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Rent Law of 2015: Deregulation, decontrol, renewals and you (Part II)

By Adam Leitman Bailey


August 26, 2015

By Adam Leitman Bailey and Dov Treiman


 

Preferential Rents Now Decrease Vacancy Increases

Under the Rent Law of 2015, the law irrefutably assumes that a preferential rent is not based on some special relationship with the tenant but is a genuine statement of what the market will bear.
Since rent stabilization is supposed to prevent tenants paying above market rents, the logic of the situation that the Legislature saw was that in some manner, so-called “preferential rents” are to have permanent legal effect.

Under the Rent Law of 2015, if the rent that is charged a vacating tenant was less than the legal rent, the 20% vacancy increase now goes down to a 5% vacancy increase if the last vacancy was less than two years previous; 10% if the last vacancy was less than three years previous; 15% if the last vacancy was less than four years previous; and the full 20% only if the last vacancy was at least four years previous. Note that this is not gauged against how much of a preference there is.

Theoretically, if the actual rent charged is a single penny below the legal rent, these decreases to the rate of the vacancy increase come into effect. This is extremely important as it is a common practice in the industry to round rents down on issuing a vacancy lease. So, for example, the new legal rent may be $2,201.54 and the landlord decides to issue a lease in the sum of $2,200.00. This could be a disastrous mistake. In fact, where rents are calculated to a fraction of a penny, the landlord now should always round up. Thus, if the $2,201.54 was really $2,201.541, the landlord should charge $2,201.55 and risk treble damages for an overcharge of a penny instead of risking a drastically lower rent increase on a vacancy.

Example 1: The legal regulated rent for an apartment is, as the most recent tenant is turning in the keys, $2,000/month. The landlord was actually charging the tenant $2,000 a month, the full rent. The landlord is therefore entitled to a vacancy increase of 20% on a one year lease.

Example 2: The legal regulated rent for an apartment is, as the most recent tenant is turning in the keys, $2,000/month. The landlord was actually charging the tenant $1,800 a month with all the proper preferential rent riders in place and the apartment registered showing both the legal rent and the preferential rent. The departing tenant has been there for five years. The landlord is entitled to charge the full 20% vacancy allowance on a one year lease renewal, bringing the new rent to $2,400 as follows: 2,000 x 1.2 = $2,400.

Example 3: The legal regulated rent for an apartment is, as the most recent tenant is turning in the keys, $2,000/month. The landlord was actually charging the tenant $1,800 a month with all the proper preferential rent riders in place and the apartment registered showing both the legal rent and the preferential rent. The departing tenant has been there for three years. The landlord is entitled to charge only a 15% vacancy allowance on a one year lease renewal, bringing the new rent to $2,300 as follows: 2,000 x 1.15 = $2,400.

Example 4: The legal regulated rent for an apartment is, as the most recent tenant is turning in the keys, $2,000/month. The landlord was actually charging the tenant $1,800 a month with all the proper preferential rent riders in place and the apartment registered showing both the legal rent and the preferential rent. The departing tenant has been there for two years. The landlord is entitled to charge only a 10% vacancy allowance on a one year lease renewal, bringing the new rent to $2,200 as follows: 2,000 x 1.1 = $2,200.

Example 5: The legal regulated rent for an apartment is, as the most recent tenant is turning in the keys, $2,000/month. The landlord was actually charging the tenant $1,800 a month with all the proper preferential rent riders in place and the apartment registered showing both the legal rent and the preferential rent. The departing tenant has been there for one year. The landlord is entitled to charge only a 5% vacancy allowance on a one year lease renewal, bringing the new rent to $2,100 as follows: 2,000 x 1.05 = $2,100.

Changes to MCI’s (Major Capital Improvements) and IAI’s (Individual Apartment Improvements)

The Rent Law made no change to the amounts of the rent hikes a landlord could take for improving an apartment either during a vacancy or with the tenant’s consent (IAI). The formula is as it was: For buildings with 35 or fewer apartments, the landlord can take as a rent increase 1/40 of the cost of the improvements. For buildings that are larger than that, the increase is still 1/60 of the cost of improvements. As ever, the only things that can qualify for this kind of treatment are things that are improvements rather than repairs or maintenance. Thus, refinishing floors, painting, and plastering are not appropriate bases for increases. New counters, new cabinetry, entirely new bathroom tile are. Bathroom tile furnishes an excellent example of the difference. Replacing some cracked or missing tiles will not qualify for the increase. Gutting the bathroom and retiling it entirely will.

Example 1: With the tenant’s permission, the landlord renovates an apartment at a cost to the landlord of $7,200 of which $1,200 is repair and maintenance and $6,000 is for new kitchen appliances, counters, and cabinets. The entire apartment building has 12 units. The old rent was $2,000/month. The landlord is allowed to increase the rent $6,000 x 1/40 = $150. The new rent is $2,150.

Example 2: With the tenant’s permission, the landlord renovates an apartment at a cost to the landlord of $7,200 of which $1,200 is repair and maintenance and $6,000 is for new kitchen appliances, counters, and cabinets. The entire apartment building has 40 units. The old rent was $2,000/month. The landlord is allowed to increase the rent $6,000 x 1/60 = $100. The new rent is $2,100.

However, the Rent Law did change MCI’s, building wide improvements. As ever, rent increases for these require a filing with the DHCR for it to decide what to approve, what not to approve, and how much of any of it to approve. However, the amounts that are approved are now set at 1/96 for buildings with 35 or fewer apartments and 1/108 for larger buildings. As under previous law, these are permanent rent increases. They do not come off the rent after the improvements are fully paid for.

Example 1: The landlord replaces the heating system for the building for $100,000.00. The landlord applies to the DHCR for an MCI increase. The DHCR only approves $96,000 of the costs. The building has 20 units. The DHCR then issues an order allowing the building’s rent roll to increase by $1,000/month (96,000/96 =1000). That rent roll increase is then spread over the total number of rooms in the apartment building by a calculation outside of the scope of this article.

Example 2: The landlord replaces the heating system for the building for $100,000.00. The landlord applies to the DHCR for an MCI increase. The DHCR only approves $96,000 of the costs. The building has 40 units. The DHCR then issues an order allowing the building’s rent roll to increase by $889/month (96,000/108 = 889 approximately). That rent roll increase is then spread over the total number of rooms in the apartment building by a calculation outside of the scope of this article.

Loft Law Applications Are Extended Another Two Years

Although the previous law had abolished the ability of the Loft Board to accept coverage applications for buildings newly coming under the Loft Law, the Rent Law of 2015 reopened the application period for a period of two years.

Administrative Penalties Are Increased

The Rent Law increases penalties, most importantly, the penalty for harassment to a maximum of eleven thousand dollars for a second offense.

The New Face of Buy-Outs

The Rent Law of 2015 is part of a concerted push by the State and City leadership to eliminate buyouts as a method of taking apartments out of rent regulation. However, so long as buyouts remain legal both landlords and tenants are going to continue to want them. They just have to be set up differently to come under the new rules and accomplish what they were designed to do. The people whom a landlord might want to buy out fall into three categories: (1) legitimate tenants; (2) questionable tenants; and (3) people with no realistic legitimate claim to the apartment at all.

NYC tenants demonsation

Example 1: For legitimate tenants, the only way to do a buyout that will have the effect of deregulating the apartment is to get permission from the tenant to upgrade the apartment during the tenancy. This will bring the IAI formulas into effect. However, the upgrades may be extremely disruptive and it may be necessary to put the tenant in a hotel during the upgrading process. However, it is important that the tenant actually live in the apartment, at least briefly, after the landlord completes the upgrades. Of course, this may raise the rent considerably on the apartment, but if the landlord gives the tenant a rent concession rather than a preferential rent, the landlord still gets to register the apartment at a legal regulated rent above $2,700 during this tenant’s occupancy. The rent concession should have some kind of reason to back it up, but usually there is something to find that the tenant was unhappy about during the tenancy and so long as there is some reasonable connection between the amount of the concession and that previous unhappiness, after the tenant vacates the renovated apartment, the apartment can go into deregulation.

Example 2: A questionable tenant is someone with a weak succession claim, claiming to succeed to a legitimate tenant. This could be someone who was a non-relative, living with the tenant of record during the tenant of record’s final illness of a period of two years or more. Such a person will claim to be financially interdependent with the tenant and may have some records to show just that. For such a person, if the tenant of record was rent controlled and the apartment would comparably rent in the neighborhood above $2,700, a buyout would include the questionable tenant announcing in the settlement papers that there is no legitimate claim and the landlord and this person agreeing to a first decontrolled rent of over $2,700. The landlord would have to make the appropriate filings and the questionable tenant would have to agree not to file a fair market rent appeal. Once the fair market rent appeal period had passed, then the landlord could do the payouts the contract calls for. This would require no improvements to the apartment.

Example 3: The questionable tenant is as we described in Example 2, but the tenant of record was rent stabilized. If a vacancy increase would be enough to get the apartment over $2,700, then the questionable tenant would announce in the settlement papers that there is no legitimate claim and the landlord and this person would enter into a vacancy lease for over $2,700. There would be no need to do any improvements to the apartment. The same considerations for rent concessions apply here as in Example 2.

Example 4: There is a questionable tenant, but a vacancy increase would not be enough to bring the apartment over $2,700. In this case, the landlord would have to do IAI improvements to bring the apartment over $2,700 while this person is still there, just as in Example 1, although the improvements would not be as great because the landlord could still take the vacancy increase just as in example 3. The rent concessions are also handled in the same way as in the previous examples.

Persons with no legitimate claims are treated in the same manner as questionable tenants.

It is important to realize that all of these examples require strict adherence to truth. There are enough examples given here as to how to deal with the truth. There is no excuse for making something up.

Conclusion

The Rent Act of 2015 is a collection of relatively minor tweaks to the rent regulatory system and a massive overhaul of 421-a. However, these tweaks are collectively designed to severely cut down on buyouts and to increase the number of rent regulated units citywide. If one masters the new rules, however, to a large extent, business can proceed as usual.

Original content here.

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS