by Winnie Shen
Brief History of Rent Regulation in New York State & City
New York State and City have a long history of introducing rent regulations in an attempt to keep rents affordable and residents housed in the face of a perpetual housing shortage. After WWI, NYC saw skyrocketing rents and rampant evictions and in response, enacted rent regulations from 1920 to 1929. The federal government stepped in following WWII to impose a nationwide price ceiling on rents with the U.S. Emergency Price Act of 1942. With the expiration of federal protections, NYS passed the Emergency Housing Rent Control Law in 1946 to extend rent control. After 1947, as housing conditions continued to not improve, Mayor John Lindsay signed the Rent Stabilization Act of 1969 into law but it proved insufficient at preventing units from being deregulated. The New York State legislature passed the Emergency Tenant Protection Act in 1974, which restored 110,000 previously deregulated apartments to rent stabilization and extended rent stabilization to buildings built after 1947 and before 1974.
What does it mean for an apartment to be rent-regulated in NYC? Unlike market-rate tenants, who may be subject to the whims of their landlord upon their next lease renewal, rent-stabilized tenants in NYC have their rent increases determined by the Rent Guidelines Board (RGB) and, as of June 2019, so do rent-controlled tenants. However, the aforementioned laws and even the more tenant-friendly set of laws passed in 2019, the Housing Stability and Tenant Protection Act (HSTPA) still allow for landlords to raise rents on top of the regular RGB increases by taking advantage of policies such as Major Capital Improvements (MCI).
What are Major Capital Improvements (MCI)?
An MCI allows a landlord to receive a rent increase for completing a major building-wide improvement. In theory, it provides a financial incentive for landlords to continue investing in their buildings. In practice, MCIs drive up rent and hastens the displacement of low- and middle-income tenants. According to the 2017 New York City Housing and Vacancy Survey, the 2016 median income of rent-stabilized households was $44,560, while the median income of rent-controlled households was nearly half that at $28,000. In comparison, renters of private non-regulated rental units had a median household income of $67,000. In other words, many rent-regulated tenants are unable to afford the rent increases caused by MCIs and for them, an MCI approval notice can serve as a delayed eviction notice.
The elimination of MCIs has been the main goal for many tenants’ rights groups, including the state-wide Housing Justice For All coalition. Because of these groups’ organizing efforts, the MCI program’s devastating effects were somewhat curtailed by the passage of HSTPA. Instead of annual increases of up to 6% of a tenant’s monthly rent, MCI increases were limited to 2% of the rent. Additionally, the state agency in charge of administering the MCI program, Homes and Community Renewal (HCR), was tasked to “establish a schedule of reasonable costs for major capital improvements, which shall set a ceiling for what can be recovered through a temporary major capital improvement increase.” (HSTPA) Pursuant to HSTPA, HCR released Operational Bulletin 2020-1 on June 16, 2020, that laid out a reasonable cost schedule for MCIs. However, the document HCR released represents a different interpretation of the HSTPA than what state legislators intended, a sentiment which attendants at HCR’s public hearing on September 9, 2020, also echoed.
The Failings of HCR’s Reasonable Cost Schedule
On September 9, 2020, HCR held a hearing via teleconference to address their reasonable cost schedule. In attendance was a range of interested stakeholders, such as tenants, elected officials, as well as landlords. From the tenant advocate side, Seth Miller, a tenant attorney with Collins, Dobkin & Miller LLP, emphasized the lack of transparency in how HCR obtained the cost estimates for how much different projects would cost. Additionally, Miller explained that HCR’s responsibility had been to lay out an exhaustive list of MCIs. Instead, HCR skirted its responsibility by granting landlords the opportunity to apply for a waiver for any project not explicitly included in the Reasonable Cost Schedule, effectively rendering the reasonable cost schedule to be a suggestion for landlords rather than an authoritative document on what work constitutes an MCI and how much that work can cost.
The costs HCR proposed for each type of project also do not take into account the differing apartment sizes nor the varying costs of labor and material across New York State. Lewis Finkel, a construction professional, explained that the cost schedule is based on union members’ wages, but that most workers employed by landlords are not in unions. Furthermore, the cost schedule proclaims that new electrical wiring is capped to $6,450 per dwelling unit, not accounting for the fact that rewiring costs depend heavily on the apartment’s size. In other words, HCR’s cost schedule is not nearly specific enough to provide an accurate cost estimate.
Besides for opaque and insufficient data, the cost schedule also includes projects that had traditionally not been viewed as MCI-worthy, such as pressure washing or skylights. Neither of these two projects fulfill the basic requirements for what constitutes a MCI: 1) be depreciable in value, 2) be essential for the functionality of the entire building, 3) directly or indirectly benefit all tenants, and 4) meet all requirements set forth in the useful life schedule. Pressure washing is not depreciable in value in the same way an elevator or boiler may be. Skylights may not be building-wide features that all tenants benefit from and therefore, their replacement should not be considered a MCI.
Unlike tenants, the landlords in attendance generally voiced approval for the cost schedule. They also said that without the MCI program, landlords of buildings with majority rent-regulated apartments would be unable to finance improvements to their buildings. One landlord, Ken Nelson, explained that the changes to the MCI laws brought by the HSTPA have already discouraged investment. However, Nelson’s statement ignores the reality that many NYC landlords are able to obtain property tax abatements for the same renovations they would be entitled to receive MCI increases for. For example, a landlord could complete a building-wide renovation, such as replace a faulty elevator, and receive not only a MCI but also a tax exemption called a J-51 from the NYC Department of Finance. A J-51 exempts owners from property taxes for 10 years followed by a four-year period of declining exemption. In total, NYC landlords received tax exemptions and abatements totaling $301 million in FY 2020.
MCIs threaten to pull the rug out from under rent-regulated tenants, who for many rely on their rent-regulated apartment as their lifeline for stable housing. As the COVID-19 pandemic has demonstrated, housing is healthcare and the foundation on which households build their life around. The comments shared during the public hearing have made clear the steps HCR needs to take. The agency should redo their reasonable cost schedule, share their data collection methodology, and involve all parties, both tenants and landlords, in the creation process before publishing a document that will have tremendous impact on the housing stability of the over one million households in NYC that live in rent-regulated apartments.
Cover Image Source: Ivan Contreras Twitter Post