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Terrace v. New Jersey Housing and Mortgage Finance Agency

June 21, 2007


On appeal from a Final Decision of the Executive Director of the New Jersey Housing and Mortgage Finance Agency, H.F.M.A. #20.

Per curiam.


Telephonically argued May 8, 2007

Before Judges A. A. Rodríguez and Sabatino.

Appellant, Overlook Terrace Tenancy in Common ("Overlook Terrace")*fn1 , indirectly owns and controls a multifamily apartment complex in West New York. It appeals certain administrative determinations of the New Jersey Housing and Mortgage Finance Agency ("HMFA") regarding the apartment complex's annual budget and rents for 2006. We affirm, without prejudice to Overlook Terrace renewing its concerns before the agency in subsequent budget years.

Overlook Terrace consists of two high rise buildings constructed in 1968. The buildings contain 600 apartment units that are fully or substantially occupied. Their construction was financed with a fifty-year mortgage by the New Jersey Housing Finance Agency ("HFA"), the predecessor to the HMFA, through the issuance of tax-exempt bonds. See N.J.S.A. 55:14J-34(f) (repealed 1973); see also Overlook Terrace Mgmt. v. Rent Control Bd. of West New York, 71 N.J. 451 (1976) (tracing the history of the Overlook Terrace project and the State agency's role in financing and overseeing the project). The HFA was created to support the construction and rehabilitation of moderate-income housing projects within the State through below-market financing.

As successor to the HFA, the HMFA continues to hold a mortgage on Overlook Terrace. See N.J.S.A. 55:14K-2(e). In consideration of the below-market financing that enabled the units to be built, Overlook Terrace is subject to continued regulatory oversight by the HFMA. As part of that oversight role, the HMFA possesses the authority to approve or deny, in full or in part, rent increases sought by Overlook Terrace's management. Concurrently, the HFMA also reviews and passes upon the project's annual budget, including the funds reserved and expended for capital improvements.

Overlook Terrace is a so-called "limited dividend" housing project. Pursuant to that designation and consistent with the terms of the mortgage, the owners of Overlook Terrace can receive no more than an eight percent annual return on their investment in the property, subject to certain exceptions not pertinent to this case. See N.J.A.C. 5:80-3.2 and -3.3. The owners also are obligated to maintain a reserve fund with the HMFA for future repairs and replacements needed for the premises.

Through regulations set forth at N.J.A.C. 5:80-9.1 to -9.14, the HMFA conducts an annual review process to consider increases in rents proposed by project owners. The stated objectives of the agency's rent regulations are to ensure that the rents are "sufficient to pay normal operating, maintenance and utility costs; provide an adequate rate of return" to project sponsors, provide "debt service payments adequate to protect the financial interest of the [HMFA] and its bondholders," provide "reserves for repair and replacement," and "ensure adequate, safe and sanitary housing for the low and moderate income families that the [HMFA] was created to serve." N.J.A.C. 5:80-9.1. See also Overlook Terrace Mgmt., supra, 71 N.J. at 462-68 (outlining the State agency's role in assuring that rents are sufficient to satisfy maintenance costs, operating expenses and debt requirements). The rents that are subject to HMFA approval are construed to include any "carrying charges" imposed by the owners. N.J.A.C. 5:80-9.3(a). The agency's oversight preempts any local rent control regulations. Overlook Terrace Mgmt., supra, 71 N.J. at 467-68.

At least once each year, project owners are to make a determination of the rents that they expect to charge their tenants. N.J.A.C. 5:80-9.3(a). Such an annual rent determination must be made regardless of whether a rent increase is being requested. Id. The proposed rent determination for the coming year is required to be in the form of a resolution or letter from the project owner or sponsor. N.J.A.C. 5:80-9.3(b). The owner or sponsor specifically must provide written notice of the proposed new rent to each tenant individually, as well as conspicuously post the notice on the premises of the housing project. N.J.A.C. 5:80-9.6. The notice must include, among other things, a statement of the reasons for any proposed increase. N.J.A.C. 5:80-9.6(a)(3). Upon receipt of the notice, the tenants have thirty days to inspect the owner's rent increase application and to provide any written comments to the owner and the HMFA concerning the proposed increase. N.J.A.C. 5:80-9.6(a)(5).

Subject to certain categorical exceptions that do not apply here, a project sponsor must obtain HMFA's approval if it wishes to increase rents by more than three percent of the current rent, or by more than the annual percentage increase in the regional Consumer Price Index (CPI) as of September 30 of the preceding calendar year, whichever percentage is less. N.J.A.C. 5:80-9.4. A sponsor's request to the HMFA for such an increase above the allowable percentages must contain various documents. Those documents include, but are not limited to, a "narrative statement of the reasons for the rent increase;" N.J.A.C. 5:80-9.4(a)(4); the project's "[m]ost recent certified audit report;" N.J.A.C. 5:80-9.4(a)(5); a "[s]ummary of income and expenses for the preceding [twelve] month period prepared on an accrual basis for non-federally subsidized housing projects;" N.J.A.C. 5:80-9.4(a)(6); the "[a]nnual budget on which the requested rent increase is based;" N.J.A.C. 5:80-9.4(a)(7); and a copy of the notice of the proposed increase supplied to the tenants. N.J.A.C. 5:80-9.4(a)(8). See also In re Application for a Rental Increase at Zion Towers Apartments HMFA #2), 344 N.J. Super. 530, 532-36 (App. Div. 2001).

After it receives an application for a rent increase, the HMFA reviews it and determines whether the proposed increase is fully justified. See N.J.A.C. 5:80-9.7. In doing so, the agency is to be guided by the previously-noted regulatory objectives set forth at N.J.A.C. 5:80-9.1. The HMFA does not have to conduct a formal hearing on the application, so long as any resulting rent increase is not higher than the percentage annual increase in the CPI, plus either:

i. The percentage, up to a maximum of [twelve] percent annually, needed to fund operating deficits, debt service arrears or reserves for repair and replacement incurred at the housing project during the preceding [twelve] months, provided that no part of the rent increase includes an amount allocated toward providing a return on equity to the sponsor; or

ii. The percentage, up to a maximum of six percent annually, needed to offset an inability to provide a return on equity and to offset operating deficits, debt service arrears or reserves for repair and replacement delinquencies incurred during the preceding [twelve] months, if all or a portion of the ...

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