DHCR Updates MCI Application Form, Useful Life Schedule

The passage of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) significantly curtailed rent increases owners could get for major capital improvements (MCIs) and increased oversight by the DHCR. When owners make improvements or installations to a building subject to the rent stabilization or rent control laws, they can apply to the DHCR for approval to raise the rents of the tenants. When the improvement or installation meets certain requirements it will be considered an MCI.

To qualify as an MCI, the improvement or installation must:

• Be depreciable pursuant to the Internal Revenue Code, other than for ordinary repairs;
• Be essential for the preservation, energy efficiency, functionality, or infrastructure of the entire building;
• Directly or indirectly benefit all tenants; and
• Meet the requirements set forth in the useful life schedule contained in the applicable rent regulations.

Some examples of MCI items include boilers, windows, electrical rewiring, plumbing, and roofs.

Unnecessary cosmetic improvements or work done in individual apartments that isn’t otherwise an improvement to the entire building isn’t eligible for MCIs. The DHCR may grant a rent increase based upon the actual, verified, and reasonable cost of the improvement and installation. In addition, to be eligible for a rent increase, the MCI must be a new installation and not a repair to old equipment.

HSTPA and MCI Rent Hikes

MCI rent increases previously were permanent and added to an apartment’s base rent. Now, with the HSTPA, MCI increases are temporary and must be removed from the rent 30 years after the date the increase became effective, inclusive of any increases granted by the local rent guidelines board. In addition, the HSTPA made the following changes with regard to MCI rent increases:

• MCI increases are prohibited for buildings with 35 percent or fewer rent-regulated units.
• MCI increases are prohibited if there are hazardous violations on file with the local municipality in addition to immediately hazardous violations.
• MCI increases may be granted based upon reasonable costs. The DHCR hasn’t yet released a reasonable cost schedule for MCI-eligible items.
• Buildings with 35 or fewer units are amortized over 12 years; buildings with more than 35 units are amortized over 12.5 years.
• MCI increases, which were previously capped at either 6 percent or 15 percent, are now capped at 2 percent per year.

Before the June 14 enactment of the HSTPA, some owners may have rushed to apply for MCI increases, fearing that the MCI program’s possible elimination. For these owners, the DHCR has stated that applications that were pending at the time the HSTPA went into effect must abide by the 35 percent rule.

Also, DHCR Commissioner RuthAnne Visnauskas recently indicated that a request for proposals would be issued in the near future for a consultant to help create the “schedule of reasonable costs” for MCIs, which will provide guidelines for acceptable prices for certain types of renovations. The schedule should be ready by June 2020.

The HSTPA also prohibits group work done in an individual unit that is otherwise not an improvement to an entire building. The DHCR recently updated Fact Sheet #33: Useful Life of Major Capital Improvements, confirming that building-wide bathroom and kitchen renovations are considered group work and ineligible for MCI approval.

Application and Documentation

All applications for MCI rent adjustments must be filed within two years of the installation. An owner must file DHCR Form RA-79: Owner’s Application for Rent Increase Based on Major Capital Improvements. The DHCR recently released an updated Form RA-79 with a new supplement asking owners to affirm that there are no immediately hazardous and/or hazardous violations of the NYC Maintenance Code (HPD), NYC Building Code (DOB), NYC Fire Code (FDNY), Uniform Fire Code (ETPA Counties), and, if there is still such violation of record, that the violation has been corrected or the violation is tenant induced and should be waived for the purposes of the MCI application.

The completed application must contain:

• An itemized list of the work performed and a description or explanation of the reason or purpose of such work;
• Certifications provided by the owner and contractors regarding the cost of the work and dates the work started and ended;
• Proof of payment;
• Copies of all necessary approvals from applicable government agencies for the work done;
• An affirmation that the building is free of any hazardous or immediately hazardous violations with the applicable local municipalities; and
• A list of tenants with their respective rent-regulated status.

Case Processing

When an owner submits an MCI application, the DHCR notifies the tenants and gives them an opportunity to submit written responses to the application. Due to the changes enacted by the HSTPA, tenants have 60 days to respond to the owner’s MCI application. They are instructed to comment on the subject installations as specifically as possible. Tenants can request an extension of time to respond to the application.

The owner may keep a copy of the application with all supporting documentation on the premises so that tenants may examine it. But a complete copy of the MCI application with all the supporting documentation will always be available at the DHCR for tenant review upon written request. The DHCR will review the application, consider the tenant responses, and may request additional documentation if deemed necessary.

When processing is complete, the DHCR will issue an order either granting a rent increase for the total amount requested, a partial amount, or denying the request. The owner and the tenants will be notified by the DHCR of the amount of the rent increase per room along with the total amount that’s applicable to each apartment in addition to the related terms and conditions in a written order. MCI increases are effective and collectable on the first day of the first month following 60 days from the mailing date of the order.

MCI Rent Increases and Vacancy and Renewal Leases

If an apartment is vacant or becomes vacant while the MCI application is pending, the owner must notify any incoming tenant that the tenant’s rent will be increased if the MCI application is approved. Failure to indicate this anticipated rent increase in the vacancy lease will result in no MCI increase being allowed for the apartment until the lease is renewed. If an owner charges the rent increase without this proper notification, the owner risks overcharge penalties.

A vacancy lease clause that satisfactorily notifies an incoming tenant of a pending MCI application is one that provides as follows:

Application for a major capital improvement rent increase has been filed with the DHCR based upon the following work: _____________________, Docket # ___________________. Should the DHCR issue an order granting the rent increase, the rent quoted in this lease will be increased.

If the DHCR approves an application for a rent increase based on an MCI, the owner may adjust the rent during the term of an existing lease only if the lease contains a clause specifically authorizing the owner to do so. A satisfactory lease clause would provide as follows: “The rent established in this lease may be increased or decreased by an order of the DHCR or the Rent Guidelines Board.”

Editor’s Note: The 2020 edition of The Rent Regulation Checklist, available in December, contains more information, including new DHCR forms, on how the HSTPA affected MCI applications and other issues affecting rent-regulated apartments. To reserve a discounted copy, go to https://www.thehabitatgroup.com/page/exclusive-pre-publication-reservation-form-2020-new-york-rent-regulation-checklist.