Rent control is the single biggest risk factor for multifamily investors in urban NJ markets. A building that looks like a 6% cap rate can quickly become a 3% cap rate if you discover the rents are illegal.
The 30-Year Exemption
The saving grace for developers is the state law known as the "Newly Constructed Multiple Dwelling Exemption Act." This law preempts local rent control for new construction for a period of 30 years from the date of completion. This is why you see a premium paid for newer buildings.
Vacancy Decontrol
In older buildings subject to rent control, the key term is "Vacancy Decontrol." This allows a landlord to reset the rent to market rate when a tenant voluntarily vacates. Some towns have full decontrol, some have partial (e.g., a 25% increase cap), and some (like Hoboken) have very strict limits that effectively trap the unit at below-market rates forever.
Capital Improvement Surcharges
Most ordinances allow you to pass through a portion of the cost of major capital improvements (new roof, new windows) to the tenants. However, the calculation is complex and requires approval from the local Rent Leveling Board.
The "Legal Rent" Calculation
When buying a rent-controlled building, do not trust the rent roll. You must request a "Legal Rent Calculation" from the municipality. It is common to find that the current tenant is paying $2,000, but the legal registered rent is only $1,200. If the tenant finds out, you could be liable for treble damages on the overcharge.
Conclusion
Rent control laws are hyper-local and constantly changing. Due diligence here is not just about reading the lease; it's about reading the municipal code.