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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 See N.J.S.A. 55:14J-34(f) (repealed 1973); see also Overlook Terrace Mgmt.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 requested increase is intended to pay return on equity. [N.J.A.C. 5:80-9.9(a)(2)]

Conversely, if the Executive Director of the HMFA determines that a rent increase exceeding this threshold percentage is warranted, the agency must first give written notice to the owner and the affected tenants. N.J.A.C. 5:80-9.10(1). If any of those parties requests a hearing on the rent increase, the matter must be referred to the Office of Administrative Law for such proceedings. N.J.A.C. 5:80-9.10(b).

The present appeal concerns the partially-approved rent increase, and the corresponding annual budget, that the HMFA authorized for Overlook Terrace for 2006. In the preceding year's budget, effective February 1, 2005, the agency had granted Overlook Terrace the so-called "automatic" three percent increase, allowable under N.J.A.C. 5:80-9.4. For 2006, Overlook Terrace sought a much higher rent increase, specifically 10.8%. That request was predicated on a belief by Overlook Terrace's management that significant repairs and capital improvements needed to be performed in both of the two buildings, particularly concerning plumbing, electrical systems, plastering, and other major systems. Among other things, Overlook Terrace planned to replace piping throughout the buildings, install modern sheet rock to replace old plaster walls, install new kitchen and bathroom fixtures, replace floors with ceramic tiles, and perform other significant renovations.

As proposed to the agency and the tenants, Overlook Terrace intended to complete these extensive repairs over a three-year period. It anticipated spending over $2.5 million in capital expenditures during the 2006 budget cycle. Because the balance on hand in Overlook Terrace's repair and replacement fund was $2.67 million as of October 2005, the owner requested a substantial rent increase to replenish that account and also to meet other operating expenses and debt service.

The reported 10.8% rent increase exceeded what the HFMA calculated to be the maximum allowable increase of 8.3%,*fn2 based upon the agency's application of the pertinent Consumer Price Index. The agency specifically determined that Overlook Terrace could not receive, absent an OAL hearing, more than a 5.3% rent increase under the CPI in addition to the three percent "automatic" annual increase.

After reviewing Overlook Terrace's submission, which was amplified with further documents from the owner at the agency's request, the HMFA's Executive Director rendered a final decision on January 30, 2006. In her decision, which was embodied in a one-page letter attaching several documents containing various expense figures and calculations, the Executive Director approved a total 2006 rent increase of six percent. The six percent increase consisted of the automatic three percent increase, plus an additional discretionary increase of three percent. Although her letter communicating the agency's final decision is rather brief, the Executive Director did state that:

This [six percent] increase is being approved based on funding necessary to continue with kitchen and bathroom renovations. Additionally[,] this increase is being approved to offset the significant increase in the rise of utility rates that [has] taken place over the past twelve (12) months as evidenced by the rise in the Consumer Price Index for utilities.

In a corresponding adjusted budget for the year ending October 31, 2006, the HMFA determined that Overlook Terrace was authorized to expend $1,346,000 in capital improvements for that year, or approximately one-half of the amount which had been sought by the owner.

Overlook Terrace appeals the agency's determination, contending that the agency acted arbitrarily and capriciously in denying it a rent increase beyond six percent, and in slashing its planned capital expenditures for 2006 by fifty percent.

Among other things, appellant claims that the agency lacked reasonable grounds to double the proposed three-year period for capital improvements to six years. Appellant contends that such a "leisurely approach" to the needed repairs will harm the tenants, who have been forced to endure leaking water pipes, crumbling plaster, mold growth and other problems with the aging buildings. Appellant also contends that the agency made certain mathematical errors in its budget assumptions.*fn3

Our standard of review of the agency's determinations is necessarily limited. A "strong presumption of reasonableness" is accorded to an administrative agency's "exercise of its statutorily delegated duties." In re Certificate of Need Granted to The Harborage, 300 N.J. Super. 363, 380 (App. Div. 1997). On the whole, "[o]ur function is to determine whether the administrative action was arbitrary, capricious or unreasonable." Burris v. Police Dep't, 338 N.J. Super. 493, 496 (App. Div. 2001) (citing Henry v. Rahway State Prison, 81 N.J. 571, 580 (1980)). See also Aqua Beach Condominium Ass'n. v. Dep't of Cmty. Affairs, 186 N.J. 5, 15-16 (2006). The burden of demonstrating that the agency's action was arbitrary, capricious or unreasonable rests upon the party challenging the administrative action. In Re Arenas, 385 N.J. Super. 440, 443-44 (App. Div.) certif. denied, 188 N.J. 219 (2006); McGowan v. New Jersey State Parole Bd., 347 N.J. Super. 544, 563 (App. Div. 2002); Barone v. Dep't of Human Servs., Div. of Med. Asst., 210 N.J. Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987).

Bearing in mind that deferential review standard, we are satisfied that the Executive Director's decision awarding Overlook Terrace a six percent rent increase in lieu of the 8.8% increase now advocated on appeal*fn4 by the owner, was reasonable and supported by the record. We are also persuaded that the agency's budgetary assessment, lengthening the expected time for Overlook Terrace to complete major capital improvements, was not arbitrary or capricious.

We appreciate what appears to be an earnest desire on the part of appellant to rehabilitate these buildings quickly, irrespective of the fixed return on equity that the owner can derive from the property. However, the record before us does not substantiate a compelling need to complete those massive alterations and upgrades within the requested three-year time frame. Indeed, the agency's own 2005 physical inspection of the property recommended several repairs, to be completed "within a reasonable time," but identified none that it regarded as urgent. Although there clearly have been problems with the pipes and plaster within the buildings, our record does not document any significant or long-standing building code violations cited by the municipality.*fn5 We do not second-guess the agency's assessment that the owner's rehabilitation plans could reasonably be stretched out over a longer period of time, in a manner that would abate the short-term need to raise the rents to a much higher level.

The agency's determination is also supported by its rightful consideration of the financial burdens that the requested rental increase would have imposed on the moderate-income tenants who reside at Overlook Terrace. The record contains several letters from tenants who expressed strong disagreement with the amount of the rent increase sought by management. The tenants' objections were specifically referenced in the Executive Director's January 2006 final decision. We cannot fault the agency for being attentive to the tenants' concerns, particularly given their moderate-income status and the agency's statutory mission. See N.J.S.A. 55:14K-2; N.J.A.C. 5:80-9.1 (noting the agency's obligation to serve low and moderate-income families). Of course, the tenants are also entitled to safe and sanitary housing as well as reasonable rental rates. The agency's attempt to accommodate those competing considerations, here through a partial approval of the owner's financial request, is reasonably supported by the record.

Additionally, we are unpersuaded that the arithmetical errors ascribed by appellant to the agency in its budgetary analyses render invalid its determination of an appropriate rent. For example, even if the alleged $325,366 misattribution of reserve expenditures is taken into account, the project still has adequate funds on hand and in reserve to meet its approved expenditures. We similarly find no error of consequence in the agency's apparent use of eleven, rather than twelve, months in totaling up the deductions from the project's repair and replacement account from the preceding year.

In sum, we are satisfied that the agency's determinations regarding the 2006 rent increases and the 2006 budget have substantial credible support, and are neither arbitrary nor capricious. See George Harms Constr. Co. v. Turnpike Auth., 137 N.J. 8, 27 (1994). We therefore affirm the agency's determination, but do so without prejudice to the appellant renewing its concerns on similar fiscal and capital improvement issues in ensuing budget cycles.*fn6 In that regard, we encourage the agency in the future to enhance the presentation of its determinations on such matters by issuing final decisions that contain more detailed narrative explanations of the agency's reasoning, as we perceive that the issues on the present appeal may have been sharpened, or perhaps even resolved, if the form of the agency's original decision had been more explanatory and informative.


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