# COMCOR — Chapter 29. Landlord-Tenant Relations - Regulations ## Sec. 29-59 Fair Return - Regulations ### COMCOR 29.59.01 Fair Return #### 29.59.01.01 Purpose A landlord has a right to a fair return as defined by Chapter 29 of the Montgomery County Code. This Regulation establishes the fair return application process. #### 29.59.01.02 Definitions In this Regulation, the following words and terms have the following meanings: (a) Terms not otherwise defined herein have the meaning provided in Article VI of Chapter 29 of the Montgomery County Code, 2014, as amended (“Chapter 29" or “Code”). (b) “Base Year” means the year immediately prior to the year the unit became a regulated unit per requirements of Chapter 29 of the Code. (c) “Current Year” means either the calendar year (January 1st to December 31st) or the fiscal year (July 1st to June 30th) immediately preceding the date that the Fair Return Application required in Section 29.59.01.04 is filed. (d) “Current Year CPI-U” means either: (1) if the Current Year is a calendar year, the Current Year CPI-U is the annual CPI-U for that year; or (2) if the Current Year is a fiscal year, the Current Year CPI-U must be the CPI-U for December during the current year. (e) “Gross Income” means the annual scheduled income for the property based on the rents and fees (other than fees that are reimbursed to the tenants) the landlord was permitted to charge at the time of the Fair Return Application. (f) “Net Operating Income” means the rental housing’s Gross Income minus operating expenses for the applicable period. #### 29.59.01.03 Formula for Fair Return (a) Fair Return. The fair return rent increase formula is computed as follows: Gross Income minus operating expenses permitted under Section 29.59.01.06 for the Current Year. (1) In calculating Gross Income for the Current Year, the Base Year Net Operating Income under Section 29.59.01.06 must be adjusted by the annual rent increase allowance under Section 29-57 since the Base Year. (2) Any Fair Return Application must identify a requested rent increase based on: (A) actual operating expenses to be offset through a fair return rent increase; or (B) returns on investments equal to real estate investment risk premium of three percent (3%) plus the annual yield on the ten-year US Treasury Note, with the gross cost basis being the assessed value of the property as of July 1, 2023, increased annually in accordance with the CPI-U. (b) Fair Return Rent Increases. Fair return rent increases (“rent increases”) approved by the Director must be determined as a percentage of the Current Year rents, and each regulated rental unit in the rental housing must be subject to the same percentage increase. (1) Except as provided herein, a fair return rent increase approved by the Director must be implemented within 12 months of the date of the issuance of the decision or at the end of the current tenant’s lease term, whichever is later, in accordance with Section 29.59.01.07. The amount of the fair return rent increase must be clearly identified as an approved fair return rent increase in the new lease or in the lease renewal and may not be implemented mid-lease. (2) If the rent increase for an occupied unit is greater than 15%, the rent increase assessed to the tenant must be phased-in over a period of more than one year until such time as the full rent increase awarded by the Director has been taken. Rent increases of more than 15% must be implemented in consecutive years. (3) If a rental unit requiring a fair return rent increase of more than 15% is vacant or if the unit becomes vacant before the required increase has been taken in full, the landlord may elect to implement the required increase for that unit to be taken in one year or upon the vacancy of that unit, provided the unit became vacant as a result of voluntary termination by the tenant or a termination of the tenancy by the landlord for just cause. #### 29.59.01.04 Fair Return Application (a) Requirement. A landlord may file an application for a fair return and required supporting documentation (“Fair Return Application”) with the Director to increase the rent more than the amount permitted under Section 29-57 or 29-58 of the Code. (b) Rolling Review. The Director will consider Fair Return Applications on a rolling basis. (c) Prerequisites for a Fair Return Application. In order for the Director to consider a Fair Return Application, it must meet the following requirements: (1) all units within the rental housing listed in the Fair Return Application must be properly registered and licensed with the Department; (2) the Fair Return Application must be completed in full, signed, and include all required supporting documents; and (3) all Banked Amounts have been applied to regulated rental units. (d) Fair Return Application Requirements. A Fair Return Application must include the following information and must be submitted in a form published by the Department: (1) the applicant must submit information necessary to demonstrate the rent necessary to obtain a fair return; (2) the application must include all the information required by these Regulations and contain adequate information to confirm the calculation of the Gross Income for the Current Year. If the required information is not available for the Base Year, a landlord may, at the discretion of the Director, use an alternative year no more than three years in the past. The approval must be secured in writing from the Director before the filing of the application; (3) the landlord must supply the following documentation of operating and maintenance expense items for both the Base Year and the Current Year: (A) copies of tax returns, bills, invoices, receipts, or other documents that support all reported expense deductions must be submitted. The Department reserves the right to inspect the rental housing to verify that the identified maintenance has been completed and associated costs are reasonable; (B) copies of time sheets maintained by the landlord in support all self-labor charges must be submitted if such charges are claimed. The time sheet must include an explanation of the services rendered and the landlord’s calculation of the expense. If the landlord is claiming an expense for skilled labor, a statement substantiating the landlord’s skill, or a copy of the applicable license is required; (C) for amortized capital improvement expenses, copies of bills, invoices, receipts, or other documents that support all reported costs are required. The Director reserves the right to inspect the rental housing to verify that identified capital improvements have been completed and associated costs are reasonable; (D) all expense documentation must be organized in sections by line item on the application. A copy of a paid invoice or receipt documenting each expense must be attached to the front of the documentation for each line item. The documents must be submitted to the Director in the same order as the corresponding amounts on the invoice or receipt. The total of the documented expenses for each line item on the invoice or receipt must be equal to the amount on the corresponding line on the application; (E) any justification for exceptional circumstances that the owner is claiming under this regulation; (F) any additional information the landlord determines would be useful in making a determination of fair return; and (4) upon a finding by the Director that the net operating income calculated using the financial information included on the landlord’s tax return for the Base Year is more accurate than the financial information provided on the application, the Base Year net operating income must be re-computed using the financial information on the tax return. This decision must be made at the Director’s discretion. #### 29.59.01.05 Processing of Fair Return Applications (a) Filing of Application. The Fair Return Application must be filed with the Department. (b) Notice to Tenants of Filing. Within five business days of filing the Fair Return Application, the landlord must notify each affected tenant of the filing by first-class mail and electronic mail, providing each tenant a copy of the Fair Return Application (excluding supporting documentation). (c) Fair Return Application Processing. Within 30 days of receipt of a Fair Return Application, the Director must review the Fair Return Application and supporting documentation and notify the landlord in writing that: (1) the Fair Return Application is complete; or (2) the Fair Return Application is incomplete, identifying specifically the missing information or documentation. If the landlord fails to deliver the missing information or documentation to the Director within ten business days of receipt of the notice in (b) above, then the Director may deny the Fair Return Application by written notice to the landlord. (d) Decision on a Fair Return Application. The Director must review the Fair Return Application and within 60 days after receiving the Fair Return Application issue and notify the landlord of a decision stating the approval or disapproval with reason of the Fair Return Application, including the rent increase identified therein, to be allowed in accordance the Fair Return Application. (e) Notice to Tenants of Decision. (1) The landlord must distribute a copy of the decision to each affected tenant by first-class mail and electronic mail, within ten business days of the date of the Director’s approval of the Fair Return Application together with posting in common areas of the rental housing. (2) The implementation of any rent increase awarded by the Director must comply with Section 29-54 of the Code, and must be clearly identified in the lease, rent increase notice, and/or renewal as a fair return increase authorized by the Department. Said increases are contingent on the decision of the Director becoming final in accordance with Section 29.59.01.05(c) of these Regulations. #### 29.59.01.06 Fair Return Criteria in Evaluation (a) Gross Income. Gross income for both the Base Year and the Current Year includes the total amount of rental income the landlord could have received if all vacant rental units had been rented for the highest lawful rent for the entire year and if the actual rent assessed to all occupied rental units had been paid. (1) Gross income includes any fees paid by the tenants for services provided by the landlord. (2) Gross income does not include income from laundry and vending machines, interest received on security deposits more than the amounts required to be refunded to tenants, and other miscellaneous income. (b) Operating Expenses. (1) For purposes of fair return, operating expenses include the following items: (A) utilities paid by the landlord, except to the extent these costs are passed through to the tenants; (B) administrative expenses, such as advertising, legal fees, accounting fees; (C) management fees, whether performed by the landlord or a property management firm; if sufficient information is not available for current management fees, management fees may be assumed to have increased by the percentage increase in the Annual CPI-U between the Base Year and the Current Year, unless the level of management services either increased or decreased during this period. Management fees must not exceed six percent (6%) of Gross Income unless the landlord demonstrates by a preponderance of the evidence that a higher percentage is reasonable; (D) payroll; (E) amortized cost of capital improvements over the useful life as determined by the Internal Revenue Service. An interest allowance must be allowed on the cost of amortized capital expenses; the allowance must be equal to the interest the landlord would have incurred had the landlord financed the capital improvement with a loan for the amortization period of the improvement, making uniform monthly payments, at an interest rate equal to the average 52-week Wall Street Journal’s U.S. Prime Rate, as reported by The Wall Street Journal’s bank survey. The average is calculated as the mid-point between the high and low Prime Rates reported for the 52 weeks immediately before the completion of the renovation; (F) maintenance related material and labor costs, including self-labor costs computed in accordance with the regulations adopted pursuant to this section; (G) property taxes; (H) licenses, government fees, and other assessments; and (I) insurance costs. (2) Reasonable and expected operating expenses which may be claimed for purposes of fair return do not include the following: (A) expenses for which the landlord has been reimbursed by any security deposit, insurance settlement, judgment for damages, agreed-upon payments, or any other method; (B) payments made for mortgage expenses, either principal or interest; (C) judicial and administrative fines and penalties; (D) damages paid to tenants as ordered by Office of Landlord-Tenant Affairs issued determination letters or consent agreements, Commission on Landlord-Tenant Affairs, or the courts; (E) depreciation; (F) late fees or service penalties imposed by utility companies, lenders or other entities providing goods or services to the landlord or the rental housing; (G) membership fees in organizations established to influence legislation and regulations; (H) contributions to lobbying efforts; (I) contributions for legal fees in the prosecution of class-action cases; (J) political contributions for candidates for office; (K) any expense for which the tenant has lawfully paid directly or indirectly; (L) attorney’s fees charged for services connected with counseling or litigation related to actions brought by the County under County regulations or this title, as amended. This provision must apply unless the landlord has prevailed in such an action brought by the County; (M) additional expenses incurred as a result of unreasonably deferred maintenance; and (N) any expense incurred in conjunction with the purchase, sale, or financing of the rental housing, including, but not limited to, loan fees, payments to real estate agents or brokers, appraisals, legal fees, accounting fees, etc. (c) Base Year Net Operating Income. A landlord may request to adjust the Base Year Net Operating Income if the Net Operating Income for the Base Year was abnormally low and did not reflect market circumstances. The Director must adjust the Base Year Net Operating Income if the Director makes at least one of the following findings: (1) the Base Year Net Operating Income was abnormally low due to one of the following factors: (A) the landlord made capital improvements during or before the Base Year which were not reflected in the Base Year rents and the landlord did not obtain a surcharge for capital improvements for these capital improvements; (B) substantial repairs were made to the rental housing due to exceptional circumstances or new laws; (C) other expenses were unreasonably high, notwithstanding prudent business practice; or (D) other exceptional circumstances exist requiring equitable adjustment to the Base Year Net Operating Income. (2) The Base Year rents did not reflect market transaction(s) due to one or more of the following circumstances: (A) there was a special relationship between the landlord and tenant (such as a family relationship) resulting in abnormally low rent charges; (B) the rents have not been increased for five years preceding the Base Year; (C) the tenant lawfully assumed maintenance responsibility in exchange for low rent increases or no rent increases; (D) the rents were based on MPDU or other affordability covenants at the time of the rental housing’s Base Year; or (E) other special circumstances that establish that the rent was not set as the result of an arms-length transaction. #### 29.59.01.07 Fair Return Rent Increase Duration (a) Duration. Except as provided in 29.59.01.03(b), a rent increase established under an approved Fair Return Application remains in effect for each regulated rental unit for a 12-month period. (1) No annual rent increase allowance under Section 29-57(a) of the Code may be applied to a regulated rental unit for the 12-month period during which the regulated rental unit is subject to a rent increase pursuant to a Fair Return Application (as such rent increase includes any annual rent increase allowance). (2) A landlord may simultaneously charge a surcharge for capital improvements and fair return rent increase if approved or otherwise allowed in accordance with these regulations. (b) Establishment of New Base Year Net Operating Income. The Net Operating Income, income, and expenses, determined to be fair and reasonable pursuant to a prior Fair Return Application must constitute the Base Year income, expenses, and Net Operating Income for those regulated rental units included in the finding of fair return for purposes of reviewing subsequent Fair Return Applications. (c) Limitations on Future Fair Return Requests. (1) If a Fair Return Application is approved by the Director, the landlord may not file a subsequent application for the greater of 24 months following the issuance of an approval, or until any remainder of the increase permitted under Section 29.59.01.03(b) (when a fair return rent increase is permitted above 15%) has been applied. (2) If a Fair Return Application is denied by the Director, the property may not file a subsequent application for 12 months following the issuance of a denial.