By Adam Leitman Bailey
On June 26, 2015, Governor Cuomo signed into law Chapter 20 of the Laws of 2015, a complex piece of legislation covering a variety of topics, most of them having nothing to do with landlord-tenant relations. However, that section of the Chapter 20 that does cover landlord-tenant relations carries, by law, the name “The Rent Law of 2015.” Although the Legislature was nearly two weeks late in passing the law, the Legislature backdated the passage of the law to June 15, 2015. The Rent Law covers when the law will next expire, what the new threshold for deregulation will be, how to apply the deregulation threshold, how vacancy increases are to be calculated, when to apply for Loft Law coverage, what penalties can be collected, how to calculate MCI increases, and what 421-a is now going to look like.
The New Rent Regulation Expiration Date
Under the Rent Law of 2015, the rent regulatory laws, both rent control and rent stabilization, are extended through June 15, 2019. However, that does not mean the laws will end then. If the State Legislature continues the same pattern it has shown for the past 40 years, it can be expected that the laws will be renewed then again, probably again with small changes to them. The Rent Law of 2015 made no changes to the grounds of eviction such as nonpayment of rent, nonprimary residence, lease violations, illegal sublets, nuisance, and so on. Particularly noteworthy, no changes were made to simplify the highly convoluted sublet laws. It is hard to predict how the political winds will change over the next four years. While there was only a minor retroactive effect to the law in this legislative iteration, it could be more severe next time. We note that in this iteration, all of the changes were against landlord interests and the battle was not whether to include offsetting pro-landlord law, but how severely anti-landlord this iteration should be.
The Legislature Covered Its Own Tardiness in Renewing the Law
Under the law, the Legislature made the Rent Law of 2015 retroactive so as to erase the gap in coverage by their acting nearly two weeks after the laws expired. However, parties who entered leases during the few days of gap could constitutionally challenge enforcement of the law to cover them as well. Those are very few people and there is no predicting how the courts will handle them.
High Income Decontrol
The Rent Law of 2015 made no change to the income levels associated with High Income Decontrol, currently $200,000 per year, but it does adjust the rent threshold to $2,700 plus rent guidelines increases. It also made no change in the rule that it is a matter of two years in a row of exceeding the income threshold. Thus, if a tenant can manipulate his or her income to be wealthier in alternate years and poorer on paper in the other years, so as to be below the threshold every other year, such a tenant can still artificially avoid deregulation. Similarly, tenants who lower their federal adjusted gross income by keeping their money stashed in a corporation can still avoid deregulation.
Also, since the threshold rent rises each January in accordance with the Guidelines Increase for a one year renewal lease, if the tenant who is below the threshold rent only takes one year renewal leases, the tenant will never cross the rent threshold.
Example 1 (income manipulation): A tenant has a job that pays $175,000 base pay a year with an annual bonus of $35,000 a year. If the tenant takes straight pay without manipulation, the tenant whose rent is $2,700/month or more, shows federal adjusted gross income of $210,000 and therefore faces the possibility of High Income Decontrol. However, if the tenant arranges to receive her annual bonus from 2015 to be paid to her in January of 2016 instead of December of 2015 when her boss normally gives it to her, then her income for 2015 is $175,000 and her income for 2016 is $245,000. Thus, her income for 2015 will have been less than $200,000 and she is not decontrolled.
Example 2 (rent renewals): A tenant’s rent is $2,650. Therefore, the rent is below the threshold that can high income deregulate an apartment and the landlord cannot even attempt a deregulation. The current authorized increase for a one year lease renewal is 0%. Therefore, when the tenant renews the lease, the tenant is still at $2,650 and no proceeding can be brought. However, imagine what happens a year from now and the Rent Guidelines Board okays a 3% increase for one year lease renewals. Now, the tenant’s rent would go up to 2,650 x 1.03 = $2,729.50, apparently over the $2,700 threshold, but that is not correct. Because while the rent for that apartment would be $2,729.50, the threshold also took an increase automatically by the Rent Guidelines Board having authorized a 3% increase in rents. Thus, under this imagined scenario, 2,700 x 1.03 = $2,781, the new threshold for 2017 under this hypothetical example. Clearly, therefore, the $2,729.50 is still less than the $2,781 and so long as the tenant keeps taking one year lease renewals, this will always be the case. The apartment will never be decontrolled.
However, if the landlord does even modest MCI’s to the building, the rent will be bumped above the threshold and the apartment can be decontrolled.
The New Rent Threshold Needs Two Tenants to Decontrol
Prior to the Rent Law of 2015, many but not all experts believed that the crossing of the $2,500 threshold that was then in effect would only decontrol the apartment for the tenant after the one who crossed the threshold. The Rent Law of 2015 appears to lock in that interpretation and to extend it to the new $2,700 threshold.
Example: A tenant rents an apartment at $2,400 and moves out. A 20% vacancy increase takes the apartment to $2,880 for the next tenant. That tenant is still rent stabilized. However, at the end of that tenancy, the next tenant will be unregulated, regardless of what improvements the landlord effects to the apartment and regardless of if that next tenant is actually charged less than $2,700.
Rent Controlled Apartments Now Decontrol at $2,700
Under the Rent Law of 2015, if a rent controlled apartment achieves a legal rent of $2,700, called “the threshold rent,” the apartment becomes decontrolled upon a vacancy. However, the threshold rent will now rise in every January by the same percentage of increase of one year lease renewals from the previous October. That new threshold will be uniform throughout NYC and predictable as soon as the new rent guidelines are announced each year. Since the Rent Guidelines Board has already announced that a 0% increase will be allowed in the coming October lease renewals, this means that the $2,700 threshold will hold steady through December 31, 2016.
Rent controlled rents can rise because of MBR increases that the landlord applies for and by MCI increases. Most analysts are seeing the new law as an incentive that will heat up the MCI market. Few tenants will allow an IAI that has the effect of boosting the rent over the threshold, but of course, during a vacancy, the landlord does not need anybody’s permission to do an IAI.
Example 1: The rent controlled rent in an apartment is $2,300. The landlord does major capital improvements to the entire building sufficient to raise the rent to this apartment to $2,750. Upon a vacancy, the apartment is automatically deregulated.
Example 2: The rent controlled rent in an apartment is $2,300. The landlord does no major capital improvements. Upon vacancy the apartment is not automatically deregulated, unless the fair market rents in the neighborhood can be proven to be over $2,700 by establishing comparable apartments are at or above that level in the same neighborhood, subject to challenge by the next tenant.
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 three 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 three years. 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.
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.
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.