Beat Improvement Rent Hike Challenges When Owner and Contractor Are Related Entities

January 25, 2011

If you make improvements to a rent-regulated apartment or you make a building-wide major capital improvement (MCI) to a property, you may be entitled to a rent increase. The amount of an “individual apartment improvement” rent increase is equal to 1/40th of an improvement's cost.

If you make improvements to a rent-regulated apartment or you make a building-wide major capital improvement (MCI) to a property, you may be entitled to a rent increase. The amount of an “individual apartment improvement” rent increase is equal to 1/40th of an improvement's cost. And if the Division of Housing and Community Renewal (DHCR) issues you an order granting an MCI increase, the monthly rent hike for each rent-regulated tenant in your building is calculated by taking the total cost of the MCI as allowed by the DHCR and dividing it by 84, the number of months in seven years, and then dividing this sum by the number of rooms in the building. This yields the cost of the MCI the owner can collect per room per month.

In either case, a tenant may challenge your right to collect the improvements rent hike by filing a rent overcharge complaint with the DHCR. A tenant may claim that you are not entitled to a rent hike because you and the contractor are somehow related. But even if true, this should not automatically disqualify you from the rent hike.

An owner may be a principal of a contracting company and also the principal in a management company or in a company that owns a building. “This arrangement is very common,” says New York attorney Karen Schwartz-Sidrane. “In fact, it is so common that the DHCR has acknowledged and approved the situation in numerous cases and addresses the situation in its Policy Statement 90-10 and DHCR Fact Sheet 12,” she adds. With the help of Schwartz-Sidrane, we will cover what proof an owner with ties to a contracting company must be prepared to show to allow the rent hikes.

Disclosure Requirements

There is no language in the Rent Stabilization Code Section 2522.2(a)(1) that explicitly requires an owner to disclose the “identity of interest”; however, the language of the standard DHCR “Request for Additional Information/Evidence” states, “If it is found that there is an equity interest or an identity of interest between the contractor and the building owner, then additional proof of cost and payment, specifically related to the installation, may be requested, where proof is not adequately substantiated….”

Thus, there does not appear to be any requirement at the outset to inform the DHCR that there is an equity interest of an owner in a contracting company, says Schwartz-Sidrane. However, the proof usually reveals the common ownership in that the addresses are the same or the complaining tenant recognizes that a contractor is also employed in the building as part of the building maintenance staff, notes Schwartz-Sidrane.

Proving 'Arm's-Length' Transactions

DHCR Policy Statement 90-10 says that, if the owner and contractor are related, the DHCR may ask for additional proof of the cost of the improvements and proof that the owner paid for them. So don't be surprised if you are asked to provide an affidavit as to the separate nature of the two companies, says Schwartz-Sidrane.

The purpose of the further inquiry is to make sure that you were involved in an “arm's-length” transaction with the contractor. This means that the contractor actually charged you for the cost of the work and you in fact paid that cost. If you submit enough proof of cost and payment, the DHCR should allow you to collect the rent hike.

The criteria the DHCR looks for is that the companies exhibit the same “arm's-length” transactions that they would have with third-party vendors. Here are the key elements:

  • Each company must have separate bank accounts;
  • The contracting company must issue invoices to the owner or management company at the time the work is done;
  • The owner or managing agent must actually pay the contracting company with its own checks, and the checks are to be paid at the time the work is completed; and
  • The management company must produce invoices issued from the same period of time as the improvements and the related canceled checks (electronic images) when a tenant files a rent overcharge complaint with the DHCR or the owner seeks an MCI rent hike for a building-wide improvement.

Other Good Business Practices

It is always good business practice to keep meticulous records. Regardless of whether you are making individual apartment or building-wide improvements, your proof must give specific details of what was done. The DHCR must be able to tell whether the work you did qualifies as an improvement, as opposed to simply maintenance or repair work, which doesn't qualify for a rent hike.

The DHCR can do this only if it knows exactly what was done in the apartment. If your evidence is vague about what improvements were made, the DHCR will not allow you to collect a rent hike. As a result, make sure your invoices give details of the work done. Don't use general terms, especially for items that could be considered maintenance or repairs. Here are several good business practices to consider:

  • Invoices and checks should reflect the apartment or apartments that are being worked on or receiving the appliances, cabinets, etc.;
  • “Repairs” are considered to be “maintenance” or “fixing” what is already there, whereas “improvements” are “replacements.” You can receive individual apartment improvement increases only for improvements; and
  • Refrain from describing “improvements” as “repairs” on any of the paperwork or invoices.

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