15 West Kellogg Blvd.

Saint Paul, MN 55102

City of Saint Paul

Minutes - Final

Rent Stabilization Appeal Hearings

Marcia Moermond, Legislative Hearing Officer

Nhia Vang, Legislative Hearing Officer

Mai Vang, Hearing Coordinator

Joanna Zimny, Executive Assistant

legislativehearings@ci.stpaul.mn.us

651-266-8585

Tuesday, July 19, 2022

3:00 PM

Room 330 City Hall & Court House

3:00 p.m. Hearings

Rent Stabilization Appeals

RLH RSA 22-3

Appeal of Jack Cann, Housing Justice Center, representing Hannah

Gray, to a Rent Stabilization Determination at 787 HAMPDEN AVENUE

#213.

Jalali

Sponsors:

Lay over to RSLH Thursday, September 1, 2022 at 9:00 AM. For further discussion.

Hannah Gray, tenant and Jack Cann, tenant representative, appeared

Owen Metz – property owner representative and Tammera Diehm, counsel to property

owner, appeared

Rent Stabilization Staff: Lynn Ferkinhoff and Department of Safety & Inspections

(DSI) Angie Wiese appeared

[Moermond gives background of appeals process]

Moermond: I will turn it over to staff to get us started and will be right back with you.

Ms. Ferkinhoff, Ms. Wiese good afternoon. We will be getting a staff report. Tell us a

little about this application and how it fits into the process. This is the very first tenant

appeal we’ve heard so I don’t think it would hurt to give a little bit of a 101 on the

process.

Ferkinhoff: Tenants are allowed to appeal a decision that’s been made by City staff

through the process. First, they can go online and enter the information that they are

prompted to provide on the form online and that would generate a complaint into our

system. Staff reviews that complaint and determine whether or not additional action

should be taken. In this particular case, on May 27th the department received an

intake form from a request for exception to the 3% increase per Ordinance 193A. The

application is part of the record and Jack Sipes is listed as the applicant representing

Dominium. They were requesting an 8% increase on rent using the self-certification

method. The reasons listed in the application were: an unavoidable increase in

operating expense, a decrease in rental income, and a pattern of recent rent increase.

The intake form asks applicants to enter three pieces of information from the

Maintenance of Net Operating Income (MNOI) worksheet: income adjusted by CPI is

one of those items, allowable rent increase is another of those items, and allowable

increase unit per month is the third item. As part of the self-certification process, the

applicant received a confirmation email including their determination letter and a fillable

flier for tenant notification. Staff also reviewed the recent inspection record. It was

approved by Fire Safety Inspections as an “A” property in October 2017 and it has had

11 complaints since. There are no current inspection issues.

The premise of MNOI is that an owner is entitled to the same rate of return on

investment in the current year as they received in the base year. This premise

assumes there is some profit margin attained that is allowed to remain. So, as part of

this appeal, the interpretation of rental income has 2 questions. In the rules, gross

rental income is gross rents calculated as gross scheduled rental income at 100%

occupancy and all other income or consideration received or receivable in connection

with the use or occupancy of the rental unit. There are further details about how to

cover owner-occupied or vacant units which are not applicable to this appeal. Our

interpretation of this has been the actual income received, not the income potential.

Second, the base year income or operating expenses can be adjusted for exceptional

circumstances. The landlord must present evidence to rebut the presumption that the

base year net operating income provided a reasonable return. For this appeal, since we

have not had a chance to discuss the supplemental appeal documents, staff is

questioning how the proposed base year income is exceptional from 2019 or the

current year. Finally, the department has not received a complaint from any resident at

this address.

Moermond: Ok, to be clear, at this juncture there is no provision in the ordinance

specifically or in the rules that have been finalized by the department for a tenant

appeal. However, it is considered by me and backed up by the City Attorney’s Office

that tenants are interested parties and, therefore, due process would apply to the

tenants and they would have the ability to appeal. This appeal came in directly to the

Legislative Hearing office, it did not come through the Department of Safety and

Inspections by way of a complaint which would be another procedure for that to have

happened.

Wiese: Thank you for making that clarification and we just wanted to make a

distinction or just recognize that we had not received one previous to the appeal

coming in. So not saying that it couldn't come in the way it did just that we did not

receive one and, therefore, did not review any sort of complaint. The web form is a way

that complaints can be made it also can be made via phone call or any other method.

We've received handwritten letters, but we prefer the website intake form.

Moermond: Ok, so keeping that in mind. We have an application that was made for

self-certification for an exception to the 3% rent increase cap. It was self-certified and

therefore granted by way of email. When the appeal came in, I asked building

management to submit the MNOI and other associated materials that were supporting

of the exception to the ordinance to be sent. The DSI rules do state that those forms

should be retained for the records of the owner so they should have been available.

They were submitted upon request and made available to the appellant, as well. You

have had a chance to look them over. You have not had a chance to talk either with

the appellant or the property owner with follow up questions you would have for that. Is

it typical that you would have follow up questions for this? This is a significant

proposal, there's a lot of units involved, so I'm assuming that you would in the normal

course of events.

Wiese: Yes, Hearing Officer Moermond. I don't know that we've approved or denied a

single one of these applications yet without confirming our understanding with what's on

the piece of paper that's in front of us. We always have a conversation with the

applicant to make sure that our understanding of what's on the written document is

what they intended to share with us and then we clarify through the documents any

discrepancies in our understanding so that the record is really clear. So yes, under

normal protocol for a staff determination we would do that back and forth.

Moermond: So if it were a staff determination and the paperwork would need to be

submitted, and that would be 8% or more of an increase in rent, then you would have

that paperwork and do that follow up communication with the applicant.

Wiese: Yes.

Moermond: So you do have follow up questions; you enumerated them and we'll come

back to those. What I'm going to do right now is turn it over to Mr. Cann. You filed an

appeal without the background knowledge of what the supporting information was,

which you didn't need to have with you at that time, but you appealed based on what

you knew. What I'd like you to do is talk a little bit about that appeal and then I would

like to switch and hear from the building owner about what their comments are on the

paperwork they submitted. You did submit, I believe you titled it a rebuttal, of the

information that they provided. So, I'd like to take this in chronological order as it came

into my office so that we can review it that way. Mr. Cann you have a client who wants

to appeal this, tell me the story of the appeal.

Cann: Well, the appeal, was really simply to get them to submit the MNOI and the guts

of everything is the rebuttal. And the rebuttal is based on really two sets of arguments.

One is that the MNOI worksheet is wholly inconsistent in really two important ways in

this case.

Moermond: Wholly inconsistent with what?

Cann: Internally inconsistent. Staff pointed out that that they wanted to see actual

operating income, actual operating expenses used to calculate an actual net operating

income. The form requires that for the base year and the current year, which is

basically defined as 2021 in this case, it's the full calendar year before the application

for exemption. The problem is that this building didn't open until May of 2019 and it

was still accepting applications at least through the fall of that year. Nevertheless, what

appears to have been submitted is a full year’s operating statement with a full year of

income, a full year of expenses. That doesn't make any sense because the income

was only generated over part of a year. The other problem is that the net operating

income that was calculated isn't based on real numbers and real operating experience.

It's somehow hypothetical, I have no idea how Dominium came up with it. The second

problem is that the very first line in this calculation of net operating income is

supposed to be the potential gross rents for the building for the entire year. Basically,

summing up all of the rents of all of the units multiplying by 12, assuming 100%

occupancy. Then the next line following is a vacancy reduction. Well, the problem is

that later on in the form, and in this case it’s attached in five pages of appendix, is a

complete list of all the initial rents, of all the rents used to make the calculation. Right

next to it is a complete list of all of the initial rents for the for the tenants. Well, things

don't add up.

Oh and then, and actually most important, if you add up all of the rents for the current

year that are on this five page list, which shows for the current year the rent for each

unit added up multiply it by 12 it exceeds the number put into the net income

calculation for this year by, I think it's more than $300,000. In other words, their net

income calculation for the current year is way too low and their net income calculation

for the base year is based on purely hypothetical numbers. So that's the first set of

problems. The second set of problems is that their argument, there's a two- or

three-page argument that they submitted explaining why they were entitled to the 8%

percent exception. And it's based entirely on the notion that the rents on this project,

which is a low-income housing tax credit project, are somehow reduced from market

rate units that are somehow comparable. What they did is they looked at the rules and

what the rules provide for an exception to the 3% limit, is that the rules permit an

exception if the net operating income from the building since the base year has not

kept up with the consumer price index, kept up with inflation. The rule provides that

under exceptional circumstances the base year net operating income can be adjusted

and among those exceptional circumstances are reduced rents for particular or certain

tenants. So, their argument is that this is a is a low-income housing tax credit building,

it's not a market rate building. Therefore, we have reduced rents and therefore, we

should be able to base our net operating income as if our building had comparable

market rents.

That's ridiculous for at least a couple of reasons. This building received, let me

actually get the numbers, a little over $2.5 million in low-income housing tax credits

annually for 10 years. They sold those tax credits to investors for $22.7 million. In

addition, they got over $1 in grants to write down the cost of the project. And they got a

long-term federally insured fixed rate mortgage. It's not a market rate project. The

project was underwritten obviously with all of those tax credits and all that tax credit

equity, resulting in a much lower net operating income then a market rate project would

require. The market rate projects that they've used as comparables have much higher

rents because they don't have $20 million in tax credit equity syndication to write down

the mortgage. So they're not even remotely comparable. First of all, they've taken

reduced rent completely out of context. There is nothing in 2019, the base year, that

was remotely different than what they completely expected. There were no exceptional

circumstances. The rents were exactly what they projected, and the rents are exactly

what all the underwriters involved in both the provision of the mortgage and the

provision of the tax credit equity assumed would provide them with: a reasonable

return. They don't need market rate rents to give them a reasonable return because

they've got all this public subsidy. I guess the final point to make about this

reasonable return is if they actually were, if they actually got rents, market rate rents,

that they're saying they should be able to use to sort of calculate a hypothetical net

operating income for the base year that would be totally unreasonable for two reasons.

For one thing it would provide them with way, way, way, way more cash flow then

everybody that put in all of that public money expected and secondly the investors,

because they're buying tax credits, are looking for tax shelters. The last thing they

want and the last thing that would be reasonable for them is to get a huge amount of

cash each year. So, their use of reduced rent as an excuse for the exception is taken

totally out of context because there was nothing exceptional about the operation of the

project. The comparables, and it's really ridiculous to use a market rate project that

hasn't received 10s of millions of dollars of public subsidy as a comparable and as

setting comparable rents. So, for those two basic sets of reasons they have no right at

all to any kind of exception. The two basic reasons are one, their MNOI worksheet

doesn't make any sense and doesn't hold together and two, their written explanation

doesn't make any sense or hold together. I'll leave it at that.

Moermond: So, the other arguments that you presented in the appeal you filed with my

office you're not carrying forward? Would you like to make any comments, specific to

Ms. Gray’s unit in particular because you are representing her and her unit in this? It's

not a discussion of the entire building.

Cann: Well if the 8% rent increases are not permissible under the ordinance or under

the rules then of course Ms. Gray’s 8% rent increase is not permissible.

Moermond: Any other comments about the appeal that you filed originally?

Cann: Well, the original appeal was made without any knowledge whatsoever of how

they could possibly have justified this in the MNOI worksheet that they purportedly did

before they filed the appeal. And what it said was look, if you look at the rent

increases in that building between the 2019 base year and the increased rent that

they're proposing right now, it was something like a 24-25% rent increase. If you

looked at the increase in consumer price index from the base year, and I actually took

it all the way to this year, this March, it was like it was 1.2% + 3% + 8%., way, way

less than the percentage increase in the rents. And my argument was well, if the CPI

has increased by only 10 or 12%, I forget what the number was, and that's the amount

that the net operating income can increase and you're increasing the rents by over

20% the only way that works mathematically is if the operating expenses have

increased dramatically more than the 20% or 24% increase that the rents laid out. I

mean it was the best I could do knowing nothing about what the actual net operating

income said. The idea that that the operating expenses could have increased that

much when the actual inflation was on the order of 10 or 12% seemed ridiculous.

Moermond: OK. Do staff have any questions at this juncture or would you prefer to hold

them until we hear also from the owner?

Ferkinhoff: We’d prefer to hold them until we hear from the owner.

Moermond: Alright do you have any other comments?

Cann: No… well I point out that you suggested that this appeal is just about Ms. Gray

and I'm suggesting it obviously is not.

Moermond: I am saying that Ms. Gray has the ability to file an appeal on her own

behalf and on no one else’s. If there's follow up based on any outcome here, that is

separate from what I'm looking at today.

Cann: I understand that. I’m just telling you there will be a follow up.

Moermond: Enough said then. Thank you, Mr. Cann. Alright, who do we have here from

Dominium? Can I get your names for the record please?

Diehm: Yes, my name is Tammera Diehm.

Moermond: And your name sir?

Metz: I'm Owen Metz, I’m with Dominium.

Moermond: Can I ask what your roles are with the corporation?

Diehm: I'm an attorney at Winthrop and Weinstine, so we are legal counsel to the

landlord.

Metz: I'm a partner at Dominium and a partner in the ownership group that owns the

apartment community.

Moermond: Thank you. Alright so you have heard now from Mr. Cann about his appeal

and about the reasoning that he has applied to the information that Dominium provided

when requested as part of the application for the 8% increase which would be an

exception to the 3% cap. So, what I'd like to do is to provide you an opportunity to

describe the information you provided and if you have comments about Mr. Cann’s

statements I will accept them and also hear again from Mr. Cann if he has any follow

up after that. We will do it that way then and it looks like Ms. Diehm I will turn it over to

you to begin.

Diehm: Good afternoon. Again my name is Tammera Diehm. I am an attorney at

Winthrop and Weinstine and I am representing the landlord entities. I am joined today

by Owen Metz who is also a representative of the landlord entities. First of all, thank

you for giving us the opportunity to participate in this process. We recognize this as a

new process for the city and with that there's some learning on all sides and so we

appreciate being here and having a chance to share our comments. We do understand

there are two separate and distinct appeals, so we'll go through those and then we are

happy to talk specifically about the information in each appeal to the extent that is

helpful, too. These two properties Union Flats and Cambric are affordable housing

residential communities which means that the appellants, Ms. Gray and Ms. Banbury

are paying and will continue to pay rent that is well below market rent for their

residential units. The record that you have received and that is before you for review

has a lot of information in it, a lot of information from the Housing Justice Center, as

well as information that has been provided by the landlord. As you review this

information and you listen to our testimony today and others who are here and present,

you'll see that affordable developments, like Union Flats and Cambridge do not fit

neatly into the city's current rent stabilization rules. In fact, most communities that

have rent control or rent control rules or rent restricted affordable housing that is

developed using federal tax credits or other public subsidies are treated differently than

regular market rate properties under those rent control rules. That is one way in which

many cities provide affordable housing in and of itself which helps the city further its

goals of providing stable affordable housing for residents. We are not here today, and

we understand it's not the purpose of this appeal, to argue that these properties fall

outside of the city’s ordinance, but instead we think the record will show that the

landlord for these two properties followed the City’s process and increased rent well

below the amount that would be legally allowed not only under the City’s rent control

rules but also under contractual agreements that are in place between the landlord and

the city.

As a starting point it's important to acknowledge the underlying goals of the residential

rent stabilization ordinance that was approved by Saint Paul voters in November of

2021. The ordinance seeks to balance the desire to ensure that Saint Paul residents

have access to affordable housing with an acknowledgement that property owners in

this state have a right to a reasonable return on investment. To achieve this balance,

the ordinance creates a presumption that monthly rent increases should be limited to

3% in any 12-month period. But this presumption is just that, a presumption or a

starting point. For an analysis that allows landlords to present information that would

justify an increase of more than 3% in certain situations. As part of the ordinance

implementation the city developed rules to clarify first, whether a property qualifies for

an exception to the rent cap and two, how the requests for the exception to the three

percent cap would be considered. The rules were finalized in late April and the limits

on rent increases took effect on May 1. In this case the landlord followed the City’s

regulatory process and was granted an exception to the 3% rule. For reasons that I will

explain in greater detail both Union Flats and Cambric are affordable housing

developments that operate in a way that allows them to qualify for the exceptions to the

rent cap under the city rules that have been adopted.

The appellants have argued that the city erred when it granted the exception. In doing

so they attempt to create a cloud of confusion by first claiming that we're not legally

entitled to an exception and then challenging the net operating income calculations

that have been provided by the landlord through the worksheet. The rules as adopted

by the City define what the city believes to be a reasonable return on investment. The

city starts with an assumption that the landlord's actual net operating income, or NOI,

in the year 2019 represents a reasonable return on investment for that particular

property. Using 2019 as a base year, landlords then have a right to continue to receive

the same NOI adjusted by 100% of the percentage increase in the consumer price

index. The rules, however, acknowledge that the 2019 base year adjusted by CPI may

not work in all situations. To that end, the rules allow a property owner to rebut the

presumption that the 2019 base year NOI is a reasonable return on investment if they

can show that they were exceptional circumstances in the base year. To help clarify

when a property may qualify for an exception to the rent cap the city provides examples

of what may be considered an exceptional circumstance. These examples are provided

in the rules and they’re also included in the worksheets that landlords receive as part of

the exception process.

There are three examples of exceptions that we would like to draw your attention to

today. First, one example of exceptional circumstances is that gross income in the

base year, that 2019 year in most cases, was lower than it may have been because

some residents were charged reduced rent, and Mr. Cann spoke to that. Second, base

year rents were disproportionately low in comparison to base year rents of other rental

units in the city. Mr. Cann also spoke to that. And finally, the rules contemplate that

there may be kind of a catch all “other” exceptional circumstances. So, I just want to

talk briefly about all three of those situations. As noted earlier, both these properties

that are subject to the appeals today are rent restricted affordable developments which

means that both Ms. Gray and Ms. Banbury are currently paying and will continue to

pay below market rates for the residential units. The landlord for both Union Flats and

Cambric established exceptional circumstances for each of these properties because

the gross income in the base year was lower than it would have been as a result of

residents paying reduced rent. The two properties are residential communities that

were developed using a complex financing structure designed and administered by the

federal and state regulators to provide affordable housing to residents in the City of

Saint Paul. As part of this financing the developer entered into multiple contracts to

ensure that rent in these communities would continue to be affordable to a segment of

the population who earns income at a level that is 60% of the area's median income.

The first contract is called the Declaration of Land Use Restrictive Covenants or

LURA. The LURA is an agreement between the City of Saint Paul and the developer.

The second agreement, a regulatory agreement, is an agreement between the

developer and the United States Department of Housing and Urban Development or

HUD. And finally, the bond financing that was used to support these developments

resulted in a regulatory agreement that was signed by the developer and the Saint Paul

HRA.

These agreements impose restrictions on the maximum amount of rent that can be

charged for units that are part of these developments. The restrictions in these

documents, specifically the LURA, the first one I mentioned, not only binding the

original developer, but all future owners of the property and those restrictions last for

30 years. For Union Flats, where Ms. Gray lives, there are 217 units and 100% of these

units in the development must be rented to individuals who earn no more than 60% of

the area's median income. Under federal and state guidelines and the terms the LURA,

rent for these units is set at 30% of the income that is earned by someone who makes

60% of the area's median income. For Cambric, where Ms. Banbury resides, there are

113 units and like Union Flats all of these units are encumbered by a LURA and this

along with the state and federal regulations impose restrictions that result in below

market rent and it sets limits on the income of the residents who live in these units. In

accordance with these documents, which are legally binding agreements with the City

of Saint Paul, HUD establishes what rent should be for residents who live in these

communities ensuring that rent is affordable for families at specific income levels.

Because of this, residents in these communities are paying rent that is reduced from

what the market would otherwise dictate the rent to be for these units. As a result,

both of these properties qualify for an exceptional circumstance that's listed in the

ordinance because the gross income in the base year was lower than it might have

been as a result of some residents paying reduced rent.

For the same reasons both Union Flats and Cambric qualify for an exceptional

circumstance under the city stated description that base year rents were

disproportionately low in comparison to base year rents of other rental units in the city.

That's the language from the exception: base year rents were disproportionately low in

comparison to base year rents for other residential units in the city. In 2019, Ms.

Gray’s rent was $1060 for a one-bedroom apartment and Ms. Banbury rent was $1243

for a two-bedroom apartment. Both of these rental rates are significantly lower than the

average Saint Paul rent for units of a similar size even before adjusting for differences.

Specifically the City’s average rental rate for a one-bedroom unit like Ms. Grays in

2019 was $1525 or 30% higher than the rent that Ms. Gray was paying. Ms. Banbury’s

rent in 2019 was $1243, this is 40% less than the average Saint Paul rent for a

two-bedroom apartment. The Saint Paul average in 2019 for this unit was $2060 and

the average does not take into account that Ms. Banbury’s unit was brand new, and

the building boasted more amenities than many of the other apartments in the city.

The reason that the 2019 rents paid by Ms. Gray and Ms. Banbury are so far below

what a typical unit in Saint Paul would rent for is because HUD, not the typical rental

market, establishes what the maximum rate for units are when these units are

financed by low income tax credits and they're subject to a LURA and regulatory

agreements. And these rates that are established and published by HUD are below the

market rental rates that would otherwise be paid for a unit like this in the open market

in the City of Saint Paul. Based on this both Union Flats and Cambric qualify for an

adjustment to the base year NOI under the City stated standard that rent paid by

residents at these properties is disproportionately low when compared to base rents for

other comparable properties in Saint Paul.

Finally, the third way in which we meet that standard is the rent stabilization ordinance

and related rules contemplate that flexibility will be provided if there are “other

exceptional circumstances.” Here there is an additional exceptional circumstance

because the City entered into a contractual agreement with the property owner agreeing

that the regulations established by HUD would be used to set the rent for these

residential communities. HUD entered into a similar agreement with the property owner.

Following the terms of these previously agreed to contracts the landlord is entitled to

increase rent this year by almost 12% based on what HUD has established and

published as 2022 changes in the calculation of median income of this area. Limiting

the landlord to a 3% cap on rent increases for these two properties would be

contradictory to the City’s legal commitment to the property owner, the developer, the

lenders, the investors all as set forth in the LURA and the regulatory agreements.

The fact that both the City and HUD entered into contractual agreements related to

appropriate rent for units in these communities, that in and of itself creates an

exceptional circumstance to rebut the presumption that the 2019 NOI as increased by

CPI would be a reasonable return on investment for the property owner. Mr. Cann

argues that the landlord expects a reasonable rate of return to be the same as what

market rent would be. That is simply not true. To the contrary in these two cases a

reasonable return on investment should be defined as the return that was negotiated

by the City, HUD, the developer, the lender, and the tax credit investors when these

two communities were developed and financed. This agreed upon return is already well

below market for a 30-year time period. Accordingly, Union Flats and Cambric

properties that are the subject of today's appeals satisfy the exceptional circumstance

standard in the rent stabilization rules in three separate and distinct ways. First,

residents paid reduced rent. Second base rents in 2019 were significantly lower than

the rent that would be charged for comparable units in the city. Finally, third, the other

exceptional circumstances are the contractual agreements that are in place between

the city and the property owner and HUD which already set forth the process of

determining rent. Once the property owner establishes that there are exceptional

circumstances as the landlord has done here, the 2019 net operating income is no

longer presumed to be the basis for the landlords reasonable return on investment.

Instead, the City agrees that it will allow an adjustment to the base year NOI and

evaluate subsequent rent increases accordingly. Here the landlord followed the specific

regulatory procedures that were established by the City to apply for the exception.

Specifically, the owner provided support for the increases in rent through the adjusted

income and operating expense worksheet. Using the maintenance of net operating

income worksheet the 2019 increase in allowable rent for Union Flats. when you do the

adjustments and the calculations, would be 66%. The 2019 increase in allowable rent

for Cambric would be 51%. That is certainly not what the landlord is asking the City to

approve. Using HUD calculations related to median income, the LURA, and the

regulatory agreements with the City, rent increases for these communities, or for the

residents in these communities, would be close to 12%. Again, that is not what the

landlord has asked for and not the adjustment that they made. Notwithstanding their

right to request a greater increase, in an acknowledgement of the fact that this is a

new process for the City, and the City has a self-certification and beyond that there's

some question as to exactly how the process would work, the landlord provided notice

for the 8% increase in rent and followed the self-certification process that the City

developed.

The Housing Justice Center’s position that the base year NOI cannot be adjusted

because the financing of the original development used subsidies and tax credits

makes absolutely no sense. In fact, if the 2019 NOI is left in place and you don't allow

there to be an ability to adjust, the City would be creating a situation in which the rent

stabilization ordinance would prohibit the City from honoring the legal obligations that

are in the contractual agreements the City has with the landlord. Specifically, under the

LURA following 30 years of compliance with affordability the City has promised that the

landlord would have the right to adjust rent to then market rates. But if the City’s rent

stabilization ordinance is read in such a way as to prevent any adjustment to the NOI

for affordable housing developments then the City’s rent stabilization ordinance would

make it impossible for the landlord to ever achieve anything close to a market rate rent

30 years from now. Not only would this scenario result in the City’s violation of the

LURA but it would constitute unconstitutional taking of the landlord’s property. We are

confident that that is not the intent of the City today.

In the Housing Justice Center’s reply documents Mr. Cann descends into what I

consider a hyper technical and somewhat erroneous examination of our maintenance of

net operating income worksheet in an effort to kind of confuse the process and argue

that the properties don't qualify. He also, as he stated earlier today, claims that the

exceptional circumstances standard cannot be met. In doing so he then goes on and

asks for four orders that I think clearly exceed the issues that are presented in these

two appeals. Instead, the only question before you this afternoon, and before the City

Council in accepting your recommendation, is whether the landlord for Union Flats and

the Cambric property properly adjusted the 2022 rents for Ms. Gray and Ms. Banbury

based on the self-certification paperwork and the process that's outlined in the City

rules. The record that you have before you today, and as we will clarify with any

questions, establishes that the rent increases are justified and the landlord did so not

only in accordance with the rules that have been established by the City but also in

accordance with the contractual documents in the LURA and the regulatory

agreements that are binding; not only on us as the property owner but also on the City.

So, based on the record we respectfully request that you recommend to the City

Council that the appeal of Ms. Gray and the appeal of Ms. Banbury be denied and that

the legal agreements between the landlord and the City be honored and the rent

increase be affirmed. Thank you.

Metz: I'll just add, we use actual income and expenses. The form has asked for that

so certainly if there's request to see the financial statements, we have a HUD audit

done every year. The auditors and accountants look deeply at the operating expenses

and incomes of the properties. We're happy to share that information. You know, we

follow our agreements with the City in good faith and we believe we're following the

rules established by the City. To Tammy’s point, without an adjustment to these base

year rents to a hypothetical market rent, which is done all the time in market studies

and information, where you look at a comparable market rate property. For example,

Lyric at Carleton Place Lofts is directly across the street from Union Flats and a

one-bedroom there rents for $443 more than a comparable one-bedroom in our

building. We have comparable amenities, we’re actually a newer building than that

building and we have a pool, they don't. There are high amenities at both of these

apartment communities that would justify significantly higher market rent. We're asking

to follow the agreements, we’re asking to follow the rules and equally as important we’re

asking that 30 years from now that we're not removed from our obligation to at some

point theoretically charge a market rent. And under the ordinance there's no vacancy

decontrol and without an adjustment to these base year rents and to have NOI that's

hypothetically market that is taken from us and that is a major problem. It would be in

direct violation of our agreements with the city and something we’re very happy to

continue to honor the affordability which we have been all along. The rent increases

have been done in accordance with those agreements. We’ve never had any finding of

charging more rents than what is allowed under our agreements and will continue to

happily abide by those. Thank you.

Moermond: Alright, I will let you folks take your seats again and invite Mr. Cann to

make a couple comments and then hear from anyone else. Do you have any follow up

on anything you heard just now?

Cann: Absolutely. So first of all, she made the point that the rules in discussing

exceptional circumstances in the base year say the gross, so it's headed “exceptional

circumstances in the base year” the gross income during the base year was

disproportionately low due to exceptional circumstances. What she said was well

disproportionately low means disproportionately low compared to all of the other

buildings, market rate buildings in the City. But the context makes it completely clear

that disproportionately low means disproportionately low compared to other years. The

entire section is about adjustments to the base year and exceptional circumstances in

the base year compared to other years. So first of all, the disproportionately low

doesn't help her at all. Secondly, she said look the City and various governmental

entities have entered into contracts with us that provide for a guaranteed return. They

absolutely do not. They provide for potential rent increases. The return; there has been

no testimony whatsoever that in either project the return that they got in the base year

or in 2020 or in 2021 is any different from the return they completely expected given the

10s of millions of dollars of public subsidy that was put into those projects to assure

that they did not need a net operating income like, that they did not need rents like a

market rate project.

You know in order to have a net operating income that that gave them a reasonable

return on investment. In their MNOI worksheet for Union Flats they did a calculation of

the allowable rent increase they could get if they were allowed to use comparable rents

in making the calculation. The allowable rent increase that they came up with was

$739.50, average rent increase using the mechanisms and procedures that they were

talking about. That would produce way more than a reasonable return on investment

because it would produce an enormous cash flow, a cash flow that's enormously

greater than any of the parties that reviewed their applications for tax credits or

reviewed their applications for millions of dollars of public subsidy thought they that

would ever get. What they're asking for is a procedure in setting their exemptions that

wouldn't come even close to guaranteeing them a reasonable return, that would

guarantee them a return that is ridiculously higher than a reasonable return. We're not

saying that they shouldn't be able to increase their net operating income, to keep up

with inflation. Absolutely, that's what the ordinance says and that's what they should be

able to do. But they have not shown, or even tried to show, that the net operating

income in the base year was in any way exceptional in any way other than what they

completely bargained for. We’re fine with them increasing that net operating income by

the consumer price index increase, assuming that you use the consumer price index

that's specified in the preface to the rules rather the one than that the city for some

reason stuck into the to the form.

Moermond: Can I pause right there? That remark, there was some e-mail that you sent

to the Department of Safety and Inspections on that exact point and I just want to allow

them a chance to correct what their information had said and because there is a

change here. Director Wiese?

Wiese: Yes, I can address that. The former language in the rules talked about the CPI

as of March and it was listed in a couple different places in the narrative. The

worksheet itself used the annual CPI. So, in understanding that there was a

discrepancy there in the language versus the worksheet. And the language is in the

worksheet, so they're both in the same document but referencing a different CPI which

would have yielded a different number. We got a city attorney’s office opinion that the

number in the worksheet is the one that people expected to utilize and, therefore, to

keep as far as the correct CPI for MNOI. Therefore, we've now, and I believe it is

posted currently, has been corrected today in all locations. It should now say the

annual CPI and then also gives the reference to the BLS which is where we come up

with the CPI numbers for the Minneapolis Saint Paul Bloomington area.

Moermond: That acronym being?

Wiese: The Bureau of Labor Statistics.

Moermond: Mr. Cann, I apologize that I interrupted but I thought that that needed to be

clarified because I know that there had been a correction. You can respond.

Cann: My response is that the only there are all kinds of CPIs and you know there's

not.

Moermond: You enumerated several in your materials.

Cann: There's consumer price indexes for different geographical locations, there's a

CPI for the 12 months ending in March and 12 months ending in a couple of other

months. The point I'd like to make is that the only CPI that's actually referenced in the

rules adopted by the City Council.

Moermond: I need to correct you on that point that the rules were not adopted by the

City Council.

Cann: Oh, they weren’t?

Moermond: No. The ordinance was not either, that was by ballot initiative.

Cann: And the council didn't adopt the rules?

Moermond: No.

Cann: So, the rules were made up by the city staff.

Moermond: Department of Safety and Inspection drew up draft rules and they finalized

rules. As specified in the ordinance itself.

Cann: OK, but nevertheless the CPI, the only CPI that's actually referenced in the

rules is the 12 month CPI for March so you know

Moermond: We’ve gone over that territory a couple times now. You have more

comments though it appears.

Cann: Well, again basically the ordinance itself requires a demonstration by the city or

by the applicant that they're entitled to an exception in order to get a fair return. They

have not demonstrated that the exception they proposed, which would again allow a

$739 rent increase, is related in any way to a fair return. Nor; I'll leave it at that.

Moermond: Are there other people who wish to testify today on the Hampton Ave

property? Does counsel for this property, for Dominium have any other comments right

now? OK I'm going to ask staff, do you have questions that you want to put on the

record right now? I'm not expecting that anyone will be answering them, but just

questions that have come up for you during the course of this. I'm anticipating that on

reflection from what you're hearing today you will have additional questions and I'd like

to reduce those to writing so that they can be shared with all of the parties involved and

we're all in the same place on what still could be done. Where I want to get is that staff

will have had an opportunity to review what you would have reviewed if this were a staff

determination question, so that there is that recommendation on the record from staff

for me to consider in the context of this appeal. So that I have information from you as

well. So, anything right now that you would want to share?

Wiese: One, I would like the reference that Ms. Diehm gave to the, and Mr. Cann

brought it up too, the comparison to other properties. Which section of the rules

specifically for that citation? And then, also on the rental income just clarification on

both properties actually what year the owner is using for base year and what rents. I

think we all saw in the record that there's several columns of the spreadsheet with

several different numbers, so we'd like to get a confirmation from the owner what base

year they are considering and the rents they are utilizing in the base year.

Moermond: Anything else? And that applies to both properties?

Wiese: That applies to both properties and may generate further questions.

Moermond: Of course. Mr. Cann, I can see you have one other comment on this

property and then we'll go on to the next one.

Cann: Oh, well I guess I was just gonna get to that. Dominum addressed both

properties at once and I was simply going to make the point that the arguments are

virtually the same for the Cambric except that the problem with

Moermond: Can I just try to run the hearing for just a second? I wanted to get to

wrapping up on 787 Hampden and did you have any other comments on 787 Hampden

before we switch gears to talk about the other property?

Cann: I wanted to make sure you were going to switch gears or that we would come

back we come back in some way.

Moermond: That’s my job. Alright?

Laid Over to the Rent Stabilization Appeal Hearings due back on 9/1/2022

RLH RSA 22-2

Appeal of Jack Cann, Housing Justice Center, representing Katherine

Banbury, to a Rent Stabilization Determination at 720 SEVENTH

STREET EAST #330.

Prince

Sponsors:

Lay over to RSLH Thursday, September 1, 2022 at 9:00 AM. For further discussion.

Katherine Banbury, tenant and Jack Cann, tenant representative, appeared

Owen Metz – property owner representative and Tammera Diehm, counsel to property

owner, appeared

Rent Stabilization Staff: Lynn Ferkinhoff and Department of Safety & Inspections

(DSI) Angie Wiese appeared

Moermond: I am going to turn it back to staff and I will invite you back up Mr. Cann

with your client for this property who is Ms. Katherine Banbury. Staff you have a

summary of this information that you've seen and I imagine that it will be largely similar

to the summary you provided for the previous case, but if you could simply make a

record that would be appreciated.

Ferkinhoff: On May 27th the department received an intake form for a request for

exception to the 3% increase on rent per ordinance 193A. The application is part of the

record and Jack Sipes is listed as the applicant representing Dominium. They were

requesting an 8% increase on rent using the self-certification method. The reasons

listed in the application were an unavoidable increase in operating expense, a decrease

in rental income, a pattern of recent rent increase. The intake form asks applicants to

enter three pieces of information from the MNOI worksheet. These include income

adjusted by CPI, allowable rent increase, and allowable increase per unit per month.

As part of the self certification process the applicant received a confirmation e-mail

including their determination letter and a fillable flier for tenant notification. Staff also

reviewed the recent inspection record. It was approved by fire safety inspections as an

“A” property in January of 2020 and has 11 complaints since. There are no current

inspection issues. The premise of MNOI is that an owner is entitled to the same rate of

return on investment in the current year as they received in the base year. This

premise assumes there is some profit margin obtained that is allowed to remain. As

part of this appeal the interpretation of rental income has come into question. In the

rules gross rental income is gross rents calculated as gross scheduled rent rental

income at 100% occupancy and all other income or consideration received or

receivable in connection with the use or occupancy of the rental unit. There are further

details about how to cover owner occupied or vacant units which are not applicable to

this appeal. Our interpretation of this has been the actual income received not the

income potential. Decondly the base year income or operating expenses can be

adjusted for exceptional circumstances. The landlord must present evidence to rebut

the presumption that the base year net operating income provided a reasonable return.

For this appeal since we have not had a chance to discuss the supplemental appeal

documents, staff is questioning how the proposed base year income is exceptional

from 2019 or the current year. Lastly the department has not received a complaint from

any residents at this property.

Moermond: You had mentioned just a moment ago 11 complaints?

Wiese: 11 complaints related to housing, not to the rent stabilization ordinance. The

last statement is “not received any complaints regarding the rent stabilization

ordinance” at 720 7th Street.

Moermond: For clarity’s sake, with both this property and the one we just discussed,

you indicated clearly on the record that these were considered to be Class “A”

properties and the complaints that you mentioned, I'm assuming were marginal, this is

a Class “A” building and it's the highest rating. It means it's on a 6 year reinspection

cycle.

Wiese: Correct.

Moermond: So that amount of complaints would be considered to be very low or

normal.

Wiese: Correct and that they have been appropriately dealt with and none are currently

open. So that review and those statements are part of the department review of the

warranty of habitability which is in the ordinance and in the rules and that's why it's

mentioned here.

Moermond: I just wanted to be clear for someone who wasn't familiar with that

terminology. What that actually translated to.

Wiese: Ok we'll clarify that for future appeals, should there be any.

Moermond: Alright so we did talk exhaustively in the first case about issues that apply

to both of these buildings and your comments as well as Dominium’s comments. Are

there things that you would like to draw my attention to with respect to this property in

particular?

Cann: Very briefly. In the first argument I made two basic points that actually the staff

just summarized. One is the question of how were the MNOI worksheets done and did

they use actual rental income and operating experiences. The second was how was the

base year exceptional and I talked about that extensively earlier. The difference here

was that, that the first issue, that is what were the actual operating experiences in the

base year. It seemed highly questionable to me in the Union Flats case because there

was only a partial operating year, yet they've represented the full year of operating

income and expenses. That's not the case in the Cambric. There is still at though in

the Cambric a discrepancy between the gross potential income in the net operating

income worksheet and what you get when you add up all the actual rents in the

attachment. I guess the only other point I'd make is that in the Cambric case were

Dominium permitted to use the procedure they wanted to use to determine the net

operating income in the base year. It would justify a $682.77 rent increase this year.

And I point out that that's just as ridiculous in this case as the similar one was in the

earlier case. That's all.

Moermond: Do you have comments, Ms. Banbury?

Banbury: In what specifically? I’m just really listening.

Moermond: You and Ms. Gray are both the appellants. If you had something to add, I’d

be happy to hear it.

Banbury: Dominium has the title of affordable housing and as Jack was laying out they

get a lot of public funding. As a tenant that has lived there for four years, I compare it

to a revolving door. People come in they get means tested and Dominium, or HUD

takes the area medium income every year that continues to go up, and we are people

that don't have that kind of income to continue to pay the highest amount that

Dominium uses for the HUD number. They don't have to take that highest number but

they do. So I've had countless neighbors having to economically evict. They cannot

afford to live there and to me affordable housing is affordable. It keeps people in their

homes and that is not the case with the Cambric Domimum that I live in.

Moermond: Alright, Ms. Diehm I’ll turn it over to you.

Diehm: Thank you, we have just a couple of comments. First since we can easily

answer staff’s question we'll go ahead and do that. In the city of Saint Paul rent

stabilization landlord worksheet on page 19 it lists exceptional circumstances for the

base year and I do note those differ a bit from what are in the rules but number B4

says base year rents were disproportionately low in comparison to the base year rents

of comparable rental units so that's where that language is coming from. Just two other

quick comments, Mr. Cann made the argument that we're looking for guaranteed

return, that's not true. Our argument is that a reasonable return on investment for

these properties there should be an adjustment to that base year NOI because a

reasonable return on investment would be as reflected in the agreements that we have

with the city and with HUD and with other federal and state regulators. They note that

our worksheet justifies a $600 or $700 rent increase, that's not what is being proposed

or what is being asked for we're talking about an $89 rent increase and a $96 rent

increase. A comment was also made that were asking for just the maximum increases

that are allowed, as we noted earlier under the HUD regulations the properties would be

looking at a 12% increase and the landlord has only increased the rent 8%, so it is not

at the maximum level that's allowed. They have come in at the 8% which again is $89

for Ms. Gray and I believe $96 for Ms. Banbury.

Metz: Hearing Officer Moermond, I'll just add I wish we could get 8% CPI. That's

effectively what we're asking. Mr. Cann said we were happy with CPI. I think generally

most landlords are happy with CPI and that's effectively what they 8% is under the

self-certification. I think one of the struggles we've had in following the rules is there

isn't a clear process as we looked at it so we submitted the self certification. It’s not a

clear process to establish those base year rents other than through the MNOI

worksheet. That process describes five different circumstances, we meet three of

those five in order to adjust that base year rent. There's not a separate process on the

city's website and how to follow that. So to be expedient we just went with the 8%

which is as Tammy mentioned is less than the 12% we’re entitled to under our

agreements with the city and HUD. The only way for us to describe those was through

this process was as Ms. Wiese mentioned we will certainly follow up with that

information to answer those questions to show where that that information was coming

from. And to Mr Cann’s point we're not asking for enormous cash flow we're asking to

follow our existing agreements. We have these agreements in place, we're asking to

abide by those and follow the rules that were put in front of us. That that's very

different than asking for enormous cash flow. I just wanted to clarify that.

Moermond: Before you leave I just want to clarify one thing for the record, and we

should probably clean this up in the record for the previous case as well, is that the

agreement is not with the city of Saint Paul per se it's with the city’s housing and

redevelopment authority which is a slightly different legal entity. So I just want to put

that on the record that it is the HRA.

Metz: Hearing Officer Moermond, we did, and I think it was in our response but if it

wasn't we can clarify it too, on Union Flats, as Mr. Cann mentioned, it was a partial

year in 2019. It's only a 3 year old building so 2019 was not a full year, we used 2020 in

order to have a 12 month process of stable operating expenses and income. That was

the information we used in the form not having a full year in 2019, so just want to make

that clear for the record.

Moermond: Ok thank you. I'm going to ask Mr. Cann if he has any other comments

and then I'll ask the audience generally if there's anyone who wants to comment on this

property as well. Mr. Cann?

Cann: When I quoted the numbers that they put into that operating income worksheet

showing for Cambric for instance is a $682 permissible rent increase, I wasn't

suggesting that they were asking for that level of increase. What I was suggesting is

that that is where their argument about what's permissible leads. It's obvious that's

where it leads because that's what they showed. I quoted the ridiculously high number

to point out how ridiculous their argument is. They have not ever in any of this

discussion or any of their submissions indicated that they require any kind of

exception at all to obtain a reasonable return on their investment as the rules define it.

I guess the only other point I'd make is that if they use the 2020 operating experience

to calculate the net operating income, of course they should have said it in the

worksheet, but it also means that they don't get to use two years of inflation. They only

get to use one year of inflation. They can't use the 6.05% number because they're not

using 2019 as the base. Right?

Moermond: Alright is there anyone else here who'd like to testify on 720 7th St. Ok do

staff have any questions on this property to put on the record at this time? I have very

few comments myself at this juncture. What I will say is that I want to express my

appreciation to the tenants, to appellant’s representation, to the property owner, to city

staff - this is an entirely new process that we are looking at. This is literally the second

and third appeal that we've dealt with for the rent stabilization ordinance and its

implementation. So very early days. We are charting a path, we are learning from that.

I'm sure that what we learn will be used to fine tune the machinery of the ordinance

moving forward. That being said we do need some time to evaluate the numbers, to

evaluate the statements, I would personally like to connect with the housing and

redevelopment authority's attorneys in this matter, and I think that to do due diligence

is going to take just a little bit of time and communication back and forth. So I'm

going to lay this matter over, which you could probably have guessed at the very

beginning. There is just a half inch file on each one of these cases right now and it

merits further examination. Today is July 19th and trying to take into account the

ability of Dominium to provide any updated information and we should have not only the

questions put on the record today but any additional questions we will have rounded up

by shall we say Friday morning? And that will go out in a piece of correspondence

that's a follow up to all the interested parties in this. So we will confirm that this case is

being laid over confirm with the open questions are the deadline by which we'd like to

get the materials back again. All the materials will become part of the public record,

so all that being said could you have materials back by 29th or August 5th? With

given the complexity of the discussion we've had so far.

Metz: I will say without knowing what the questions are for sure, we’re usually pretty

quick to respond. So we would do our best to respond by the 29th. When will the

hearing date be then?

Moermond: Well what I'm thinking is if you were able to respond by the 29th I would

want to allow Mr. Cann to be able to review those materials, give him a good week.

And to have staff be able to review things as well. I'm going to actually continue this to

August 16th. We're going to go out that far, I would like to have staff be able to

complete their determination, their recommendation on this and that might require

additional correspondence that would be passing through my office but it is a

cumbersome communication process and I want to take that into account and make

sure that everybody does have the ability… and I'm going to ask you to come back up

to the mic which I should have done a moment ago and did not.

Metz: Hearing Officer Moermond, I believe Tammy’s on vacation on August 16th

unfortunately and I have a City Council meeting already planned, I can try to rearrange.

Is there any way to do it later in that week by chance or does it have to be a Tuesday?

Moermond: Let me check something. Actually we could do Thursday morning on

August 18th. Yes Mr. Cann?

Cann: I am on vacation for two week starting August 13th.

Metz: For what it's worth we’re happy to do the week before if that's helpful.

Moermond: Alright we'll say the morning of Thursday, August 11th and that will… no?