My building used a rent control loophole. Here’s what happened.

Shortly before Christmas 2018, my neighbors and I came home to notices alerting us that our landlord, who had owned the property since the 1990s, planned to sell our building to the tune of $46,350,000.¹

At the same time, we were notified of our rights under DC’s Tenant Opportunity to Purchase Act (TOPA), which gives current tenants the first right to buy the property or to assign their purchase rights to another entity. Some choose to form limited equity cooperatives, for example, or to work with a non-profit developer, all options as long as tenants match the offer set by the third-party purchaser.

At Harvard Hall, with few options available due to the high purchase price, we agreed to assign our rights to a for-profit developer, and ultimately signed away the rents of our rent-controlled apartments in exchange for protections, buy-outs, and new amenities. Our voluntary agreement with the new landlord increased the allowable rents for new tenants in our building by up to 467%, and put in place a powerful incentive to displace current residents.

The events at Harvard Hall—a 1928 building with 156 units just east of Rock Creek Park and the National Zoo—illustrate the gaps in DC’s rent control protections. As we learned the hard way, the combination of hardship petitions and voluntary agreements puts tenants in the uncomfortable position of negotiating away future affordability in an attempt to protect themselves from substantial rent increases.

Harvard Hall, TOPA, and rent control:

I moved into Harvard Hall in 2017, drawn by the proximity to Rock Creek Park and the 16th Street buses, and looking to live by myself for the first time. With studios renting at $1,500, the cost was on par with what I was finding in other buildings in the area, but promised stable rents year to year—a major plus for me.

Harvard Hall falls under DC’s rent control law, which limits rent increases to 2% plus inflation in older, larger apartment buildings. Some newer residents at Harvard Hall pay close to market-rate, because a unit’s rent can be increased by up to 30% after a tenant moves out. Still, many of my neighbors have lived in the building for decades, thanks to consistently affordable rents. This stability also contributed to the diversity of the community in the building; Harvard Hall is home to young and old; long-term residents and newcomers; black, white, and latinx.

When we received our notices at the end of 2018, our options were limited due to our building’s size and inflated purchase price ($46.3 million). At Harvard Hall and other rent-controlled buildings around the city, developers bid well above the appraised value of buildings. They pay higher amounts because they assume they can find ways out of rent-control, increasing their profits by charging higher rents than currently allowable. This makes it harder for tenants, non-profits, or any buyers whose intention is to keep rents stable, to compete in the market.

At Harvard Hall, our only viable option was to use the bargaining power granted by TOPA to negotiate with potential market-rate buyers. Akelius, the firm that wanted to purchase our contracts, attempted to woo tenants by hosting events with free Chick-fil-A and wine, handing out glossy pamphlets with promises of upgrades in exchange for our purchase rights. Urban Investment Partners later joined the competition. With multiple potential buyers, we were able to successfully negotiate for concessions: improvements to common areas, buy-outs for tenants who couldn’t or didn’t want to stay, and no rent increases for current tenants beyond the typical rent control increases. After several rounds of negotiations, we ultimately voted to assign our rights to Akelius.

Yet one aspect was clearly not negotiable. Both potential buyers made it clear that we would be required to sign a “70% Voluntary Agreement.” This loophole in the rent control law allows landlords to increase future rents beyond the rent-controlled level, if they have the approval from 70% of tenants. These agreements often entail a promise to current residents that the new rent levels will only apply to future tenants. So, when a new tenant moves in, the unit is rent controlled in name only, and the rent vastly increases. At Harvard Hall, the current rent-controlled rents generated about $3.31 million in rental income each year. As detailed in our Voluntary Agreement, Akelius could eventually generate up to $6.97 million.

For many Harvard Hall tenants, Akelius’ proposed voluntary agreement provoked uneasiness and valid concerns. The new rent levels were more than three times what some residents had been paying. The average increase was $1,884 per month per unit, on par with the typical increase for a voluntary agreement (the average is $1,500/month, WAMU reports). And while our rents would stay the same, new tenants would be subject to exorbitantly higher rents:

We feared this would create a powerful incentive to displace current residents, especially longer-term tenants whose rents are much lower than market rate (a phenomenon previously documented). For example, one of my neighbors has lived in the building since the 1970s, paying around $1,000 a month for his two-bedroom apartment. If he moves out, Akelius could charge up to $4,700 for the unit.

So why did we sign the voluntary agreement? Akelius made us an offer we quite literally could not refuse.

If we chose not to sign, Akelius could submit a hardship petition, another loophole in the Rent Control Law. This loophole allows landlords to permanently increase rents to reach a 12% return on their investment. Unlike a voluntary agreement, a hardship petition offers no protections for current residents.

Twelve percent may seem like an egregiously high return, and it is: The typical yearly return on a multi-family real estate investment in DC is 5.38% The 12% level was set in the 1970s when inflation was very high. It has not been adjusted since, with lingering consequences.

At Harvard Hall, Akelius could have filed a hardship petition to raise rents to reach the 12% return on a $46,350,000 investment, equal to $5,562,000 per year. It’s important to note that Akelius was an all-cash purchaser, buying the building without debt. This was originally seen as positive, increasing the likelihood that the sale (and thus our agreed-upon protections) would go through.

But it also left us at risk of higher rent increases. To give you a sense of the magnitude, if rents are kept constant at Harvard Hall, Akelius’ annual return would likely be around 3.8%—about $3.9 million less than the 12% return sanctioned by the Hardship Petition.² The potential increase was enough of a threat to encourage even the most reluctant tenants at Harvard Hall to sign the voluntary agreement. And so we did.

When wielded together, the hardship petition and voluntary agreements are a powerful force. The threat of a hardship petition essentially forced us into signing a voluntary agreement, limiting our ability to bargain for changes that could keep rents stable for the long-term. Units that have been affordable to people making $60,000 a year may now only be affordable to those making at least $116,000.³ And those moving out of Harvard Hall (or that could have moved into Harvard Hall) will likely need to seek apartments in more affordable buildings, creating additional pressure in the market.

The Reclaim Rent Control coalition’s platform would, in part, address the failures of the voluntary agreement process. You can read the full platform here, and sign a petition to support for more a more expansive Rent Stabilization Act here. (GGWash joined the coalition last month.)

The loopholes in voluntary agreements have cascading consequences. Our experience at Harvard Hall isn’t limited to Harvard Hall; it can happen in any rent-controlled building where tenants decide to pursue a TOPA deal, chipping away at DC’s affordable-housing stock. To protect current and future tenants, we need to reform and strengthen our rent stabilization laws.

Footnotes:

¹According to the last deed transfer on the Office of Tax and Revenue’s Recorder of Deeds.

²Estimated using rent roll provided in Voluntary Agreement minus average expenses as reported in DC’s FY2019 study

³Calculated for studios at Harvard Hall, using average rent before voluntary agreement ($1,551), and average new rent proposed ($2,900). This is limited by what the landlord could charge in the market, but the upper limit of the allowable rent is $2,900.