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