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(2) Step 2: add to the figure computed in Step 1 an amount equal to 8 percent of such figure.

(3) Step 3: (A) In the case of a housing accommodation for which the rate of return, as shown on the registration statement and computed according to part (B) of this step, is less than 8 percent, the landlord may add to the figure computed in step 2 a pro rata share of an amount sufficient to increase the maximum possible rental income for that housing accommodation by such an amount as will generate a rate of return of no greater than eight percent, Provided, That no increase shall be more than five percent of (1) the amount computed in step 2 or (2) the rent as established by the Housing Rent Commission or a court of competent jurisdiction.

(B) In determining the rate of return for each housing accommodation, the following formula shall be used (computed over a base period of any consecutive twelve month period within the .. fifteen months immediately preceding the filing of the registration statement):

(1) The sum of the maximum possible rent income which can be derived from a housing accommodation shall be added.

(2) To the sum of all other income which can be derived from the housing accommodation.

(3) From the total of maximum possible rental income which can be derived from a housing accommodation plus the sum of all other income which can be derived from the housing accommoderation shall be subjected (i) the dollar value of vacancy losses and (ii) uncollected rents the remainder of which shall be defined as the "gross income".

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(4) From the gross income shall be subtracted (i) the operating expenses; (ii) property taxes; (iii) management fee of no more than six percent of the maximum rental income of the accommodation unless and only to the extent any additional amount is approved by the Rent Administrator pursuant to subsection (b) of section 205 of this act; (iv) depreciation expenses (computed on a straight line basis) of no more than two percent of the assessed market value of the housing accommodation may be de ducted in any one year as a depreciation expense, unless and to only the extent any additional amounts are approved by the Rent Administrator pursuant to subsection (c) of section 205 of this act; and (v) amortized costs of capital improvements if and spermitted pursuant to subsection (a) of section 205 of this act. The remainder after such subtractions shall be defined as the "net income".

(5) The net income shall be divided by the assessed nark value of the housing accommodation to determine the rate of

return.

(b) The rent ceiling for a particular rental unit computed according to the procedure specified in this section may be increased or decrease as the case may be,

(1) according to section 206, to allow for an increase or decreas in related services or facilities:

(2) according to section 210, to allow for the cost of substantis rehabilitation; or

(3) according to section 208 to allow for adjustments for vacant accommodations.

(c) In addition to the adjustments in the rent ceiling which are allowed as specified in subsection (b), any landlord may apply for a hardship adjustment to be computed under section 209.

(d) The rent ceiling for any unit in a housing accommodation exempted by paragraphs (3), or (6) of subsection (a) of section 202 from the provisions of sections 203-212, after the termination of such exemption, shall be the rent charged during the initial leasing period or during the first year of tenancy, whichever is less, increased by an amount not in excess of an amount computed in accordance with step 3 of the formula specified in subsection (a), Provided, That, no increase shall be more than five percent of the rent so charged. Such increase may be effected only in accordance with the procedures specified in subsections (h) and (i) of this section.

(e) Notwithstanding any provision of this act, the rent for any rental unit shall not be increased above the base rent unless (1) the housing accommodation of which such rental unit is a part is in substantial compliance with the housing regulations, Provided, That, such non-compliance is not the result of tenant neglect or misconduct; (2) the housing accommodation is registered in accordance with section 202; (3) the landlord of such housing accommodation is properly licensed pursuant to the housing regulations if such regulations require his licensing; and (4) the manager of such housing accommodation, when other than the landlord, is properly registered pursuant to the housing regulations if such regulations require his registration.

(f) If, on the effective date of this act, the rent being charged exceeds the allowable rent ceiling, the rent shall be reduced to the allowable rent ceiling effective the next date that the rent is due, Provided, That this subsection shall not apply to any rent approved by the Housing Rent Commission under Regulation 74-20 or any rent approved by a court of competent jurisdiction. The landlord shall notify the tenant in writing of the required decreases prior to the effective date of such decreases.

(g) Notwithstanding any other provision of this act, no rent shall be increased under this act for any rental unit with respect to which there is a valid written lease or rental agreement establishing the rent for such rental unit for the term of such written lease or rental agreement.

(h) (1) If a landlord indicates on his registration statement filed under subsection (b) of section 202 of this act, or on any document filed under item (3) of subsection (c) of section 202 of this act, that he is entitled to an increase in rents under part A of step 3 of subsection (a) and that he intends to so increase such rents, such landlord shall immediately notify (in writing) the tenants of the rental units to which such increase applies of the intended rent increase. Such notice shall be mailed to the tenants by certified mail, return receipt requested. Such notice shall include those items listed in subsection (i) of this section, and, in addition, a copy of that portion of the registration statement which shows the computation of the rate of return relating to the housing accommodation containing the rental units for which a rent increase is sought. The Commission shall by regulation prescribe the actual wording (including the size of type to be used)

of a statement to be included with such notice informing the tenantthat they may request an audit of such registration statement and a hearing on such audit and giving the address where and time within which such request may be made.

(2) Any intended rent increase to be made under part (A) of step 3 of subsection (a) of this section shall not be effective before the first day that rent is due occurring more than 30 days after the notice specified in paragraph (1) of this subsection is mailed. If during such 30 days, a tenant in a housing accommodation to which such increase applies files a request for an audit of such registration statement, the Rent Administrator shall forthwith notify the landlord of such request and the landlord raising such rents shall pay the amounts collected reflecting such increase from the tenants of the housing accommodation, beginning on the effective date of such increase, into an interest bearing escrow account established by the landlord in a bank or other financial institution in the District of Columbia. Interest on such accounts shall be at least 514 percent. The landlord shall keep detailed records for such accounts showing the exact amounts in such accounts attributable to each tenant in the housing accommodation concerned. Such account, and such records, shall be maintained until the Rent Administrator completes the requested audit and issues an order specifying how the contents of such account is to be distributed. Either the landlord, or the tenant requesting an audit, may demand and receive a hearing on the audit. If the Rent Administrator finds. as a result of his audit, that such increase is justified, then he shall award the amounts in such account to the landlord. If the Rent Administrator finds, as a result of his audit that such increase was not justified, then he shall award the amounts in such account to the tenants concerned. If he finds such increase to be partially justified, he shall order the amounts in such account to be distributed equitably to reflect such finding. The Rent Administrator shall complete each such audit within a reasonable time.

(3) If any tenant files a petition for an audit of a registration statement more than 30 days after the mailing of the copy of such statement, the Rent Administrator shall conduct such an audit in a reasonable time, but the landlord shall not be required to place the amounts reflected by the increase in escrow. In addition, the Rent Administrator or Commission may initiate such an audit.

(4) An appeal may be taken from a decision of the Rent Administrator made as a result of an audit by filing a notice of such appeal with the Commission within fifteen days after the date of the decision being appealed.

(5) In the course of conducting any audit or review of any proposed rent increase under this act, the Rent Administrator may require the landlord concerned to produce copies of relevant portions of income tax forms filed by the landlord with either the Federal or District of Columbia for no more than three years.

(i) Each notice of an impending rent increase shall be in writing and shall contain a statement of the:

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(1) current rent;

(2) proposed rent;

(3) percentage increase that the proposed rent represents over the current rent;

(4) effective date of the proposed rent increase;

(5) base rent;

(6) percentage increase that the current rent represents above the base rent;

(7) percentage increase that the proposed rent represents above the base rent;

(8) registration number of the accommodation;

(9) certification and explanation by the landlord that the unit is in substantial compliance with the housing regulations and that the increase is in substantial compliance with the housing regulations and that the increase is in compliance with this act. (10) exact method of computation of the increase including itemization of cost figures to which the increase is attributable when such increase is pursuant to sections 205, 206, 208, 209, of this title:

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(11) statement of the penalties as described in section 215, and

(12) location of the registration statement in a public place on the premises in accordance with subsection (d) of section 202.

CAPITAL IMPROVEMENTS

SEC. 205. (a) In the case of a landlord who has completed capital improvements, the Rent Administrator may permit the costs of such improvements, amortized over the useful life of such improvements and applied on an equal basis to all rental units within the housing accommodations benefiting from such improvement, to be included as an item in the computation of the rate of return to be subtracted from gross income as defined in part (B) of step (3) of subsection (a) of section 204 of this title PROVIDED That, (1) the landlord has made available to the Rent Administrator and to the tenant concerned the plans, contracts, specifications, and building permits relating to the capital improvements; and (2) the Rent Administrator is satisfied that the interests of the tenant are being protected.

(b) Where, in the computation of a rate of return, a landlord seeks to deduct a management fee in excess of six percent of the maximum possible rental income, he shall first file with the Rent Administrator a petition to allow such excess to be deducted. If the Rent Administrator determines that such excess or part thereof is reasonable, he may permit to be deducted the same or so much thereof as he determines to be reasonable. The petition shall contain such information as the Rent Administrator may require including but not limited to the name of the payee of the fee and what, if any, identity exists between the landlord and the payee.

(c) Where, in the computation of a rate of return, a landlord seeks to deduct depreciation expenses in excess of two percent of the assessed market value of the housing accommodation, he shall first file with the Rent Administrator a petition to allow such excess to be deducted. If the Rent Administrator determines that such excess or part thereof is justified, he may permit to be deducted the same or so much thereof as he determines to be justified. The petition shall contain such information as the Rent Administrator may require including but not

limited to what if any depreciation of the housing accommodation has been claimed for tax purposes.

(d) Nothing in subsections (b) and (c) of this section shall be construed to prohibit or limit the Rent Administrator in any determination of the accuracy of any claimed management fee of six percent or less of the maximum possible rental income or any claimed depreciation expense of two percent or less of the assessed market value of the housing accommodation.

SERVICES AND FACILITIES

SEC. 206. If the Rent Administrator determines that—

(1) the related services or related facilities supplied by a landlord for a housing accommodation or for any rental unit therein are substantially increased; or

(2) the related services or related facilities supplied by a landlord for a housing accommodation or for any rental unit therein are substantially decreased; then the Rent Administrator may increase or decrease the rent ceiling applicable to such rental unit accordingly.

SECURITY DEPOSIT

SEC. 207. No person shall demand or receive a security deposit for any rental unit where no security deposit was demanded or received for such rental unit upon the effective date of this act.

VACANT ACCOMMODATION

SEC. 208. (a) When, after the date the initial registration statement is filed under this act, a rental unit becomes vacant, the landlord may adjust the rent ceiling for such rental unit to the rent ceiling applicable to any substantially identical rental unit within the same housing accommodation, provided the tenant has vacated on his own initiative or as a result of notice to vacate for one of the following causes: (1) nonpayment of rent; (2) violation of an obligation of his tenancy, as provided in item (1) of subsection (b) of section 213 of this act; or (3) use of the accommodation for an illegal purpose or purposes, as provided in item (2) of subsection (b) of section 213 of this act.

(b) For the purposes of this section, rental units shall be defined to be "substantially identical" where they contain essentially the same square footage, essentially the same floor plan, comparable amenities and equipment, comparable locations with respect to exposure and height (if exposure and height have previously been factors in the amount of rent charged), and are in comparable physical condition.

HARDSHIP PETITION

SEC. 209. (a) In those cases where, after any increase which may be permitted by Part (A) of step 3 of subsection (a) of section 204, the landlord can show a negative cash flow after consideration of debt service, the Rent Administrator, upon petition of the landlord, may allow such additional increases in rent as will generate a positive cash flow, Provided, That, in the consideration of such petitions, the Rent Administrator shall consider the degree of hardship which the re

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