Substantial rehab: MCI's for remaining rent-regulated

[mkraft]

If rent-regulated tenants remain in a building that otherwise is converted to non-regulated status through a substantial rehabilitation, can the landlord still obtain rent increases from them by applying to DHCR to have the rehab renovations designated as 'major capital improvements'?

[MikeW]

Generally speaking, buildings aren't deregulated, units are. If the LL can get all the units deregulated, then, de facto, the buildingis deregulated.

In your case, even if all the other units in your building may be deregulated, if you haven't been deregulated, he still has to follow the rules with you. What this means is that he can apportion part of buildingwide MCIs to you, based on the rules that apply to MCIs. You can challenge any such increase. With the empty units, the MCI may (and was probably designed to) bring the vacancy rent over $2000, which gets a unit out of regulation.

[chelsea]

I've got to disagree with MikeW: substantial rehabilitation refers to a building, not individual apartments. But to qualify for substantial rehabilitation, the building has to, among other requiremetns, be extremely dilipidated and virtually empty (80 percent or more.) See the DHCR operational bulletin 95-2 on substantial rehabilitation, and the Rent Stabilization Code, which incorporated the DHCR policy in 2000.

But assuming that the work that the original poster referred to DID qualify as substantial rehabilitation, the owner could not turn around and obtain MCI's for the same work. Here is a portion of a posttrial memo in a substantial rehabilitation case arguing this point. The judge agreed, finding no grounds for substantial rehabilitation where the work qualified for MCI's.

Chelsea

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The substantial rehabilitation exemption is not applicable when reimbursement for renovations can be obtained through major capital improvement rent increases.
In Pape v. Doar, 160 A.D.2d 213, 553 N.Y.S.2d 344 (1st Dept. 1990) the owner spent $1.8 million dollars on renovations that included replacement of the kitchens and bathrooms in the five (5) residential apartments, replacement of all building systems, including sewage, plumbing, electrical, heating, sprinklers and chimneys, a new elevator, new windows and installation of a central air conditioning system. The Civil Court denied the landlord’s exemption claim and Appellate Term affirmed because the work did not result in the creation of new family units.
Appellate Division affirmed but for different reasons. The Appellate Division did not perceive an intent in the statute to require an increase in residential units. It stated:
There are, nonetheless, significant limitations on the applicability of the exemption. It should be interpreted in conjunction with provisions entitling owners of rent stabilized buildings to rent increases for major capital improvements, Administrative Code § 26-511©(6)(b). See Estate of Romanow v. Heller, supra. The exemption, as an exception to the remedial protections of rent stabilization and having alternative parallel provisions by which owners may recoup their investments, is to be strictly construed. The exemption requires that the building be “substantially rehabilitated as family unit”, Goodman v. Ramirez, 100 Misc.2d 881, 420 N.Y.S.2d 185; Hickey v. Bomark Fabrics Inc. 553 N.Y.S.2d at 346.

The facts in Estate of Romanow v. Heller, 121 Misc.2d 886, 469 N.Y.S.2d 876 (Civ. Ct. NY. Co.), aff’d, 134 Misc.2d 606, 513 N.Y.S.2d 347 (App. Term, 1st Dept. 1987), cited above, are similar to those in Pape, i.e., a residentially occupied building underwent significant renovation but did not qualify for an exemption because the owner could have recouped it costs through MCI increases.
Thus, in cases where the building was residentially occupied before the renovation an exemption will not be granted because the owner is given an alternative method, short of deregulation, to recoup its costs. Pape v. Doar, supra; Estate of Romanow, supra; 81 Russell Street Assoc. v. Scott, NYLJ, August 25, 1993, p. 24, c.z. (Civ. Ct. Kings Co.) [21 HCR427A].

If a landlord applies for and is granted an MCI increase, it recoups its costs. These rent increases become part of the base rent and payments continue even after the owner recoups its actual cost. RSC § 2522.4.

[mkraft]

With the empty units, the MCI may (and was probably designed to) bring the vacancy rent over $2000, which gets a unit out of regulation.

I think you must be mistaken here. The only vacancies are in apartments that will be "substantially rehabilitated." As such, the landlord, as far as I know, isn't bound by any regulations at all concerning the rent he can charge and therefore wouldn't need to rely on MCI's at all.

My question was really whether the landlord can have his cake and eat it, too -- i.e., obtain market rents in rehabilitated units and charge MCI's for the same work (i.e., for building-wide improvements) to occupants of rent-stabilized units who continue to reside in the building.

[mkraft]

Chelsea, thanks for those case cites. In practice, though, aren't substantial rehabs being allowed routinely without any proof that the housing units that are being renovated were substandard?

I'm also wondering who brought the cases you cited -- tenants who had been evicted, tenants who were still in the building but objected to having renovations designated as substantial rehab, etc. - ? I'm not following why a tenant would sue a landlord all the way up the court system, at considerable expense, in order to have substantial rehab work declared MCIs instead. How does that benefit the tenant?

As far as the 'family unit' requirement goes, what does that actually mean? For example, the landlord in my building is reducing the number of units by duplexing several apartments. Does that work in his favor or against him in terms of having the work he's doing being considered "substantial rehab" rather than MCI's?

[MikeW]

Reading Chelsea's case citation, it would seem more likely that he could get MCIs, than a subtantial renovation of the whole building, especially if there are occupied units, and if the renovated units did not change significantly in configuration. If that is the case, what I said stands. The LL would probably prefer it to be considered a substantial renovation, mooting the whole issue of dealing with deregulating the units individually. But if he can't do that, he'll do the MCIs.

The MCIs would likely be broken out as individual unit improvements and buildingwide improvements. Each of these has an increase amount based on a different percentage of the cost of the work. The buildingwide improvements would likely be applied to all the units, occupied or not. The costs of the individual unit improvments would be applied to each unit.

[mkraft]

<<< Reading Chelsea's case citation, it would seem more likely that he could get MCIs, than a subtantial renovation of the whole building, especially if there are occupied units, and if the renovated units did not change significantly in configuration. If that is the case, what I said stands. The LL would probably prefer it to be considered a substantial renovation, mooting the whole issue of dealing with deregulating the units individually. But if he can't do that, he'll do the MCIs. >>>

Without a court case brought by a tenant (or group of tenants), who decides whether it's a "substantial rehabilitation" or "MCI's"?

In other words, who has jurisdiction? In the RS Code, DHCR appears to claim that it doesn't -- a landlord need not even apply to DHCR to have his renovations approved as a "substantial rehab."

It appears that there's going to be only one rent stabilized tenant in the building (i.e., all other units -- 9 of the 10 -- will have been vacated), so I don't think percentages are going to stand in the landlord's way.

What administrative body will decide whether he ends up with a deregulated building (except for the one non-vacated apartment) or not?

Also, what relevance, if any, to that decision will there be that the vacancies were obtained through buyouts and that no "delapidated housing" conditions actually existed -- i.e., that the landlord just wants to create high-rent luxury units?

[mkraft]

Chelsea, based on your 12/10/02 reply, shouldn't I conclude that I'll actually be better off if the landlord does get his renovations approved as a 'substantial rehab'?

That is (if I understood you correctly), getting the 'substantial rehab' approved means he won't be able to charge MCI's for the building-wide improvements he makes. He'll have to recoup the costs of those improvements through the unregulated rents he charges tenants who move into apartments in the building when he's finished renovating it.

Since, as far as I know, the MCI's won't apply to the other (future) tenants in the post-renovated building either (because their apartments will all have been deregulated), why would I want to oppose the landlord's getting his 'substantial rehab' status approved?

Yes, I'm sorry that the other rent-regulated tenants all chose (or were forced) to leave their apartments and pave the way for more deregulated apartments, but I can't change that. So why fight the landlord on this point?

(I'd still like to know what administrative agency -- if any -- approves or disapproves 'substantial rehabs.' Since it's apparently not DHCR, who would it be -- the Dept. of Buildings? HPD?

[chelsea]

Sorry, I've been busy and haven't been able to respond before this....

If the landlord is able to show substantial rehabilitation of a building (a dilipidated, vacant building, not one with vacancies because tenants have been forced out or bought out) without a J-51 tax exemption, the entire building may be removed from rent stabilization. It's the entire building, not apartment by apartment. The work has to be really major, i.e. gut renovation.

What typically happens is that a landlord will offer new or existing tenants a non-stabilized lease, claiming that the building is no longer subject to rent regulation. The tenant can file a complaint with DHCR, or take the case to Housing Court or Supreme Court, usually as a overcharge case. The building department is involved only in inspecting the construction itself, as for any other construction, and in issuing a new certificate of occupancy, which will be required for the amount of renovation involved in a substantial rehabilitation. (The landlord will have to show the certificate of occupancy before and after the work.)

If the landlord has already recouped renovation costs as a MCI, they cannot be recouped against as a substantial rehabilitation.

Chelsea