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Tenants of 1255 New Hampshire Ave., N.W. v. District of Columbia Rental Housing Com'n

September 8, 1994

TENANTS OF 1255 NEW HAMPSHIRE AVENUE, N.W., PETITIONERS
v.
DISTRICT OF COLUMBIA RENTAL HOUSING COMMISSION, RESPONDENT, AND HAMILTON HOUSE LIMITED PARTNERSHIP, INTERVENOR



Petition for Review of a Decision of the District of Columbia Rental Housing Commission

Before Terry, Schwelb, and King, Associate Judges.

The opinion of the court was delivered by: Schwelb

SCHWELB, Associate Judge: On February 8, 1990, the District of Columbia Rental Housing Commission held that Hamilton House Limited Partnership (HHLP), which operates the 304-unit Hamilton House apartment complex near Dupont Circle in northwest Washington, D.C., was entitled to a substantial hardship rent increase pursuant to D.C. Code § 45-2522 (a) (1992), but remanded the case to the Rent Administrator for additional findings with respect to certain issues. The parties subsequently stipulated to the facts to which the remand related and, on May 22, 1992, the Rent Administrator issued an order, based on the stipulations, which resolved the remanded issues. Petitioners, the tenants of the complex, have asked this court to review the Commission's 1990 decision, as implemented by the Rent Administrator's 1992 order.

The tenants contend that the Commission erroneously permitted HHLP, in calculating the return on its equity for purposes of its hardship petition, to treat as a deductible expense the interest paid by HHLP on a second mortgage loan from one Peter Sharp, a principal of HHLP who controlled HHLP's operations. According to the tenants, this loan was not negotiated at arm's length and resulted in a windfall for Mr. Sharp, who had borrowed the money on the same day at a substantially lower rate of interest. *fn1 The tenants also claim that the Commission committed reversible error by allowing HHLP to treat the property's parking garage and valet shop as residential rather than commercial properties, and to deduct expenses relating to those establishments in calculating the return on its equity.

HHLP contends that this court lacks jurisdiction to entertain the petition because, according to HHLP, the petition is untimely with respect to the Commission's 1990 decision and because the tenants appealed directly from the Rent Administrator's 1992 decision, without first filing an administrative appeal to the Commission. On the merits, HHLP maintains that the Commission decided the case correctly.

We decline, as did a motions division of this court, *fn2 to dismiss the petition on jurisdictional grounds. On the merits, we vacate the Commission's decision and remand for further proceedings.

I.

THE ADMINISTRATIVE PROCEEDINGS

A. Factual Background.

At all times relevant to this controversy, Peter Sharp was the dominant partner of HHLP. The Rent Administrator found that Sharp "controls [HHLP's] operations." In its initial decision in this case, *fn3 the Commission referred to Sharp as a "housing provider who made a loan to his company and received a $376,359.00 profit." Although the Commission also described Sharp as "a principal" of HHLP, it evidently viewed him, for purposes of this case, as HHLP's "alter ego." HHLP I, at 5-6 and n.1.

In February, 1986, HHLP purchased the property to which this controversy relates by borrowing $7,750,000.00 from a German bank at a favorable interest rate. Under the terms of the loan, Peter Sharp was personally liable in the event HHLP defaulted. In June, 1986, Sharp borrowed $11,400,000.00 from the same bank at 8.5% interest. He then immediately lent $7,500,000.00 of the borrowed money to HHLP at 12% interest, in order to enable HHLP to redeem the initial purchase money loan within a reasonable time. There was uncontradicted testimony before the Rent Administrator that, at the time of the transaction between Sharp and HHLP, the "going interest rate" was approximately 13%-14%.

B. The Rent Administrator's Decision.

The wheels of Justice have ground slowly in this case. More than seven years ago, on July 30, 1987, HHLP filed a hardship petition claiming that it was not receiving the 12% return on its equity to which it was entitled pursuant to D.C. Code § 45-2522 (a). HHLP requested authority to increase the rent ceiling for the various units by 39%. The tenants opposed the petition on various grounds and, on April 1, 1988, following an evidentiary hearing, the Rent Administrator held that "the rent ceilings for each rental unit . . . may be increased by an amount which does not exceed 33.7% over the current rent ceilings." With respect to the specific issues with which we are now concerned, the Rent Administrator found that although the loan from Sharp to HHLP was not an arm's length transaction, the 12% rate was commercially reasonable. He further found that HHLP had proved that "the loan proceeds were applied towards the acquisition of the housing accommodation," and that the interest on the loan was therefore allowable as an expense under the Commission's then applicable standards. See Tenants of 1323 Clifton St., N. W. v. Joseph Beavers, H.P. 10,692 (R.H.C. July 22, 1987) ("a loan secured by a housing accommodation cannot be allowed as part of an expense in a hardship petition unless the landlord establishes by credible documentation that the proceeds were applied towards the acquisition . . . of the housing accommodation"). Finally, the Rent Administrator ruled that the garage parking facility, the valet shop, and seven apartments which were then being rented to business tenants were not to be considered commercial enterprises, and that the income and expenses from these entities need not be excluded from the calculation of HHLP's hardship increase.

C. The Commission's first decision -- HHLP I.

Both parties appealed to the Rental Housing Commission, and on November 2, 1989, in HHLP I, the Commission reversed the Rent Administrator's order in part. The Commission held, on two separate grounds, that the interest on Sharp's loan to HHLP could not be deducted as an expense in calculating HHLP's return on its equity. First, the Commission concluded, contrary to the holding of the Rent Administrator, that the proceeds of the loan were not being used to benefit the property as required by the Commission's decision in Beavers. Second, the Commission held that transactions between landlords and landlord-controlled entities require special scrutiny, and that the loan from Sharp could not withstand such scrutiny because it resulted in Sharp's receipt of a windfall at the tenants' expense. The Commission stated, in pertinent part:

We do not disagree with the hearing examiner that 12% may well be a commercially reasonable rate. We do disagree with the hearing examiner that this transaction was a reasonable commercial transaction in real estate financing in light of the legislative purpose undergirding the hardship increase process.

Mr. Sharp received a loan in the amount of $11,400,000.00 on June 30, 198[6], and on that same day, he made a $7,500,000.00 loan to Hamilton House Limited Partnership to pay off the first mortgage. This paper transaction was designed to create a $376,359.00 windfall to Mr. Sharp. We conclude that the $11,400,000.00 loan to Mr. Sharp from the BHF bank was not for the sole purpose of acquiring the building. Another factor raised is the issue of the arm's length transaction. In this case, this was a voluntary transaction by the housing provider. [It was a] loan from the principal of the housing accommodation to the housing provider. The housing provider had complete control over this transaction and it cannot be attributed to a hardship. We cannot agree that a housing provider who makes a loan to his company and receives a $376,359.00 profit can turn to the hardship petition and receive a subsidy from the tenants for the profit.

HHLP I, at 3, 5.

Turning to other issues raised by the tenants, the Commission held that the garage and valet shop in the apartment complex were commercial enterprises and that the Rent Administrator had erroneously allowed the deduction of expenses relating to these enterprises in calculating HHLP's rate of return. Finally, the Commission remanded the case to the Rent Administrator for appropriate findings relating to the use of seven apartments during the relevant time period.

D. The Commission's second decision -- HHLP II.

On November 26, 1989, less than three weeks after the Commission's decision in HHLP I, this court decided J. Parreco & Son v. District of Columbia Rental Hous. Comm'n, 567 A.2d 43 (D.C. 1989). We held in Parreco that the hardship petition ...


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