DHCR Decisions
DOC. NO.: BC 110198-RT et al.
STATE OF NEW YORK
DIVISION OF HOUSING AND COMMUNITY RENEWAL
OFFICE OF RENT ADMINISTRATION
GERTZ PLAZA
92-31 UNION HALL STREET
JAMAICA, NEW YORK 11433
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IN THE MATTER OF THE ADMINISTRATIVE : ADMINISTRATIVE REVIEW
APPEAL OF : DOCKET NOS. BC 110198-RT;
VARIOUS TENANTS OF BC 110204-RT;
REGENTS PARK GARDENS, BC 110205-RT;
PETITIONERS : BF 110315-RT
------------------------------------X DRO DOCKET NOS.:
Z QS 000283-OM [Section A]
Z QS 010283-OM [Section A]
Z QS 010179-OM [Section A]
Z QS 000179-OM [Section B]
Z QS 020179-OM [Section B]
Z QS 010504-OM [Section A]
Z QS 000504-OM [Section B]
Z QS 020504-OM [Section B]
Z QS 000621-OM [Section A]
Z QS 010621-OM [Section B]
ORDER AND OPINION DENYING PETITION FOR ADMINISTRATIVE REVIEW
IN PART AND REMANDING PROCEEDINGS ON APPEAL
On March 17, 1987 and June 28, 1987 the petitioner-tenants filed
Petitions for Administrative Review against orders issued in
February and May, 1987 by the District Rent Administrator, 92-31
Union Hall Street, Jamaica, New York concerning housing
accommodations known as Regents Park Gardens, Kew Gardens, New
York.
While the owner's application regarding new boilers and hot water
heaters was processed as Docket No. QS 000283-OM for all 14
buildings, issued copies exist for Section A [Buildings 1-8] as
both Z QS 000283-OM and Z QS 010283-OM, and Order No. Z QS 020283-
OM was issued for Section B [Buildings 9-14]. The DHCR's
computerized indexing system shows QS 010283-OM as having been
deleted in favor of QS 000283-OM. The tenants' petition (Docket
No. BC 110204-RT) against No. Z QS 010283-OM will be taken to be an
appeal of both Section A order numbers, but not of the Section B
order number as they filed their petition several months before
that order was issued.
DOC. NO.: BC 110198-RT et al.
While the owner's application regarding new windows was processed
as Docket No. QS 010179-OM for all 14 buildings, Order No. Z QS
010179-OM was issued for Section A, and it appears that orders may
have been issued for Section B as Z QS 000179-OM and/or Z QS
020179-OM. Because of the confusion of docket numbers, the
tenants' petition (Docket No. BC 110198-RT) against Order No. Z QS
010179-OM will be taken to be an appeal of any and all of those
dockets, particularly since the petition incorporates by reference
their answer in Docket No. QS 000179-OM.
While the owner's application regarding electrical work was
processed as Docket No. QS 000504-OM, Order No. Z QS 010504-OM was
issued for Section A, and (unissued) copies of the order for
Section B bear individual docket numbers of Z QS 000504-OM and Z
QS 020504-OM. The tenants' appeal (Docket No. BC 110205-RT)
against Order No. Z QS 010504-OM will be taken to be an appeal of
any and all of these dockets.
While the owner's application regarding new doors was processed as
Docket No. QS 000621-OM, Order No. Z QS 000621-OM was issued for
Section A and Order No. Z QS 010621-OM was issued for Section B.
The tenants' petition (Docket No. BF 110315-RT) against Docket No.
Z QS 000621-OM will be taken to be an appeal of both orders.
The applicable section of the Law is Section 9 NYCRR 2522.4 of
the Rent Stabilization Code.
These proceedings are being consolidated since they involve common
issues of law and fact.
The Commissioner has reviewed all of the evidence in the record and
has carefully considered that portion of the record relevant to the
issues raised by the administrative appeals.
On January 17, 1985 the owner completed the filing of an
application (Docket No. QS 000283-OM) to increase the stabilized
rents based upon major capital improvements consisting of the
installation of new boilers and hot water heaters. The owner
submitted documentary evidence showing that it had made
expenditures totalling approximately $540,000.00 for said
installations in all 14 buildings. The application included a
"Master Scope of Work" approximately 100 pages in length,
including a "Standard Form of Agreement Between Kraus Construction
Inc., Contractor and Subcontractors. " In answer, the tenants
requested a full-scale audit of both the merits of the application
and of the finances underlying the application,
particularly because of the owner's hiding from the face of the
application the involvement of his own construction company as
DOC. NO.: BC 110198-RT et al.
prime contractor. They also cited a 1980 audit by the Comptroller
of the City of New York in which the owner was cited for passing
along artificially-inflated operating costs to tenants of a
Mitchell-Lama development through the use of wholly-owned service
companies.
In an order (Z QS 010283-OM and/or Z QS 000283-OM) issued on
February 18, 1987 the District Rent Administrator made a finding
"that the tenants' responses had contained "[n]o relevant complaint
pertaining to the installations," and granted an increase of 9.16%
in the rent of the stabilized apartments of Section A for the
installation of new boilers and water heaters, effective March 1,
1985. On August 12, 1987 the Administrator issued an order (No. Z
QS 020283-OM) granting an increase of 7.28% for Section B,
effective March 1, 1985. (The tenants did not appeal that order.)
In their March 17, 1987 petition (Docket No. BC 110198-RT) against
the February 18, 1987 order for Section A, the tenants contend in
substance that the Administrator's one sentence finding of no
relevant complaint is not a finding of fact nor a conclusion of law
and is therefore violative of the State Administrative Procedure
Act. The tenants also annex and incorporate their omnibus answer
in Docket Nos. QS 000179-OM, QS 000194-OM, QS 000283-OM and QS
000504-OM as part of their petition and allege that, as referred to
in the owner's answer to
Docket Nos. ART 12424-Q/ART 12505-Q, the owner submitted a written
response to the omnibus answer, which written response was never
served on the tenants or their attorney. The omnibus answer
contends in substance that the DHCR may not permit Major Capital
Improvement (M.C.I.) increases in excess of 6%, while the owner in
this and other dockets is applying for 56.1% worth of increases;
that M.C.I. increases do not become part of the base rent; that
Herman Kraus' sworn answer on his M.C.I. application that there is
no relationship financially or otherwise between the owner and any
company listed is a flagrant act of misrepresentation, since the
"Scope of Work" filed with the DHCR but not served on any tenant
reveals that the companies listed as "contractors" are actually
subcontractors of the prime contractor, the owner's own company
Kraus Construction, and since no financial detail of payments made
to Kraus Construction is disclosed even though Kraus has control
over every detail of the
performance work and manner of payment; that Mr. Kraus is
concealing all details of the contract between himself as owner
and himself as President of Kraus Construction Co., just as he did
in another building owned by him as shown by a 1980 New York City
Comptroller's audit; that the owner should disclose the details of
the financing to ensure that the tenants are not being required to
DOC. NO.: BC 110198-RT et al.
pay for it; that the tenants should not have to pay for architect
services mentioned, without cost being specified, in the contract;
and that no notice has been taken of Rent Stabilization Law Section
26.511(c)(6), which prohibits M.C.I. increases to the extent that
they result in a profit on equity greater than 8 1/2%. In
responding to the individual applications for M.C.I. increases, the
omnibus answer also asserts in substance that the application
regarding pointing is defective in that the only reason it gives
for the work is "as per contract"; that the certification that the
entire building was inspected and all necessary pointing work was
done is defective as it refers to only one building and is not a
certification of $251,300.00 worth of work allegedly performed on
a 14- building complex; that the application referred only to
pointing although the cost charged also included waterproofing;
that unrelated items such as scaffolding, masonry res mtoration and
"alteration of existing work" are buried in the application
regarding windows; that the owner has not provided the required
information about the age of the windows being replaced; that the
owner did not give notice of the amount of increase sought for the
windows; that Page 2 of the application in Docket No. QS 000504-OM
was omitted from the material sent to the tenants, thus denying
them an opportunity to know what the proposed improvement was and
to respond; that the application regarding boilers and water
heaters did not state the age or condition of the old ones, but
instead gave "as per contract" as the reason for their replacement;
that new boilers had been installed by the prior owner in 1973, so
the 20-year useful life of the equipment had not expired; and that
the subcontractor named in the owner's application is not the same
one named in Schedule C of "Scope of Work."
The owner did not submit an answer to this petition (or the other
three petitions being considered herein), although given an
opportunity to do so.
On November 7, 1987 the owner completed the filing of an
application (No. QS 000179-OM) to increase the stabilized rents
based on the expenditure of approximately $430,000 for new windows.
The application included a "Master Scope of Work."
In an order (No. Z QS 010179-OM) issued on February 12, 1987 the
Administrator made a finding of "[n]o relevant complaint pertaining
to the installation," and granted an increase of 6.45% for Section
A effective January 1, 1985. While the file for Section B does not
contain an issued copy of an order, it does contain unsigned
DOC. NO.: BC 110198-RT et al.
orders, under Docket Nos. Z QS 000179-OM and Z QS 020179-OM, for a
6.53% increase effective January 1, 1985.
The tenants' petition (Docket No. BC 110204-RT) against No. Z QS
010179-OM is identical to the petition in Docket No. BC 110198-RT.
On March 15, 1987 the owner completed the filing of an application
(Docket No. QS 000504-OM) to increase the stabilized rents based
upon the expenditure of approximately $1,345,000 for
electrical upgrading. The application included a "Master Scope of
Work."
On February 12, 1987 an order (No. Z QS 010504-OM) was issued
granting a rent increase of 20.89% for Section A. While the file
does not contain a copy of any issued order for Section B, an
unsigned order (No. Z QS 020504-OM, changed by hand to Z QS 000504-
OM) lists a rent increase of 19.59% for Section B, effective May 1,
1985.
The tenants' petition (Docket No. BC 110205-RT) against No. Z QS
010504-OM is identical to the petition in Docket No. BC 110198-RT,
with the addition of an added emphasis on the claim that the
underlying alleged improvement in Docket No. QS 010504-OM was not
identified in the owner's application. [The application on file at
the DHCR does contain "Page Two" identifying the work, as well as
the "contractor and/or Vendor Information" supplement identifying
the nature of the work, the contractors and the cost.]
On July 12, 1985 the owner completed the filing of an application
(Docket No. QS 000621-OM) for a rent increase based on the
expenditure of $401,060.94 for new doors. The only answer from the
tenants contained in the available files is a 2-page letter from
their attorney questioning the financial involvement of Kraus
Construction and the inclusion of unrelated items in the contract,
and a 60-page Comptroller's audit. On May 25, 1987 orders were
issued granting a rent increase of 5.86% for Section
A, effective September 1, 1985, based on allowable costs of
$202,336.14, and of 5.80 % for Section B, based on allowable costs
of $187,082.24. The orders each excluded over $5,000 in sales
taxes from allowable expenditures. The order also found "[n]o
relevant complaint pertaining to the installation." The order for
Section B was issued as Order No. Z QS 010621-OM.
In their petition (Docket No. BF 110315-RT) against No. Z QS
DOC. NO.: BC 110198-RT et al.
000621-OM, the tenants raise substantially the same points as in
their other petitions. They also contend, in a copy of an answer
dated March 1, 1986 but not contained in available files, that all
apartments did not benefit equally, as some doors cost $1,095.00
while others cost $110.00; that the tenants should not have to pay
for door frames, buzzers, key locks and latches; that the
contractor has not identified his signature to certify that the
work was actually performed [while there is no company name on
section B of the contractor supplement of the owner's application,
the only contractor named anywhere on the page is Finest Ceiling
and Wallboard Company, and the signature is the same as that of
Aron Ostreicher, President of Finest Ceiling and Wallboard Company,
in Schedule C of the Section A contract]; that the contract
includes items, such as scaffolding, cleaning and
removal of debris, and the daily services of an experienced
superintendent, that are not legitimate expense items for an
M.C.I.; that a bill from Metropolitan Fire Door raises questions
about the bona fides of the work because it gives only "Capital
Improvement" as the reason for failure to charge tax; that there
are no receipts on file for the alleged installation of new
vestibules; and that descriptions of the companies supplying or
installing doors duplicate each other.
While the files for the proceedings under appeal do not contain any
response by the owner to the tenants' omnibus answer, the file of
another proceeding (Docket No. QS 000016-OM) does contain a
response by the owner to a tenants' answer that is generally
similar to the omnibus answer. Because the owner's response is
referred to in several of the tenants' petitions (wherein they
claim they never saw the responses, [although the response was
submitted in QS 000016-OM and not in the proceedings under
appeal]), and because it deals with similar issues in a proceeding
similar to the ones under appeal, that proceeding is hereby set
forth in detail.
On August 13, 1984 the owner completed the filing of an application
(Docket No. QS 000016-OM) to increase the stabilized rents based
upon the expenditure of approximately $1,128,000 for new roofs.
The application included a "Master Scope of Work." In addition to
individual replies not relevant to the question of the owner's
entitlement to a rent increase, the tenants enclosed an early
version of what later became the omnibus answer allegedly submitted
in the proceedings considered in this appeal. In a response dated
January 6, 1986 the owner contended that, while Kraus Construction
acted as the General Contractor, the owner did not apply for an
M.C.I. increase on the basis of a General Contractor's fee, but
solely bore the cost of the expenses of Kraus Construction; that
the only items applied for related to the work done by independent
subcontractors with no relation to Kraus Construction; that the
1980 audit of Kraus Management by the Comptroller's office was
DOC. NO.: BC 110198-RT et al.
irrelevant; that in any event the quotation criticizing Kraus
Management was taken out of context; that construction contracts
routinely describe the overall scope of a project to enable
coordination of work between subcontractors; that only two sections
of the contract actually specify the roofing work to be done by
each subcontractor; that pointing work was applied for under a
separate application; that the owner has employed architects,
engineers and attorneys at its own expense and has not included the
cost in the MCI application; that it is common practice in the
construction industry for a portion of the contract to be withheld
and paid only after completion of the work; that the subcontractors
were eventually paid in full; that the tenants' leases do allow
M.C.I. increases; and that the 6% limitation and additional
requirements concerning mortgage debt service and fair market value
refer to hardship increases rather than M.C.I. increases.
In orders issued on July 7, 1986 the District Rent Administrator
granted increases of 16.53% and 16.89% for Sections A and B
respectively, effective as of October 1, 1984.
The tenants appealed these orders in Docket Nos. ART 12505-Q and
ART 12424-Q. In an order issued on September 21, 1989 the
Commissioner remanded the proceeding for further processing to
evaluate the validity of the costs claimed by the owner since the
owner, when requested to submit a breakdown of costs, submitted
only one-sentence statements from two of the three roofing
contractors.
Upon remand the proceeding was assigned Docket No. DJ 130017-RP.
The owner submitted a report from an independent roofing consultant
concluding that the cost per square foot of the roofing was not
unreasonable, as well as letters from two of the roofing
contractors breaking down costs of their work. In an order issued
on March 13, 1991 the Rent Administrator affirmed the granting of
the rent increases for the new roofs, although it noted that the
increase was not collectible during a 21-month period because of a
rent reduction order. Neither the tenants nor the owner appealed
this order.
In a similar manner an order (No. Z QS 010194-OM) was issued on
July 31, 1987 granting a rent increase of 3.86% effective January
1, 1985 for brick pointing in Section A. An order (No. Z QS
020194-OM) was issued on August 12, 1987 granting a rent increase
of 3.54% for Section B, effective January 1, 1985. These orders
were appealed in Docket No. BI 110189-RT (SJR 2904). In answer to
the petition the owner contended among other things that its
attorney's response to the tenants' omnibus answer was available to
the tenants at the DHCR and did not have to be specifically
furnished to the tenants; that no part of the M.C.I. application
reflected a claim for a general contractor's fee; that the owner
employed architects, engineers and attorneys at its own cost; and
that waterproofing was within the scope of the pointing contract.
DOC. NO.: BC 110198-RT et al.
An order was issued on March 29, 1989 remanding the proceeding.
Upon remand the proceeding was assigned Docket No. DD 130044-RP.
The owner submitted an affidavit from a Professional Engineer
stating that he had advised the owner in February, 1984 that
brickpointing was required throughout the apartment complex. In an
order issued on January 2, 1990 the Rent Administrator affirmed the
granting of a 3.86% increase for the $134,500.00 in pointing work
in Section A, although the order noted that the increase was not
collectible during a 21-month period because of a rent reduction
order. Neither the tenants nor the owner appealed that order.
The Commissioner is of the opinion that these petitions should be
denied in part, and that the proceedings should be remanded to the
Administrator for further processing.
Section 2522.4(a) of the Rent Stabilization Code provides for rent
increases based on building-wide major capital improvements, where
the items being replaced are past their useful life. The rent
increases are to be based on the actual reasonable costs of
eligible improvements. If the work is done by an entity or
entities related to the owner, then a closer scrutiny of the costs
is required. If the costs claimed on the owner's application
represented amounts paid to Kraus Construction, with Kraus
Construction then paying less than those total amounts to
subcontractors, after retaining amounts for its profit, overhead
and costs including fees of architects and engineers, as well as
finance charges, the tenants would be correct about the need for
further inquiry. However, the owner's applications requested rent
increases based only on the amounts actually paid by Regent's Park
Gardens directly to subcontractors or suppliers. While the owner
may have made other payments to architects, engineers, banks,
and/or Kraus Construction, such payments would not be relevant to
the present proceedings since they are not included in the owner's
applications and the tenants are thus not being asked to pay for
them. The tenants have not alleged that the subcontractors, on
whose charges the requested rent increases were based, have any
relationship to the owner, so there is no reason to believe that
the costs are not reasonable ones based on arms-length
transactions. (In fact, in the MCI proceeding that was remanded to
look into the reasonableness of the cost of new roofs, it was found
that the cost was indeed appropriate, as might have been expected
of work done by an independent subcontractor.) The
tenants'interpretation of the construction contracts as making the
employees of the subcontractors practically employees of the prime
contractor is based on a misapprehension of the normal prime
contractor/subcontractor relationship. The subcontractor remains
an independent company responsible for delivering the agreed-upon
work and materials at the agreed-upon contract price. This is a
different situation than the one involved in the 1980 Comptroller's
DOC. NO.: BC 110198-RT et al.
audit, where the work and services were being provided by Mr.
Kraus' companies,
and where even materials and supplies were being provided through
his companies after a markup over the cost to his companies.
The tenants put misplaced reliance on Section YY51-6.0(c)(6) of the
New York City Administrative Code [Section 26.511(c)(6) of the Rent
Stabilization Law] in contending that an M.C.I. increase may not
result in a profit on equity of more than 8 1/2%. The referenced
section refers to "increases in excess of the level of fair rent
increase established under this law." The owner was asking, as an
entitlement under the law, for an increase in the monthly rent of
1/60 of the actual cost of eligible improvements. The 8 1/2%
profit limitation would come into play only if the owner was asking
for a rent increase above the increase based on
the cost of the improvements - that is, a hardship increase. The
owner has not applied for such an additional increase, so the cited
section is not relevant. While Section 2522.4(a)(6) of the Rent
Stabilization Code allows a consideration of all factors bearing on
the equities involved, the Commissioner does not find the equities
to require any change in rent increases granted on the basis of
costs incurred by the owner for benefits received by the tenants,
particularly since the orders granting the increases have followed
Section 2522.4(a)(8) of the Rent Stabilization Code in limiting the
increases to 6% each per year for the permanent increases and the
temporary increases. The provision of the Code that M.C.I.
increases are permanent has been upheld in Ansonia Residents
Association vs. New York State Division of Housing and Community
Renewal, 551 N.Y.S.2d 871 (Ct. App. 1989).
Regarding the contention that Rick Mechanical, Inc. was named as
subcontractor in the owner's application in Docket No. QS 000283-OM
while Sanitary Plumbing and Heating Corp. is named in Schedule C of
the "Scope of Work": The owner's application lists Sanitary as
subcontractor for Section A and Rick as Subcontractor for Section
B. There are two separate "Scope of Work" contracts, one for each
section of the apartment complex. Each subcontractor has their own
"Scope of Work" contract for their particular section of the
complex.
Regarding the tenants' contentions about windows: The specific
provisions about the installation of new windows are contained in
Division 8, Section 08550 of the contract. The other divisions of
the contract are general provisions (alteration, demolition,
sealants, etc.) inserted into the contract. Alteration of existing
work, masonry restoration and scaffolding are either general
DOC. NO.: BC 110198-RT et al.
provisions, related work of other subcontractors which the
subcontractor has to coordinate with, or items which are a normal
and necessary part of construction work. The tenants are
incorrect in asserting that the owner did not give notice of the
increase sought for the windows; "6.2%" was requested on Side 1 of
RA-79 Supplement III.
Regarding the contention that the subcontractor named in the
owner's application for Docket No. QS 000283-OM is not the same one
named in Schedule C of the contract, the tenants are confusing the
two subcontractors for Sections A and B.
Regarding the contention that all apartments did not benefit
equally, in Docket No. QS 000621-OM, as the cost for doors ranged
from $110.00 [birch door only, without frame] to $1,095.00
[actually 2 doors, buzzers, and double frame], and that the tenants
should not have to pay for allegedly unrelated items: It is not
necessary that all doors in a complex-wide installation be
identical; all tenants benefit from the improved appearance of the
complex if more aesthetically-appealing doors are installed in the
most - easily - seen parts of the complex. However, the fact that
the fancier doors have buzzers and intercoms, and the cheaper doors
have peepholes, suggests that the fancier doors are doors to the
outside while the cheaper doors are individual apartment doors
opening into an alcove or stairway. Door frames,
buzzers, key locks and latches are an integral or at least related
part of a new door system; it is not unreasonable for them to be
included in the M.C.I.
Cleaning and removal of debris and the daily services of an
experienced superintendent or foreman employed by the subcontractor
are items that would be expected to be included in the cost of
hiring someone to do the entire job of replacement of doors; they
are indeed a legitimate expense item for an M.C.I. increase.
"Capital Improvement" is not at all an unusual reason to give for
not charging sales tax, where the company has been given a copy of
the certificate of sales tax exemption; charging sales tax would be
the more unusual action. In fact, Burt Millwork did charge sales
tax; the Administrator rightly excluded nearly $12,000 from the
allowable costs because sales tax was included. It is unclear why
the tenants claim that there are no receipts on file for the
alleged installation of new vestibules: There are invoices from
Burt Millwork for supplying doors, and cancelled checks in payment.
The contract called for Finest Ceiling & Wallboard Company to
install them, there are cancelled checks in payment, and the
tenants have not alleged that the work was not done.
DOC. NO.: BC 110198-RT et al.
The question of whether or not the owner's answer to the early
version of the omnibus answer, contained in Docket No. QS 000016-
OM, was served on the tenants is not germane as QS 000016-OM is not
on appeal here.
While the tenants refer to their "omnibus answer" as having been
submitted in opposition to the four MCI applications considered
herein, none of the files for those proceedings contain such an
answer, nor do they contain any response by the owner to any
omnibus answer which may have previously been in the files. If the
omnibus answer had been considered by the Administrator it would
not have been sufficient to have dismissed all of its allegations
as "[n]o relevant complaint pertaining to the installation" without
further inquiry, such as an investigation into the age of the
boilers and the windows. Since this suggests that the omnibus
answer was never considered by the Administrator, these proceedings
are being remanded for further consideration of the contentions of
the tenants as to the age of the boiler and windows which were
replaced and as to whether the useful life of such replaced items
had expired, thus entitling the owner to M.C.I. increases.
Information should be gathered as necessary. The owner and the
tenants should be allowed to make submissions, and to respond to
each others' submissions. New orders should then be issued,
setting forth the reasons for the determinations made about the
contentions. New orders should be issued in all proceedings
setting forth schedules for collection of the rent increases which
take into account the period of time for which no increase could be
charged because of a rent reduction order.
While the tenants' petition in Docket No. BI 110189-RT is not being
considered herein, since an order was issued on March 29, 1989
remanding the proceeding, the Commissioner notes for the sake of
completeness in dealing with the M.C.I. applications at the
apartment complex that a new order has been issued only for Section
A, so one still needs to be issued for Section B (formerly Docket
No. QS 020194-OM).
THEREFORE, in accordance with the Rent Stabilization Law and Code,
it is
ORDERED, that these petitions be, and the same hereby are, denied
in part and that they be, and the same hereby are, granted to the
extent of remanding these proceedings to the District Rent
Administrator for further processing in accordance with this order
and opinion. The automatic stay of so much of the District Rent
Administrator's orders as directed retroactive rent increases is
hereby continued until new orders are issued upon remand. However,
the Administrator's determinations as to prospective rent increases
are not stayed and shall remain in effect until the Administrator
DOC. NO.: BC 110198-RT et al.
issues new Orders upon remand.
ISSUED:
ELLIOT SANDER
Deputy Commissioner
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