Real Estate Board of New York to New York State Division of Homes and Community Renewal Related to Proposed Amendments to Regulations Governing Rent Regulated Apartments

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REBNY thanks the New York State Division of Homes and Community Renewal (DHCR) for the opportunity to comment on the proposed amendments to regulations governing rent regulated apartments: the Rent Stabilization Code, the Tenant Protection Regulations, and the State and New York City Rent Control Regulations.

New York City faces a housing crisis that is driven by the lack of rental housing production. Earlier this year, REBNY commissioned a study by AKRF that showed there is an immediate need for over 200,000 housing units, and that needed number of units will reach over half a million by 2030. A key part of this analysis is the recognition of the need to re-invest in the housing we already have or face an even higher need in production to replace obsolete units. Unfortunately, per reports from the New York City Rent Guidelines Board, New York Building Congress, and DHCR itself, we are seeing less investment, not more, in our existing rental housing stock. Since 2019, the rental housing stock has seen three years of increasing numbers of distressed buildings, $7.3 billion less in residential investment from 2019, forecasted residential spending down 33%, and billions of dollars less in Major Capital Improvements (MCIs). The 2021 Housing Vacancy Survey reported for the first time in decades an increase in the number of dilapidated units and approximately 38,000 rent stabilized apartments that became vacant in the last year that had been occupied for more than 30 years.

It is therefore baffling that DHCR in its efforts to promulgate agency rules to implement the statute of the Housing Stability Tenant Protection Act of 2019 (HSTPA) would willingly choose to focus on changes that would discourage investment in the City’s rapidly aging building stock. Of equal concern is the agency’s intent to overturn judicial precedent on matters it was not granted the authority to do so.

The agency states that the amendments are intended to ensure regulatory alignment with the provisions of the rent regulation reforms passed in 2019 under the Housing Stability Tenant Protection Act. However, the proposed amendments also include changes to the reconfiguration of apartments and setting of initial rent, the determination of substantial rehabilitation for the purposes of deregulation, demolition, and other changes to initial rent, legal rent and deregulation not specifically set forth in the HSTPA, which exceeds the agency’s statutory authority.

Please consider the following comments:

Reconfiguration of Apartments

HCR proposes new requirements pertaining to the combination of two or more vacant apartments or other apartment reconfigurations and the resulting legal regulated rent. The proposed changes essentially require that in any case of combination where all or some of the new unit was previously subject to regulation, the newly combined unit will be rent regulated. This section establishes a protocol for the calculation of the new legal rent. Unfortunately, the proposed method for setting this initial rent is completely disconnected from the work necessary to improve and combine apartments. It would not account for substantial improvements and code upgrades. It does not account for changes in building systems and need for more common areas. Furthermore, none of these changes impact a tenant in place and therefore should not fall under the purview of the agency.

For decades rent stabilization has established legal requirements, including legal rent, on the basis of an apartment’s rent history. If the owner effectively creates a new apartment, there is no longer any rent history. Therefore, the owner’s establishment of a “first rent” is not subject to challenge.  By virtue of HSTPA, the new apartment and the new rent continue to be subject to rent stabilization, the new apartment is stabilized in perpetuity. However, DHCR proposes to go further, preventing reinvestment, and ensuring the preservation of substandard conditions, despite HSTPA making no mention of the combining of apartments or setting of initial rent.

DHCR’s proposed Code amendment exceeds the agency’s regulatory authority under HSTPA, is contrary to decades of DHCR precedent, and is further contrary to appellate holdings that the legal rent of a no longer existing unit is irrelevant to the establishment of a rent for a newly created apartment. 

Substantial Rehabilitation

The definition of “substantial rehabilitation” is also proposed to be modified despite not being addressed by the HSTPA.

Current code requires 75% of a building to be replaced and have a deteriorated condition, with a rebuttable presumption of poor condition if the building is 80% vacant. Over the years, and subject to certain court challenges, DHCR has promulgated an Operational Bulletin that provides that substantial rehab occurs if (1) 75% of the building systems are replaced or made as new –with an exception for recently installed systems and (2) the building was in deteriorated condition, with a presumption of substandard condition if the building was 80% vacant. 

The proposed changes would require “at least” 75% of the building to be replaced and repeal the 80% presumption. This means the owner may be required to replace more than 75% of the building and still be subject to an agency inquiry to prove deterioration. The proposed changes broaden the exception based on findings of harassment; and presumes those findings to be in effect for three years. This would require wasteful expenditures to replace systems that may have recently been redone and create a completely subjective standard regarding deteriorated condition. 

The Emergency Tenant Protection Act (ETPA) provides that a building substantially rehabilitated post January 1, 1974 is exempt from rent stabilization, a point which HSTPA did not modify. Yet, DHCR proposes that the new definition would also provide that regulated tenants who remain in their apartments during rehabilitation shall be regulated until they vacate and expressly disclaims any consideration of a lack of evidence due to passage of time. The proposal also establishes procedures surrounding “dollar orders” where a tenant seeks to preserve its right of return or where an apartment has been given a vacate order; requires that the landlord restore the vacated premises unless financially infeasible; and provides limited circumstances where nonpayment or inability to find the tenant will excuse the return.

It is important to note that substantial rehabilitation exemptions have occurred since 1974.  In essence, DHCR is stating that the absence of documents that may relate to a time frame nearly 50 years ago is inexcusable. This is illogical and inequitable.

Demolition

The proposals would amend the requirements for demolition including: a “good faith” requirement, that the applicant at the time of the application submit proof of financial ability to complete the proposed work, along with proof that the appropriate governmental agency has already approved demolition plans, and requires that the entire building be removed, including the foundation.

This change, too, is not within the statutory language of the HSTPA, and again goes against long standing DHCR policy and court precedent, which have allowed the shell and foundation to remain. The only justification for the changes appears further restriction of owners’ rights even as the walls are literally falling down around them. This conflicts with a recent appellate ruling, Matter of First NY v DHCR, in which the Appellate Division ruled that New York State’s DHCR had improperly denied an owner’s application for permission to refuse a rent stabilized tenant’s lease based upon an intention to demolish the building. DHCR had denied the application because, although the owner had established the intention to demolish, the owner had not proven what it intended to build. The Appellate Division found no such proof was necessary as the law related to the need to establish the demolition itself. Here, DHCR proposes to adopt rules with no relationship to the law as well.

Changes that Circumvent the Regina Decision

The rule adoption process is an opportunity to implement the court’s finding in Regina and clarify retroactivity of the HSTPA regulations. Instead, HCR implements provisions retroactively that would violate the Court of Appeals holding from the Regina case, which holds that retroactive imposition of rules denies due process.

For overcharge claims filed before June 14, 2019, the base date is four years prior to the filing date of such claim except where a special provision of the Code allows a further look-back. For claims filed on or after June 14, 2019, the base date shall be June 14, 2015. This means that the Base Date for such a claim is more than four years before the filing of the overcharge claim, which may violate the Regina decision. Another potential violation of the court decision is that the changes would preclude collection of an MCI rent increase retroactively to the effective date of a Rent Reduction Order. A third problem in potential conflict with the Regina decision is the manner in which DHCR intends to apply the $15,000 cap to individual apartment improvements – applying the cap to work performed pre-HSTPA if the apartment lease date is post-adoption of HSTPA.

Furthermore, the proposal amends the time limit for starting a Fair Market Rent Appeal to six years to comply with HSTPA, and repeals and replaces existing process. The proposal repeals language which limited to four years the filing of notice of the initial legal regulated rent and time for maintenance of rental records. This effectively repeals the language regarding time-period for examination of rental history, making it open-ended.

Lastly, the proposed rules would change legal rent and lease requirements by repealing and replacing the section regarding determination of legal regulated rents, overcharges and penalties: this would include the extension of a prior 4-year rule to a “6 or more” year rule, providing the base data shall be no earlier than June 14, 2015. Tenants would be allowed to file an overcharge claim “at any time.”

Changes to the Administration of MCIs and IAIs

The proposed amendments largely align rules for Major Capital Improvements (“MCI”) and Individual Apartment Improvements (“IAI”) with mandates from HSTPA.

For MCIs, the proposal establishes that MCIs may only be claimed for buildings which are more than 35% stabilized. The amendments include the establishment of a useful life schedule; removal of MCI increases after 30 years; amortization of costs with any increase capped to 2% per year; and establishment of a reasonable cost schedule, amongst other changes. These changes create a retroactivity issue and potential undermining of economic expectations, thus creating a potential taking issue.

As proposed, DHCR may prohibit rent increases if there are other immediately hazardous and hazardous violations present in the building. DHCR also establishes arbitrarily a 25% audit quota for MCI applications. It is reasonable, therefore to infer that an MCI application could be jeopardized by doing a hazardous violation check when the application is filed, leaving no method to remedy necessary repairs. There is no language to require that the violations in question be tied to the MCI scope of work, nor to common areas of the building wholly within owner control. 

HSTPA does not define hazardous violation. These regulations are an invitation to tenant-created conditions leading to MCI dismissal. Additionally, with retroactivity eliminated, tenants now have every incentive to fight MCI’s endlessly, no matter how meritorious the MCI application.

For IAIs the proposal codifies the limits set forth in HSTPA. Those limits bear little relationship to actual costs required to be incurred to keep a housing accommodation in good condition at apartment turnover. Particularly with respect to lead abatement, upgrade electrical wiring or other systems within the apartment, these amounts have no relationship to actual costs. Recent changes in interest rates mean that access to capital and debt service ensure these improvements are out of reach.

Thank you for the consideration of the above points.