go. Let's say a client walks in the door and says, "I just bought a rent controlled property. You need to help me with the compliance." Well, what next? Rent control compliance is pretty robust, especially in Jersey City. Rent control ordinances necessarily create a lot of data, because they're accumulating data on an annual basis in most circumstances. And this data, this annual data applies to each apartment or each tenancy in a building. One of the most common elements of rent control compliance is something called a rent registration form or rent registration generally. A typical rent registration form asks a landlord to identify apartments. The number of rooms, who the tenant is, their move in date, their move out date, and their base rent. Why is this important? Well, rent registrations are important because they're the only way a municipality can track the way in which rents are increased from the day in which they're leveled. So, in a perfect world, and we're far from a perfect world in rent control compliance and administration, but in a perfect world a municipality, specifically Jersey City would have rent registrations for each year since 1973. These must be filed by the landlord. And these rent registrations would show us across time what rents were when they were leveled and how they were increased. And this control applies to each individual unit. And so across time we may have some capital improvements for unit one, but not unit two, unit three, but not unit four. CPIs that change based on move in date or move out date, CPI increases I mean, and potentially hardship increases that apply across every unit. And so in this rent registration statement, there's a lot of data, and these rent registration statements are gonna be our way points along the way in evaluating whether a landlord is complying with an ordinance. And if we're counseling landlords, this is gonna be our guideline in instructing landlords how to comply. Some other information that's contained on these rent registration forms includes the mortgage, the bank that holds the mortgage or the mortgagee, the date of the certificate of occupancy. The extent to which the building is oil heated, so the fuel dealer or the utility company, and then rent increases. And these sections ask a landlord to specifically identify the manner in which rent increases were passed along and the reason why, specifically for tracking purposes. This is how the municipality is going to determine whether a landlord's in compliance. Now, I note that it's the landlord's obligation to complete these rent registration statements. And these registration statements are accessible to the public via an Open Public Records Act request. The names of the tenants and their contact information isn't. But the existence of the registration and the content of the registration is subject to an Open Public Records Act request. Landlord should comply with this, even though a municipality may not come knocking on your door every year to say, "Where is your rent registration?" The reason why a landlord should comply is because a rent registration form is the best way to establish what the rent is. The annually filed rent registration, which tracks all of the prior increases will prove the legality of increases and establish the legality of the base rent charge to tenants. And a landlord's compliance with the rent control ordinance is critical. And this is a part that's really crazy. It's critical because overcharging tenants is a violation of the New Jersey Consumer Fraud Act, dun, dun, dun. And when we hear the Consumer Fraud Act, what do we think? Treble damages, mandatory attorney's fees and a one-way ticket to bankruptcy court. And then we have to pay a very expensive bankruptcy lawyer to tell us, is this debt dischargeable? Why must we do this? Well, because the Consumer Fraud Act is one of the strongest consumer protection laws in the U.S. It applies to a range of consumer directed activities, and applies specifically in among other places, landlord tenant relationships. For our purposes we're concerned about one section of the Consumer Fraud Act that makes unlawful affirmative misrepresentations, affirmative misrepresentations. Let's talk about how the CFA, that's how we'll abbreviate the Consumer Fraud Act, the CFA. Let's talk about how it applies to rent control. A landlord who charges, I'm gonna quote here from a case called Hayer v. Tedeschi And this is an Appellate Division case from 2013. And this case held a landlord who charged rent in excess of a local rent control ordinance violates the Consumer Fraud Act, regardless of the fact that the landlord claimed that he did not know that the ordinance was applicable to my property. Because the landlord committed an affirmative act by raising the tenant's rent, the tenants did not need to prove that the landlord intended to commit an unconscionable commercial practice. Uh-oh, well, this means we don't need a mental state to be subject to liability, that's a problem. We've all heard you can't tell the policeman who pulls you over, you can't tell them, "Well, I didn't know the speed limit was 35 when I was going 70." Because that's not an excuse, it's strict liability. And that is analogous to a violation of the Consumer Fraud Act. It's essentially strict liability for affirmative misrepresentations. Mental state, intent, knowledge, intent to rely, any of this, any of these. Mental state is not an element of an affirmative misrepresentation under the New Jersey Consumer Fraud Act case law. Many people are often shocked by this, especially when you consider that the Consumer Fraud Act provides for triple damages, treble damages, and mandatory attorney's fees. But until the law has changed, that's the way it is. There is no mental state required for affirmative misrepresentations under the act. And so, once we establish that a landlord violates the Consumer Fraud Act by overcharging a tenant, how do we calculate our damages? And this is where heads explode. Damages recoverable by tenants under the Consumer Fraud Act for rent charges are the excess of the rent charge over the rent allowed trebled, plus interest, attorney's fees, and costs. Yikes, yikes, yikes, yikes. So we're talking about the difference between the rent that was charged, versus what was allowed. Then we're gonna triple that amount. We're gonna add interest. We're gonna add mandatory attorney's fees, and then court costs. So, a $100 a month overcharge, $1,200 a year, ends up being $3,600. Do that for five years, you're over $15,000. Add attorney's fees, you're easily over 20. Do that for 10 tenants, $200,000. This is how a building goes from a wonderful investment where we pop the champagne bottles on our date of acquisition, to something that ends up ruining lives for landlords. It's great for tenants, bad for landlords. Rent control overcharges end up being tripled, measured against the overcharge against the base rent, add your interest, add your fees, add your attorneys, add your costs. And this is a big deal. The best way to avoid this is rent control compliance. Compliance, compliance, compliance. But to comply, we need to know the rent control regulatory structure. Generally speaking, keep in mind though, rent control is a municipal concern. So to understand the regulatory structure, we have to accept that each municipality is going to have, or may have a varying structure. Most of the time though, in a municipality you'll have something like a rent control administrator or rent control officer, or rent control office. This is the lowest level of rent control administration. This office maintains routine rent control compliance, maintains rent control records, and often acts as the initial decision maker for rent control disputes. Think about it like your first level, your first level decision maker. Then sitting above the rent control office, the administrator officer, is the rent control board. And the board is comprised of either elected or appointed members of the public who serve for a specified term. And the board preserve performs a quasi-judicial function. This is important for appellate considerations later. But rent control boards when they hear applications or hear appeals are performing a quasi-judicial function. Considering that they're performing a quasi-judicial function, we should understand the legal standards that apply. When resolving a dispute, a rent control board must articulate the basis for arriving at the ultimate conclusions it makes, and make findings of fact upon which the conclusion relies. Decisions of rent control boards are presumptively valid, but to be overturned the litigant must show the decision was arbitrary, capricious and unreasonable. Keep in mind this though, in reviewing the action of a rent control board, the court is limited to an examination of the record below. Limited to an examination of the record below. This is a major, major, major point, because although we're dealing with our friends and neighbors and people we may know at rent control boards, this quasi-judicial function that the board is performing is going to stick us with the record that's developed at the board level. And so if we don't like the outcome and we go to superior court to try to overturn the outcome, the board's factual findings are going to be binding in almost every circumstance, unless there's something seriously crazy going on on the reviewing court, which is that the first level, the law division, we'll discuss that in a second. And so, because the record on appeal is comprised entirely of the record before the rent control board, you must be prepared. Practitioners, landlords and tenants must be prepared. What do I mean by be prepared? Well, obviously you have to be prepared to do a great job, and I'm sure you will because you're listening to this. But you should also consider printing and delivering multiple copies of documentary evidence. My preferred method is one set of exhibits per each member on the board, and mark the exhibits in advance. So this way, when you go to do your presentation, whether it's an appeal or something else, you're essentially handing everyone a booklet that they can draw from. And it's best, although not necessary, that you make your case in order of the exhibits. Just so it flows logically. Another big thing, and people are hesitant to do this because sometimes it feels unnecessary, is to take testimony. What tends to happen at these board meetings is that they can take on a colloquial, you know, neighborhood feel, because most people are nice people and the setting doesn't feel imposing like it does in a courtroom. But on paper because the record is only gonna be the transcript, no judge or reviewing court is gonna be able to see how chill everyone was talking about these issues. And that's a problem, because we need a record we can rely on. And so we need to take testimony. We can't rely on the board to arrive at the best decision on the papers. We should use live witness testimony to make our point. So if a landlord is going to say, "I have these expenses," the landlord should testify to the expenses. They should testify to how much it costs them, the financial pain from this, the difficulty making expenses meet at the current rents, and the need for an increase. All of this should be documented in live testimony. Why? Because if done properly it's persuasive, and maybe more importantly, or equally as important, this is going to create our record below. Our record on appeal. On the tenant side, it's almost always necessary for tenants to show. If a tenant is seeking some kind of reduction in the rent, let's say based on a reduction in services, live testimony is gonna be irreplaceable. And this is something the court's going to use, a reviewing court is going to use when making a decision. Appeals from rent control board decisions are heard by the law division of the superior court. And the court rule is 4:69-1. These actions are technically called, complaint in lieu of prerogative writ, which is a very fancy way of saying, "We're appealing a decision of a governing body." So, an action filed against a municipality or seeking appeal of a rent control board is called a complaint in lieu of prerogative writ, and it must be filed within 45 days of accrual, 45 days from the board's decision. That's when your cause of action accrues or your right to appeal accrues. And if you miss the deadline, you're gonna be hurting for certain, because the deadline for filing of complaint in lieu of prerogative writ is strictly enforced. Keep in mind that when you file this action, the action is not a plenary review of the board's decision. It is a limited review based on the record below against the standard we discussed earlier. These cases are actively case managed by an assigned judge. And they're almost always resolved on a motion for summary judgment. Why might they be resolved on a motion for summary judgment? Because we're not doing any fact finding. We're limited to exclusively the facts below that were developed that day before the board. I note also that because these cases are actively case managed, once the case is filed, there is a case management conference in which the court sets a schedule for dispositive motions, and then you get your decision. The appeals are not complicated procedures, and they're often resolved in favor of the municipality, given the standard below. I just want to articulate though that while the findings of fact are binding on a reviewing court, conclusions of law are not entitled to the same difference. Although the decision is presumptively valid if you can show on appeal that the reasoning is arbitrary, capricious or unreasonable, or they relied on an incorrect law or something like that, you're more likely to prevail. But disagreeing with the factual conclusions arrived at by a board is just not gonna work. And that is a recipe for an easily dismissed appeal. And now we've reached just about the end. And so we're gonna take some time to put it all together. What's the easiest way to put this all together? Well, let's start with the basics. Rent control is a municipal concern. So now we know we're gonna walk away from this presentation, knowing that there's potentially over 500 variations of rent control ordinances in New Jersey. And so, whether we're representing landlords, tenants, purchasers, sellers, our first frame of reference is the municipality. We wanna know what the municipality says about the rent control ordinance. The ordinance does not have to treat all landlords equally. And differing outcomes among differing landlords is permissible. To survive a challenge an ordinance must have a mechanism, however inartful, for allowing landlords to increase rent and realize a just and reasonable return. Rent control, rents are leveled at a specified time period and then controls or increases in the rent going forward. Some permissible increases are CPI increases. This is consumer price index increases that become part of the base rent. We have capital improvement increases, we talked about these in New Jersey. You've got hardship increases and vacancy decontrol.