Jersey City Rent Control in 2019: The “Investment-Based Standard”

In May 2019, the City of Jersey City made a subtle but substantial change to its rent control ordinance. This change directly impacts the profitability of affected property owners. With the passage of Ord. 19-044, Jersey City revised the definition of “Fair Return” under its rent control ordinance from “6% above the maximum…demand deposit savings account interest rate” to “2.5% above…” The new 2.5%+ “Fair Return” applies to the “equity investment in real property.” The “equity investment” is considered only the “actual cash contribution of the purchaser” at closing, plus any additional principal payments.  The Jersey City ordinance follows the “Investment-Based Standard” and is the most restrictive constitutional rent control formula.

To understand the effect of Ord. 19-044,  it is helpful to restate the amended ordinance in plain language. Stated simply, the revised rent control ordinance “guarantees” a landlord a minimum net income of 2.5%+ measured against the landlord’s cash contribution to the purchase.  In its most basic application, the formula works as follows:

Purchase Price: $800,000

Cash Contribution: $100,000

Minimum Guaranteed Return After Expenses: $2,500

Other rent control standards produce arguably more “fair” results. For example. The Return on Value standard measures a landlord’s minimum return against the value of the property. This approach makes intuitive sense and is congruent with real estate taxation. Between the Return on Value and Investment Based Standard is the Return on Equity standard. This method allows a landlord to capture market appreciation without additional cash investment. Massachusetts follows a “maintenance-of-net-operating income” standard (which requires explanation in a different post).

After recognizing that Jersey City’s rent control offers Landlord the narrowest avenue for return, the question becomes: “What expenses can be included in the formula used to create the 2.5%+ fair return?” After all, the more expenses included in the formula, the closer the result is to representing true profit. Jersey City’s ordinance does not define expenses. The Hardship Increase provision of the Ordinance (Section 260-10), contextualizes expenses as “reasonable, necessary and usual operating expenses.” Subsection J of Section 260-10, allows the Rent Control Board to “reasonably adjust the finance expense” if the Landlord has “unreasonably or excessively financed” the property. From this, we can conclude that the ordinance permits the cost of financing to be included in the fair return calculation.

Of course, the Investment Based Standard treats different owns of similarly valued properties differently. It also treats mortgagors of similarly valued properties differently. A future post will address whether with differing treatment is lawful. For now, Jersey City Landlords should be aware that the City’s rent control ordinance is highly restrictive. Diligent record keeping, continually maintenance and near-perfect rent control compliance are required to reach the minimum “fair return.”

Offit Kurman, P.A., maintains a broad-based landlord and property owner representation practice. In New Jersey, Offit Kurman represents landlords and property managers in maximizing return, resolving disputes and avoiding unnecessary and costly delays.  The Firm’s New Jersey geographic practice area includes: Jersey City, Hoboken, Bayonne, Hudson County, Newark, Essex County, Woodbridge, Middlesex County, Paterson, Passaic County, Hackensack, Bergen County and other points across New Jersey.

 

 

 

 

 

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