New Rent Increase Limits On Major Capital Improvements and Individual Apartment Improvements
By Robert J. Lum
Landlords of rent-regulated units greatly benefited from the use of Major Capital Improvement ("MCI"), which served to permanently increase rent for said units based on money spent by the landlord to make improvements to their buildings for the benefit of all tenants therein, such as installing a new boiler or roof. The MCI cost would in turn create a permanent increase to the rent paid by tenants, provided that the Division of Housing and Community Renewal (“DHCR”) is satisfied with the landlord’s proof of work and grants its approval to allow for rent adjustment. Similarly, Individual Apartment Improvements (“IAI”) operates in the same concept as an MCI, but IAI applies to improvement to individual apartments and does not require DHCR approval as is required for MCI.
With the passing of the Housing Stability and Tenant Protection act of 2019 (“2019 Amendments”), landlords are significantly inhibited from recovering a bulk of their costs for improvements to their rent-regulated buildings. From an economic perspective, with the passing of the Amendments, landlords may now face significant financial burden in owning rent-regulated buildings.
In the context of an MCI, the Amendments have decreased a landlord’s maximum annual rent increase based upon MCI from up to 6% to 2%. In the context of IAI, take for example, a rent regulated unit (in a building with less than 34 units) with rent set at $1,000 a month. Prior to the Amendments, the landlord who spends $20,000 on improvements to this unit would be allowed to increase the monthly rent and set it at a new rate of $1,500 (1/40th x $20,000 = $500). Now, after the passing of the Amendments, if a landlord spent $20,000 for improvements to that same unit, the landlord would only be entitled to a maximum limit of $15,000 in rent increase over the span of fifteen years. Given the circumstances, the Amendments may be a disincentive for landlords to provide for any improvements to their rent-regulated buildings. Notwithstanding, landlords do have an obligation to make repairs and improvements for their tenants based upon the warranty of habitability.
The Amendments are now in the center of a dispute in litigation commenced by landlords. In a 125-page complaint filed in the Federal Court for the Eastern District of New York by various plaintiffs, including the Rent Stabilization Association and the Community Housing Improvement Program, against the City of New York and others, it alleged that the Amendments violated the 5th and 14th Amendment of the U.S. Constitution for physical and regulatory taking of private property without just compensation. With Amendments contested in litigation and waiting for judicial determination on their legality, landlords have a silver lining as the courts may invalidate the Amendments, or portions thereof.