In relation to approval of major capital improvement rent increases and extending the length of time over which major capital improvement expenses may be recovered

Section 1 of the bill amends subparagraph (g) of paragraph 1 of subdivision g of section 26-405 of the administrative code of the city of New York, as amended by section 31 chapter 20 of the laws of 2015, to permit for the individual adjustment of maximum rents in the case of an MCI where the State Homes and Community Renewal Commissioner first finds that an improvement is depreciable under the Internal Revenue Code and is required for the operation or preservation of the structure. However, no MCI rent increases will be approved by the division of housing and community renewal (DHCR) unless the work performed is an enhancement or upgrade, or is an addition to such housing accommodation. Any repair or replacement intended to maintain an existing service is ineligible. If any outstanding hazardous violations exist, no MCI rent increase application will be approved unless DHCR determines that such work is essential to the alleviation of the violations and such approval is consistent with this section. Except in cases of emergency or good cause, the property owner will file an application and affidavit with DHCR containing specific information about the scope of the work to be done and information about the owners of the property, including a statement confirming that no owners have been found to have harassed or unlawfully evicted tenants in the five years prior to the MCI. DHCR will then provide the occupying tenants with such information and will elicit tenant comments to determine whether the work has been satisfactorily completed. No MCI rent increase shall become effective until any defective or deficient rehabilitation work has been cured.

The increase permitted for MCIs shall be collected as a separately designated monthly surcharge to the maximum rent that shall not be compounded by any other adjustments. The surcharge allocable to each apartment shall be an amount equal to the cost of the improvement divided by eighty-four, divided by the number of rooms in the building, and then multiplied by the number of rooms in such apartment. However, the surcharge to any apartment in any year may not exceed six percent of the monthly rent collected by the owner for such apartment. Any excess shall be carried forward and collected in future years. The collection of surcharges for MCIs shall cease when the owner has recouped the costs attributable to the MCI.

Section 2 of the bill amends subparagraph (k) of paragraph 1 of subdivision g of section 26-405 of the administrative code of the City of New York, as amended by chapter 749 of the laws of 1990. Where a landlord has incurred other expenditures of 10% or greater in connection with and in addition to a concurrent adjustment for an MCI, additional adjustments shall be implemented in the same manner as such MCI, as a further surcharge to the maximum rent.

Section 3 of the bill amends paragraph 6 of subdivision c of section 26-511 of the administrative code of the city of New York, as amended by Section 29 of part A of the laws of 2015. This section removes an existing requirement that the cost for completed building-wide MCIs be "amortized over a seven-year period", insofar as the interpretation of that term has departed from its ordinary meaning, misconstruing the intent of the statute.

Section 4 of the bill amends subdivision c of section 26-511 of the administrative code of the city of New York, by adding three new paragraphs 6-b, 6-c and 6-d. These paragraphs provide criteria for approving MCI applications, as follows:

Paragraph 6-b provides that the Commissioner must first finds that an improvement is depreciable under the Internal Revenue Code and is required for the operation or preservation of the structure. However, no MCI rent increases will be approved by the division of housing and community renewal (DHCR) unless the work performed is an enhancement or upgrade, or is an addition to such housing accommodation. Any repair or replacement intended to maintain an existing service is ineligible. If any outstanding hazardous violations exist, no MCI rent increase application will be approved unless DHCR determines that such work is essential to the alleviation of the violations and such approval is consistent with these provisions. Except in cases of emergency or good cause, the property owner will file an application and affidavit with DHCR containing specific information about the scope of the work to be done and information about the owners of the property, including a statement confirming that no owners have been found to have harassed or unlawfully evicted tenants in the five years prior to applying for the MCI. DHCR will then provide the occupying tenants with such information and will elicit tenant comments to determine whether the work has been satisfactorily completed. No major capital improvement rent increase shall become effective until any defective or deficient rehabilitation work has been cured.

Paragraph 6-c provides that the increase permitted for MCIs shall be collected as a separately designated monthly surcharge to the maximum rent that shall not be compounded by any annual adjustment of the level of fair rent provided for under subdivision b of section 26-510 of this law. The surcharge allocable to each apartment shall be an amount equal to the cost of the improvement divided by eighty-four, divided by the number of rooms in the building, and then multiplied by the number of rooms in such apartment. However, the surcharge to any apartment in any year may not exceed six percent of the monthly rent collected by the owner for such apartment. Any excess shall be carried forward and collected in future years.

Paragraph 6-d ensures that the collection of surcharges for MCIs, as provided for in paragraphs 6-b and 6-c of this subdivision, shall cease when the owner has recouped the costs attributable to the MCI.

Section 5 of the bill amends paragraph 3 of subdivision d of section 6 of section 4 of chapter 576 of the laws of 1974 (known as the Emergency Tenant Protection Act of 1974), as amended by section 30 of part A of Chapter 20 of the Laws of 2015 to permit an MCI where the State Homes and Community Renewal Commissioner first finds that an improvement is depreciable under the Internal Revenue Code and is required for the operation or preservation of the structure. However, no MCI rent increases will be approved by DHCR unless the work performed is an enhancement or upgrade, or is an addition to such housing accommodation. Any repair or replacement intended to maintain an existing service is ineligible. If any outstand- ing hazardous violations exist, no MCI rent increase application will be approved unless DHCR determines that such work is essential to the alle- viation of the violations and such approval is consistent with this section. Except in cases of emergency or good cause, the property owner will file an application and affidavit with DHCR containing specific information about the scope of the work to be done and information about the owners of the property, including a statement confirming that no owners have been found to have harassed or unlawfully evicted tenants in the five years prior to the MCI. DHCR will then provide the occupying tenants with such information and will elicit tenant comments to deter- mine whether the work has been satisfactorily completed. No MCI increase shall become effective until any defective or deficient rehabilitation work has been cured.

The increase permitted for MCIs shall be collected as a separately designated monthly surcharge to the maximum rent that shall not be compounded by any annual rent adjustment authorized by the Rent Guidelines Board (RGB). The surcharge allocable to each apartment shall be an amount equal to the cost of the improvement divided by eighty-four, divided by the number of rooms in the building, and then multiplied by the number of rooms in such apartment. However, the surcharge to any apartment in any year may not exceed six percent of the monthly rent collected by the owner for such apartment. Any excess shall be carried forward and collected in future years. The collection of surcharges for MCIs shall cease when the owner has recouped the costs attributable to the MCI.

Section 6 of the bill amends the second undesignated paragraph of paragraph (a) of subdivision 4 of section 4 of chapter 274 of the laws of 1946 (known as the Emergency Housing Rent Control Law), as amended by section 25 of part B of chapter 97 of the laws of 2011, to permit an MCI where the State Homes and Community Renewal Commissioner first finds that an improvement is depreciable under the Internal Revenue Code and is required for the operation or preservation of the structure. However, no MCI rent increases will be approved by DHCR unless the work performed is an enhancement or upgrade, or is an addition to such housing accommodation. Any repair or replacement intended to maintain an existing service is ineligible. If any outstanding hazardous violations exist, no MCI rent increase application will be approved unless DHCR determines that such work is essential to the alleviation of the violations and such approval is consistent with this section. Except in cases of emergency or good cause, the property owner will file an application and affidavit with DHCR containing specific information about the scope of the work to be done and information about the owners of the property, including a statement confirming that no owners hav e been found to have harassed or unlawfully evicted tenants in the five years prior to the MCI. DHCR will then provide the occupying tenants with such information and will elicit tenant comments to determine whether the work has been satisfactorily completed. No MCI increase shall become effective until any defective or deficient rehabilitation work has been cured.

The increase permitted for MCIs shall be collected as a separately designated monthly surcharge to the maximum rent that shall not be compounded by any other adjustment to the maximum rent. The surcharge allocable to each apartment shall be an amount equal to the cost of the improvement divided by eighty-four, divided by the number of rooms in the building, and then multiplied by the number of rooms in such apartment. However, the surcharge to any apartment in any year may not exceed six percent of the monthly rent collected by the owner for such apartment. Any excess shall be carried forward and collected in future

years. The collection of surcharges for MCIs shall cease when the owner has recouped the costs attributable to the MCI.

Section 7of the bill amends paragraph 5 of subdivision d of section 6 of section 4 of chapter 576 of the laws added.of 1974 and a new paragraph 6 is added.

Section 8 of the bill amends paragraph 1 of subdivision g of section 26-405 of the administrative code of the city of New York by adding a new subparagraph (p), to prohibit adjustments for any MCIs or for any other expenditures to improve, restore or preserve the quality of a structure if such MCI is a project funded by the New York State Energy Research and Development Authority (NYSERDA) .

Section 9 of the bill sets forth the effective date.

Justification

In 1989, the Court of Appeals held that building owners could increase rent levels in perpetuity based on major capital improvements (MCIs) to their buildings, with the result that tenants are forced to pay for these improvements long after costs have been fully recovered, and even after they have outlived their useful life. Ansonia Residents Assn v. DHCR, 75 N.Y.2d 206, 551 N.Y.S.2d 871 (1989). This is because the MCI "amortization period", which ordinarily refers to the spreading out and paying off of capital expenses in regular installments over a specific period of time, can instead serve as a tactic for boosting rent levels forever.

Unfortunately, many landlords utilize MCI charges as an unscrupulous means to raise the rent of their units above the legal maximum rent, unfairly burdening their tenants, circumventing the rent regulations, and edging their apartments out of rent regulation. To guard against this, this legislation requires applicants to submit a statement confirming that no owners have been found to have harassed or unlawfully evicted tenants in the prior five years.

Moreover, according to an audit issued by the Comptroller of the City of New York, "allegations made in a series of recent judicial proceedings suggest that there is a perception of fraudulent activity associated with MCI and IAI rent increases." The Growing Gap: New York City's Housing Affordability Challenge, Office of the New York City Comptroller 22, April 2014, comptroller.nyc.gov/wp-content/uploads/documents/Growing Gap.pdf. Although some MCI charges are legitimate, many landlords are granted MCI charges for work that is simply routine maintenance, and not an actual improvement. This is not the intent of the MCI program, which grew out of 1970s-era concerns that landlords needed to be incentivized to invest in their buildings. Under the current MCI program, landlords may be incentivized to do the opposite. Though this may lead to larger cost down the road, landlords may prefer this course of action because regular maintenance cannot be covered by an MCI, but a major overhaul necessitated by deferred repairs can be covered. This legislation clarifies that MCIs will only be approved if the work performed is an enhancement, upgrade, or addition, while repairs or replacements intended to maintain existing services are ineligible. Also, MCI applications will not be approved where outstanding hazardous violations exist, unless DHCR finds that such work is essential to the alleviation of the violations.

This bill also delineates a better process of consultation between DHCR, the landlord-applicant, and the existing tenants. According to media reports, until the creation of the Tenant Protection Unit (TPU) in 2012, the oversight process was "exclusively complaint-driven, meaning the onus fell on tenants to prove an owner's application was incorrect, misleading, or even fraudulent. Jillian Jones, Tenants Rip Program Tying Rent Hikes to landlord Investments, City Limits, Dec. 19, 2014, http://citylimits.org/2014/12/19/tenants-rip-program- tving-rent-hikesto-landlordinvestments/. This legislation requires that applicants submit specific information about the scope of the work to be done and information about the owners of the property. DHCR will then provide occupying tenants with this information and will elicit tenant feedback to determine whether the work has been completed. No MCIs will be made effective until deficient work has been cured.

In addition, MCIs such as window replacements or heating-system improvements create energy savings that further increase the profitability of MCIs. Apart from MCI surcharges approved by DHCR, the NYSERDA Multifamily Performance Program offers landlords incentives to invest in energy-efficient building upgrades, including implementing environmentally friendly measures to address specific energy and operational needs of buildings. In many cases, landlords have filed applications with both DHCR and NYSERDA for the imposition of MCI charges for capital work that fall within NYSERDA's jurisdiction for receiving funds. This practice of double-dipping, wherein a landlord takes advantage of two different incentive programs for the same work, violates the intent of these provisions and, if permitted, results in a windfall to landlords. This bill clarifies that such double-dipping is not permitted.

For the foregoing reasons, the lack of statutory criteria to guide the division of Housing and Community Renewal (DHCR) in its MCI application determinations is a major source of the problem. In response, this bill seeks to balance the conflicting concerns of maintaining affordable housing while ensuring that adequate incentives exist for investment in MCIs, in order to preserve and improve our affordable housing stock. To do so, this legislation provides such criteria to prevent abuse.and includes safeguards

Legislative history

This legislation consolidates A2061A (Kavanagh) / S3173A(Krueger)of 2014 and A5373 (O'Donnell) /S1493 (Krueger) of 2014: 2014: A02061A- On the Floor; S3173A - Housing 2013: A02061A - On the Floor; S3173A -Housing 2012: A06132A - Housing; S436A - Rules 2011: A06132- Housing; S436A - Housing 2010: A06814- Housing; S5220 - Housing 2009: A06814- Housing; S5220 - Housing 2008: S3404 -Housing 2007: S3404 -Housing 2006: S1461 -Housing 2005: S1461 -Housing 2004: A4250 -Housing; S317 - Housing 2003: A4250 -Housing; S317 - Housing 2002: A7115 -Housing; S717B - Housing 2001: A7115 -Housing; S717B - Housing 2014: A5373 -Passed Assembly; S1493 -Housing 2013: A5373 -Passed Assembly; S1493 -Housing 2012: A2459A- Passed Assembly; S523A -Housing 2011: A2459A- Housing;S523A - Housing 2010: A1928 -Passed Assembly; S745A -Housing 2009: A1928 -Passed Assembly; S745A -Housing 2008: A6510 -Passed Assembly. 2007: A6510 -Passed Assembly. 2006: A9994 -On the Floor. 2005: A5840 -On the Floor. 2004: A2718 -Passed Assembly; S5025 -Housing 2003: A2718 -Passed Assembly; S5025 -Housing 2002: A2641A- Passed Assembly; S730B -Housing 2001: A2641A- Passed Assembly; S730B -Housing FISCAL IMPACT ON THE STATE :

None.

Effective date

This act shall take effect immediately; provided that the amendments to section 26-405 of the city rent and rehabilitation law made by sections one, two and eight of this act shall remain in full force and effect only so long as the public emergency requiring the regulation and control of residential rents and evictions continues, as provided in subdivision 3 of section 1 of the local emergency housing rent control act; provided that the amendment to section 26-511 of the rent stabilization law of nineteen hundred sixty-nine made by sections three and four of this act shall expire on the same date as such law expires and shall not affect the expiration of such law as provided under section 4 26-520 of such law, as from time to time amended; provided that the amendments to section 6 of the emergency tenant protection act of nineteen seventy-four made by sections five and seven of this act shall expire on the same date as such act expires and shall not affect the expiration of such act as provided in section 17 of chapter 576 of the laws of 1974, as from time to time amended; and provided that the amendment to section 4 of the emergency housing rent control law made by section six of this act shall expire on the same date as such la w expires and shall not affect the expiration of such law as provided in subdivision 2 of section 1 of chapter 274 of the laws of 1946.