The Reagan administration is proposing to eliminate rent controls on moderate-income apartments with Federal insurance, a move that would affect 36,617 units here--many of them in Southwest and Southwest Washington.
The policy change, first proposed by the Carter administration but not carried through, would help boost rents to so-called market levels at 227 apartment projects here and an estimated 5,000 to 7,000 nationwide. Federal officials contend that this is the only feasible way to insure continued maintenance and operation of the projects as rental housing.
The Department of Housing and Urban Development has sent legislation to Congress that would allow deregulation by deleting the provision in Section 207 of the National Housing Act requiring the department to regulate rents and rates of return for projects insured under that section of the law.
While that legislation is pending, however, HUD is planning to issue a proposed regulation that would deregulate rents for projects with mortgages insured under Sections 220 and 221(d)(4) of the law, which do not require HUD to review and approve rents and rates of return. The regulation would also allow owners of Section 207 projects to receive a higher effective rate of return on their investment but would stop short of complete deregulation of those projects.
Both the statutory change and the proposed regulation would affect only unsubsidized projects that have insured mortgages but do not receive interest rate or rental subsidies to make them affordable for low-income families.
Unsubsidized FHA projects in the District are also subject to local rent control under the Rental Housing Act of 1980 and would still be regulatred locally after elimination of federal controls. Under the District's law, project owners can implement an automatic annual rent increase based on the consumer price index or apply for special increases that exceed that level.
The District's Rental Accommodations Office can grant higher increases to bring owners' return on equity up to 10 percent or to help finance capital improvements, substantial rehabilitation or increased tenant services. Increases can also be granted in buildings where at least 70 percent of the tenants approve the move.
HUD has the authority to preempt local rent controls if they prevent FHA project owners from meeting expenses. Under deregulation, HUD would only use that authority in cases where it approved the preoposed rents. Owners who chose to take advantage of deregulation and bypass the HUD approval process could not apply for a preemption of local controls.
Keith A. Vance, deputy rent administrator for the District, said he does not expect federal deregulation to lead to an incrase in the number of FHA project owners seeking special rent increases, saying that HUD-approved rents for the projects are generally in line with what the District allows. In the past year, he added, HUD has only acted to preempt local controls in two cases.
Philip Abrams, HUD's deputy assistant secretary for housing, said the purpose of the proposed changes is "to increase the amount of investment in rental property by making the value of the properties what it would be at market rents. It will make the properties more valuable, which means fewer defaults on the insured mortgages and better upkeep."
Other HUD officials and representatives of project owners and managers here said that rents and rates of return for FHA projects are lagging conventionally financed projects because of rent regulation. As a result, many owners have put off investment in needed maintenance and repairs, and and they have felt increased pressure to convert the rental projects to condominiums or cooperatives, officials and managers said.
They contend that the rent increases approved by HUD often are insufficient to cover basic operating expenses and that delays in getting the required approval only aggravate the problem.
"If projects were allowed to get the increases they should be getting, I would definitely say the projects all across the country would be in better physical condition than they are today," said Charles Achilles, staff vice president of the Institute of Real Estate Management, whose membership manages roughly one million units of federally assisted housing. "They organization members are telling me from all over the country they are not getting the increases necessary to operate the projects."
In the Washington area, the Shannon & Luchs real estate company manages about 1,000 units in unsubsidized FHA-insured projects that would be deregulated under HUD's proposals. (Of those, however, 800 are in the upper-income Columbia Plaza complex near the Watergate, however, where rents range from the $200s to more than $600 a month.) Joseph C. Murray, the firm's vice president for housing management, said FHA-insured projects are no longer attractive investments because the current regulatory policy does not allow for sufficient returns to owners.
Under the current policy, the rate of return is based on the original cost of the apartment buildings, with no adjustments to reflect inflation or the increase in the market value of the project. "The return on investment is way out of line when it's fixed," Murray said. "Who wants to stay in the rental business if there's no return?"
With complete deregulation, owners will be able to earn as much of a profit as the market will bear. For Section 207 projects, which cannot be completely deregulated unless Congress agrees to HUD's proposed legislative change, the proposed regulation would allow the return to owners to be based on the current appraised market value of their projects, providing a higher return for owners of projects that have appreciated in value.
However, the resulting rents would still be subject to HUD apoproval and could not be more than rents for comparable, conventionally financed projects in the same area.
But the rule would exact a quid pro quo from owners who take advantage of the relaxed procedures by requiring them to pay a higher premium for their FHA mortgage insurance. The annual premium would be increased from 1/2 percent to one percent of the outstanding mortgage balance.
Murray and other representatives of project managers think the deregulation effort will increase the viability of FHA-insured unsubsidized projects without resulting in excessive rent increases. "It will encourage more investor/owners to stop looking at conversion to ownership and encourage them to stay in rental housing," Murray said. "It would keep people in the business."
According to Murray, landlords can only increase rents so much, even under complete deregulation, without risking the loss of tenants and the extra cost of finding new ones. "I think the marketplace dictates how much rent can go up, and I think there is a strong resistance to increases above 12 percent," he said. "I don't think you're going to see enormous, excessive rent increases."
But the deregulation proposals have already drawn criticisms as unfair to tenants. "Those units were supposed to serve a public purpose, and that's the reason there's a requirement for HUD involvement in rent increases," said Florence Roisman, counsel to the National Housing Law Project, a resource center for legal representation of poor families in housing matters. "HUD's responsibility is to make sure landlords don't get too much. The landlords are always going to get enough."
She said HUD should take the need for increased income to finance repairs and maintenance into account in approving rent increases rather than deregulate rents. "It's part of the administration's effort to give away public resources," she said, "and I don't think Congress should let them get away with it."
HUD's plans are still a long way from implementation, however. It will be months before Congress finishes work on the omnibus housing bill that would be the vehicle for statutory deregulation, and congressional Democrats are likely to oppose the effort. Before the proposed rule can take effect, it must first be reviewed by the Office of Management and Budget and Congress, and then be published for public comment.