In what could not have been a surprise to anyone, last month, the New York Legislature passed the Rent Act of 2015, a rent bill with significant alterations to the law. While this renewal makes tangible changes that strengthen a tenant’s positions, it does not address several critical uncertainties for owners.
The law extends rent regulation until June 15, 2019 and was passed retroactively back to June 15, 2015 as was expected. The principal changes to the Act are:
Luxury Decontrol. The rent threshold for deregulation increased from $2,500 to $2,700. (This change primarily impacts Manhattan apartments.) For the first time, this threshold is also subject to being indexed to the one-year lease renewal rate adopted by the Rent Guidelines Board, effective Jan. 1, 2016. What was not addressed was the issues created by the Altman case in which the court, for the first time and in direct opposition to the Division of Housing and Community Renewal opinion and operating procedures, determined that in order to qualify for luxury decontrol, the rent above the threshold had to be actually paid by the last tenant in possession, not simply a legal rent attained by adding the vacancy bonus and the Individual Apartment Improvement (IAI) pass-through to the prior legal rent. Why policy makers avoided clarifying this important point is a head-scratcher.
Major Capital Improvements (MCI). The amortization period for MCI work previously stood at 84 months, meaning that an owner could recoup expenses related to this work over an 84-month period resulting in a 14.3 percent return on invested capital. For the first time, this MCI pass-through has been extended to 96 months (for buildings with 35 units or fewer) and the return on invested capital will drop by 12.5 percent in these properties. For buildings with 36 units or more, the amortization period is extended to 108 months, meaning the return on invested capital drops by 28 percent here. This change is likely to have a profound impact on the quality of the housing stock in the city. In the 1970s, many owners found it more profitable to burn their buildings down rather than renovate them. (Remember Howard Cosell famously declaring “The Bronx is burning?”)
In order to encourage private sector investment, the MCI increase was utilized and rehabilitating buildings became more economically viable versus burning them down to collect insurance proceeds. Reducing the incentive for private sector investment will hurt the quality of the housing stock. This is especially troubling when we acknowledge the public sector’s track record as a landlord.
Fortunately, these MCI increases will remain permanent. Tenant advocates were attempting to make this pass-through a temporary surcharge, only lasting until the investment was recouped then dropping the rent back to the level without the increase.
Vacancy Allowance. The vacancy allowance remains unchanged unless the tenant was paying a preferential rent, in which case the allowance is modified. Under the modified vacancy increase, the legal rent may be adjusted by 5 percent if the last vacancy lease commenced less than two years ago; 10 percent of the previous legal regulated rent if the last vacancy lease commenced less than three years ago; 15 percent of the legal regulated rent if the last vacancy lease commenced less than four years ago; and 20 percent of the legal regulated rent if the last vacancy lease commenced four or more years ago.
Preferential Rents. They remain adjustable upon lease renewal. Vacancy increases applicable after charging a preferential rent are adjusted as stated above.
J-51. This program has also been extended by four years through June 15, 2019. Here, legislators also have missed an opportunity to provide clarity on what happens to units, which would otherwise be decontrolled but for the J-51 on the property.
Elected officials continue to push for stronger rent laws, all in the name of affordable housing. Unfortunately, “affordability” has zero to do with our rent regulation system. If politicians really cared about affordability, means testing would be part of the program. Until then, rent subsidies will continue to be given out to folks who may not need them. As The New York Post’s Cindy Adams used to say: only in New York folks, only in New York.