Introduction to the NYC Rent Guidelines Board
Table of Contents
FEATURES OF RENT STABILIZATION
II) (Part III)
ADMINISTRATION OF RENTS UNDER RENT STABILIZATION: THE ROLE
OF THE DIVISION OF HOUSING AND COMMUNITY RENEWAL
discussed in the section dealing with the history of rent stabilization,
the State Division of Housing and Community Renewal ("DHCR"),
through its Office of Rent Administration ("ORA"), is responsible
for administering rent stabilization (along with rent control).
The DHCR has three major roles within the rent stabilization
system: It has the quasi-legislative role of promulgating the
Rent Stabilization Code. It has the executive role of administering
the various filing, registration and special rent adjustment
provisions of the Code, and in prosecuting those who violate
any part of it. And finally, it has the quasi-judicial role of
judging the merits of claims brought pursuant to the Code between
tenants and owners in accordance with the standards applicable
to administrative tribunals. If appealed, such determinations
are subject to review by the state courts. What follows is a
brief discussion of those areas where the decisions of the DHCR
may affect rent levels.
Capital Improvements and Individual Apartment Improvements
introductory paragraphs of a June 1989 report entitled Review
of the Major Capital Improvement Program prepared for the
DHCR by Ernst & Whinney and Speedwell, Inc., outline the issues
and objectives related to this program:
an attempt to maintain and improve the condition of rent
regulated housing in New York, owners who undertake building-wide
major capital improvements (MCI's) have historically been
allowed increases in base rents over and above annual rent
guidelines and MBR rent increases to compensate them for
such investments. These increases are allowed without the
consent of tenants if the improvements are for "the operation,
preservation and maintenance of the structure" and are approved
by the Division of Housing and Community Renewal (DHCR).
In addition, one-fortieth of the cost of improvements made
to individual apartments can be added to the monthly base
rent with the tenant's consent or if the apartment is vacant.
concept of rewarding owners by increasing their internal
rate of return has always been controversial, since the increase
is basically financed by the tenants who occupy the building
and do not have a significant role in approving the improvements.
Representatives of tenant interests argue that the potential
for MCI increases encourages owners to delay maintenance
activity, for which no incentive is provided, in order to
qualify for the MCI program and its investment incentives.
In addition, increases to base rents impact tenant affordability.
Representatives of owner interests argue that a rent regulated
system removes their ability to recapture replacement costs
without special consideration, and that the current incentive
levels are not sufficient to attract needed improvements
the major capital improvement program allows owners to increase
monthly rents by a formula that allocates 1/84th of the cost
of the improvements among the units in the building. Rents may
not be increased by more than 6% per year (15% for rent controlled
units), however, and owners must often wait two or three years
before the full 1/84th allocation is fully incorporated into
the building's rent structure. Thus, if 1/84th of the cost of
a given improvement would ultimately permit a 10% increase in
monthly rent, the tenant will receive a 6% MCI rent increase
in year one and a second increase equaling 4% of the original
rent in year two.130 These
increases are added separately and apart from increases granted
by the Rent Guidelines Board. Once the rents have been increased
they remain part of the base rent even after the expiration of
the 84-month "amortization" period.131 Major
capital improvements may also qualify for J-51 tax benefits but
a portion of the rent increases must be forgone if these benefits
are granted. MCI increases must be approved by the DHCR before
they may be collected. Tenants are notified of the MCI application
and given an opportunity to object.
new appliances or improvements to individual apartments are concerned,
1/40th of the cost is added to the apartment's base rent. The
owner is required to obtain permission from the tenant who occupies
the unit to qualify for this type of rent increase. If the apartment
is vacant, the rent of the subsequent tenant is simply adjusted
and no approval is necessary. There is no cap on the annual increase
in rent that may be collected as a result of the improvement
and the prior approval of DHCR is not required.
increases resulting from major capital improvements and individual
apartment improvements received a great deal of attention at
the hearings of the Rent Guidelines Board in the late 1980's.
Tenants often asserted that guideline adjustments should take
into account the returns being realized by owners through these
programs. Owners argued that, taken as a whole, they are still
under--compensated for their investments. According to the above
quoted study, "the estimated rate of return for the sample [of
1003 MCI applications studied], excluding a few J-51 ineligible
buildings, was 18.2%"(p.3). This figure is somewhat overstated,
however, since the "amortization period" was five years or sixty
months when the study was conducted. Legislation in 1990 [perhaps
in response to the study's findings] extended the amortization
time to the current seven-year or 84-month period, thus reducing
the allowable rent increase.
upon an "analysis of the provisions of the [individual apartment]
program" the "annual after tax rate of return ... was estimated
to be 33.9% if the improvements were not financed and 68.5% if
60% of the improvements were financed."(p.3). Despite a DHCR
initiative to raise the amortization period (and thus reduce
the rate of return) the forty month period for this program remains
in effect and was codified in statute with the adoption of the
Rent Regulation Reform Act of 1993. Since no prior approval is
needed for the individual apartment improvements, no delay in
obtaining these increases is incurred.
rent regulation system that required owners to maintain artificially
reduced rents in the face of chronic operating losses would be
viewed as confiscatory. Nearly every rent regulation system allows
for some type of rent adjustment to remedy such situations.
rent stabilization in New York City there are two formulas for
determining whether a rent increase is appropriate in hardship
cases: the comparative method and the alternative method.
Under the comparative method a rent increase may be granted if
the owner has not maintained the same average net income in the
current three year period as was maintained for the years 1968-70
(marking the beginning of rent stabilization). If records are
unavailable, a more recent three-year period may be substituted,
under certain conditions.
hardship application will not be approved unless the owner can
calculating the rate of return the Code establishes six times
the rent roll as the fair market value. Operating expenses, an
allowance for management services and "actual annual mortgage
debt service" are subtracted from gross rents to determine if
the remaining balance falls short of 8.5% of the owners equity
in the building. If it does, and all other conditions are satisfied,
the owner may obtain rent increases equal to the difference between
the average annual net income for the three-year base period
and the average annual net income for the current period. Rents
may be raised no more than 6% in any one-year period, however,
and tenants may cancel their leases if they wish to leave and
avoid the increases.132
the Alternative Hardship formula established by the Omnibus
Housing Act of 1983, owners are permitted to receive a rent increase
when the building's annual operating expenses (including mortgage
interest) are greater than 95% of the gross rent. To qualify
for a hardship increase the owner must:
owned the property for at least three years;
at least a 5% equity position;
have received a hardship increase within the previous three
paid or have lawfully challenged real estate taxes and water
and sewer charges; and
maintained all services and corrected all immediately hazardous
violations or restoration and correction has been made a condition
of granting the increase.
comparative hardship, rents may be increased no more than 6%
per year until the hardship has been remedied and the tenant
may avoid the increase by canceling the lease.133
to a 1989 report on hardship increases prepared by the Policy
and Research Bureau of DHCR, "from 1984-1988 inclusive, 128 alternative
hardship applications were reviewed. Of these, 92 were denied,
1 was approved, 33 were pending and 2 were withdrawn." Eleven
comparative hardship applications were reviewed. Ten were reported
as "denied for being incomplete" and one was pending. The report
went on to suggest some of the most likely reasons for the limited
number of applications and the extremely low approval rate:
are not losing money".
of tenant affordability problems "owners...are not interested
in a complicated filing for a rent increase they cannot collect".
hardship application suffers from •bad press'".
small owners cannot afford the services of an accountant, may
not keep good records and may "face language barriers and other
handicaps in dealing with the rent regulation structure".
hardship application process is too complex".
conditions including length of ownership, mortgage costs and
purchase price have operated to help limit the prevalence of
true hardship cases. Yet, "the current low level of applications
received, may change radically with the slowdown of New York
City's economic expansion."
approval rate of hardship applications has increased little and
the number of applications received annually remains very low.
In recent years about two dozen such applications have been filed
each year. This is an area of consistent concern to the RGB and
the focus of possible legislative reform by DHCR. The return
guaranteed by the hardship program was the subject of an unsuccessful
constitutional challenge in the U.S. 2d Circuit Court of Appeals.134
Market Rent Appeals: (Apartments moving from Rent Control to
noted in the section concerning the history of rent regulation,
most apartments under rent control will become rent stabilized
upon vacancy. Over 700,000 formerly rent controlled units have
fallen under rent stabilization this way, although only a small
fraction of newly stabilized tenants will challenge their rents.
Because the relationship of rents in rent controlled units to
prevailing market rents varies dramatically from unit to unit,
a standard increase upon becoming rent stabilized would result
in stabilized rents which themselves are erratic and inconsistent
in their relationship to market rents. To avoid this the authors
of the ETPA wanted to provide a large degree of flexibility in
the setting of rents when rent controlled units become stabilized.
They did not, however, want to deprive tenants in newly stabilized
units of an opportunity to protest rents that bear no reasonable
relationship to a "fair" market amount. Consequently, a system
was adopted which allows tenants to challenge newly stabilized
rents in formerly rent controlled units through what is known
as a "Fair Market Rent Appeal".
process begins with the vacancy of a rent controlled tenant.
Recall that rent controlled units may be found in any building
constructed prior to February 1, 1947, with three or more legal
units and occupied by the same tenant since June 30, 1971 or
occupied by the tenant's lawful successor (a spouse, adult lifetime
partner or other family member). Rent controlled units that are
in 3, 4 or 5 unit buildings do not become stabilized upon vacancy
and, consequently, no process for appealing rent levels is available.
If the vacated apartment is in a building with 6 or more units,
although stabilized, the owner is initially free to advertise
the apartment for any amount. The owner must, however, notify
any new tenant of his/her right to challenge the rent within
90 days by providing the tenant with an "Initial Legal Regulated
Rent Notice". If the tenant decides to challenge the rent, the
tenant "need only allege that [the Initial Legal Regulated Rent]
is in excess of the fair market rent and ... present such facts
which, to the best of his or her information and belief, support
the appeal is filed, two methods are employed in attempting to
determine if the new rent is legally "fair". The DHCR will look
to a special guideline promulgated by the Rent Guidelines Board
[more will be said about how this guideline is established here].
Until 1988 this special guideline took the form of a percentage
increase above the pre-existing Maximum Base Rent for the unit.
From 1988 through 1990 the Board experimented with alternative
formulas above the Maximum Collectible Rent or "MCR" [See "Rent
Control Today" for the distinction between MCR & MBR].
Returning to the original approach, in 1991 and 1992 the special
guideline consisted of a fixed rate of 15% above the MBR. In
an attempt to close the gap between rents in pre-47 stabilized
units and rents in recently decontrolled units, in 1993 the Board
moved to a straight 40% increase above the MCR.
later years the Board added a minimum increase above both the
MBR and the MCR. Thus, in 1995 the special guideline consisted
of the greater of 35% above the MBR or 45% above the MCR. In
1996 and 1997 the numbers were 40% and 50% respectively. In 1998
the Board increased the special guideline to the greater of 80%
above the MBR or a minimum of $650. In 1999 and 2000 the Board
adopted a complex special guideline consisting of the greater
of 150% above the MBR plus the fuel cost adjustment, or the Fair
Market Rent for existing housing established by the U.S. Department
of Housing and Urban Development.
DHCR will also consider "rents generally prevailing in the same
area for substantially similar housing accommodations". This
is known as the "comparability" standard. The owner may submit
evidence of rents for comparable units rented to tenants up to
four years prior to or one year subsequent to the commencement
of the complaining tenant's initial lease. Leases ending more
than one year prior to the commencement of the complaining tenant's
lease are updated by guideline amounts. Alternatively, "[a]t
the owner's option, market rents in effect for other comparable
housing accommodations on the date the tenant filing the appeal
took occupancy" may be considered.136
Office of Rent Administration will average the rent adjusted
pursuant to the Special Guideline with any qualified comparable
rents in reaching a final rent determination in a Fair Market
Rent Appeal. Thus, the comparability standard does not operate
in a manner that is wholly independent of the Special Guideline.
Notably, unlike other rent overcharges, rents paid in excess
of the Fair Market Rent determined by the DHCR are not subject
to treble damages.
is critical to note that if the newly established rent exceeds
$2,000 (and the tenant was initially charged over $2,000) the
apartment becomes deregulated in accordance with the Rent Regulation
Reform Acts of 1993 and 1997. If the owner rents the apartment
for more than $2,000 upon vacancy of a rent controlled tenant
and the incoming tenant fails to challenge the rent within the
90-day period, the apartment is also deregulated. In any event,
any rent changed and paid and not challenged within the general
four year statute of limitations is deemed lawful, whether or
not the tenant was served with a 90-day notice to file a fair
market rent appeal.
Rent Stabilization Code clearly prohibits charging rent in excess
of the legal regulated rent and this includes a prohibition against
demanding "key money" or any other special charge not specifically
authorized by the Code.137 The
amount of the security deposit and the distribution of interest
from such deposits is also regulated by the Code.138 Willful
rent overcharges may result in a penalty to be paid to the tenant
equal to three times the overcharge. Treble damages for willful
overcharge claims may be collected for only two years of the
overcharge. An overcharge which the owner demonstrates not to
have been willful will result in a straight repayment of the
overcharge to the tenant plus interest. Damages for non-willful
overcharge claims may be had for up to four years prior to filing
the overcharge claim.139 Both
the Rent Stabilization Code and Section 213-a of the State's
Civil Practice Law and Rules prohibit consideration of evidence
of a rent overcharge occurring more than four years prior to
the filing of the complaint. It is important to note that certain
courts (most notably the Housing part of the Civil Court of the
City of New York) have concurrent jurisdiction with the DHCR
over rent overcharge claims.
Adjustments in Rent: air conditioners, failure to maintain
services, failure to register
buildings where the owner provides electricity to individual
tenants as part of the services covered by the base rent [approximately
14% of stabilized units], the owner may add a special separate
charge for air conditioner usage when a new air conditioner is
installed. If the air conditioner is installed by the tenant
the owner may charge the monthly amount permitted by the DHCR
in accordance with its most recent operational bulletin update
on air conditioner rates. (See DHCR's fifteenth annual update
of section B of supplement No. 1 to operational bulletin 84-4.
For the period from 10/1/00 through 9/30/01 - permitting an $20.74
per month charge per air conditioner if electricity costs are
included in the rent). If installed by the owner with the tenant's
permission, the same amount may be collected and, in addition,
the owner may collect 1/40th of the cost of the air conditioner
as permitted by §2522.4(a)(1) of the Code.
to Maintain Services
noted in the discussion concerning habitability (supra, here),
failure to maintain the services required under §2520.6(r)
of the Rent Stabilization Code could result in a rent reduction
equal to the last guideline increase. The DHCR is responsible
for reviewing these applications.140 Most
of the services covered are now protected by the warranty of
habitability, however, and it is often the case that tenants
will resolve service complaints in the context of a housing court
proceeding - most typically in response to an owner's action
for non-payment of rent. Notably, new amendments to the Rent
Stabilization Code have classified a number of service reductions
as "de minimus" and therefore not substantial enough to result
in a DHCR ordered rent reduction (RSC 2523.4(e)).
Rent Stabilization Code requires owners to register all rent
stabilized units.141 Failure
to register will bar an owner from collecting any rent increase
for the period during which the apartment was required to be
registered but was not. Once a late registration is properly
filed the owner may collect these increases on a prospective
basis only. Thus, the tenant is not obligated to pay any rent
increase until the unit is properly registered and the owner
may not recoup his/her losses by registering late. The Rent Regulation
Reform Act of 1993 added that if rents collected on unregistered
units "were lawful except for the failure to file a timely registration,
the owner, upon the service and filing of a late registration,
shall not be found to have collected an overcharge at any time
prior to the filing of a late registration. If such late registration
is filed subsequent to the filing of an overcharge complaint,
the owner shall be assessed a late filing surcharge for each
late registration in an amount equal to fifty percent of the
timely rent registration fee."142
Rent Vacancy Deregulation
renting for $2,000 per month or more which are vacant are no
longer subject to rent regulation. Vacancy deregulation of high
rent units has been in effect since July 7, 1993 under the provisions
of the 1993 Rent Regulation Reform Act. Notably, a stabilized
rent can exceed $2,000 per month and remain stabilized if the
same primary tenant remains in the apartment and renews his or
her lease, and they are not otherwise subject to high income
the legal regulated rent for an apartment exceeds $2,000 per
month and the total household income for two consecutive years
exceeds $175,000 per year, the apartment is subject to statutory
decontrol. Confirmation of income is a process that involves
the filing of an income statement with the DHCR if the owner
makes a proper demand. If the tenant fails to respond in a timely
fashion, the unit is subject to destabilization by default. If
an income certification is received, the DHCR will check it against
the records of the State Department of Taxation and Finance.
If such a check confirms an income greater than $175,000 a destabilization
order will issue.
Introduction to the NYC Rent Guidelines Board
Table of Contents
FEATURES OF RENT STABILIZATION
II) (Part III)
practice of adding an additional increase of 6% (for a total
of 12%) to make up for delays in processing MCI applications
was stricken by the N.Y. Court of Appeals in Bryant Ave. Tenant's
Association v. Koch 71, N.Y. 2d 856 (1998).
aspect of the MCI program has been upheld by the New York State
Court of Appeals (Ansonia Residents Assn. v. DHCR, 75
N.Y. 2d 206 (1989)).
RSC §2522.4(b) and RSL 26-511(c)(6).
RSC §2522.4(c) and RSL 26-511(c)(6-a).
case #16, supra at 43-44.
RSL §26-513(b), included in Appendix
RSC §2525.1 et seq.
RSC §2525.4; see also General Obligations Law, Article 7
- The security deposit laws are enforced by the State Attorney
generally RSC §2526.1.
Stabilization Law §26-517(e).