Three properties owned by the city of Gaithersburg and leased to city employees at below-market rents are budgeted for $10,000 in upkeep this year, more than half the income they are expected to generate, according to city records.

The rental houses have demanded thousands of dollars in maintenance, according to Pete Geiling, facilities and capital projects director, who recommended in June that the city sell them to decrease costs and increase revenue. Combined, they take in $17,450 in rent annually.

"It's not the regular maintenance and upkeep that costs," Geiling said. "It's the capital costs that would be associated in the future — with replacing roofs, HVAC equipment, any other costs that would come up… Why not sell them and the city get out of the rental business?"

Selling the properties is an option, according to City Manager Angel Jones. The city attorney briefed the mayor and council Monday in a confidential meeting on potential legal issues associated with employees residing in city-owned housing, from potential tax implications to personal injury.

At the center of the issue are three properties: a 1,728-square-foot bungalow at 300 Dogwood Drive; a 925-square-foot house at 307 S. Frederick Ave. and a 504-square-foot house with screened porch at 2 James St. The properties were never mentioned during a public hearing on taxable employee housing stipends and Mayor Sidney A. Katz and several members of the council have said they did not know that the city owned the buildings and that city employees lived there.

"It's a program that started with good intentions and fell apart due to mismanagement," said Councilman Henry F. Marraffa Jr., who was elected in 1995.

According to city records, a public works supervisor has rented the 3-bedroom Dogwood Drive house for $350 since 1989. He performs some work in connection to his lease.

His subordinate, an equipment operator has rented the 2-bedroom house on South Frederick Avenue — half the size — for double that since 2007. Another public works supervisor has paid $400 per month rent since 2004 to live in the James Street house, a 1-bedroom with screened porch.

The fiscal 2010 operating budget includes $10,000 to pay for improvements to the houses, which are due to collect $17,450 in rent.

Geiling said that it's difficult to know how much the city has spent maintaining the properties over the years because the public works department's facilities division did not keep many accounting records before 2006, when he introduced a new accounting and record-keeping system.

The city bought the Dogwood Drive property in 1981 for $13,391, the James Street property in 1993 for $65,000 and the Frederick Avenue property for $103,500 in 1998, according to an Aug. 13 memorandum from the city manager to the mayor and council.

In the past three years, the city has spent more than $50,000 maintaining the houses, according to Geiling's records.

The Dogwood Drive house received $15,620 in repairs and maintenance, including a new deck, and the James Street and South Frederick Avenue properties required $18,196 and $17,720 in repairs and maintenance, including a new porch and new driveway, Geiling said.

City rental inspection records show that more than a dozen years of documents for the Dogwood Drive property are missing. Prior work on the properties ranges from repairing roof leaks and subsequent water damage to repairing floorboards, reattaching downspouts and replacing window screens, carpets and sinks.