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In Re Grogan Marineview Plaza

A-2141-07T1 (N.J. Super. App. Div. 2008) (Unpublished)

MORTGAGES; RENT CONTROL — A government housing agency, when acting as a mortgagee, has the right to include provisions in the mortgage that require its consent to rent increases and in deciding whether to grant an increase, such agencies are given considerable deference by courts with such agency decisions to be reversed only if found to be arbitrary, capricious or unreasonable.

A property owner owned and operated a government financed housing project. It entered into a mortgage agreement with a government housing agency to finance the project’s development. According to the terms of the mortgage and of a regulatory agreement, the property owner could not increase the rent on the apartments without the agency’s permission. The owner ran into financial difficulties and had difficulty in obtaining and retaining tenants. As a result, it defaulted on its mortgage. Following the default, the property owner and the agency entered into a number of mortgage modifications. About fourteen years after the mortgage had last been modified, the owner requested permission to increase rents by 33% in order to upgrade the rental units and the building lobby. No such improvements had been made in the thirty years since the building was built. It also wanted to make prepayments on its long-term debt. Part of the requested increase was to fund its repair reserve account. The agency responded with approval for a 6-1/2 % rent increase. The owner requested an administrative hearing, which resulted in a finding in favor of the property owner, but ultimately the agency issued a final decision which rejected the property owner’s request for the 33% increase, instead affirming the 6-1/2% increase.

On an appeal of the agency’s decision, the Appellate Division pointed out that administrative agencies receive considerable deference and that agency decisions are only to be reversed if found to be arbitrary, capricious or unreasonable. The owner’s argument that it needed higher rents in order to make prepayments on its debt was rejected because the amended mortgage agreement did not require the owner to make prepayments and therefore prepayments were not necessary. The Court also rejected the owner’s argument that the increase was needed to allow the owner to make return on equity distributions, pointing out that according to the amended mortgage agreement the owner was required to cure the monetary mortgage default before making any such distributions. It also disagreed with the owner that the agency’s decision to deny rent increases to fund of the repair reserve and to deny the 33% rent increase for the purpose of making improvements was unreasonable. It added that it was reasonable for the agency to require the owner to obtain multiple bids for the requested repairs.

Based on its findings and conclusions, the Court affirmed the housing agency’s final decision denying the owner’s request for increased funding of its repair reserve and denying it permission to increase the rent on its apartments by 33%.

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