DHCR Updates Reasonable Cost Schedule for MCIs

On Jan. 4, the DHCR issued update number 1 to Operational Bulletin 2021-1. When the Housing Stability and Tenant Protection Act (HSTPA) was enacted, it directed the DHCR to create a schedule of reasonable costs associated with major capital improvements (MCIs). This is the first uppdate to the operational bulletin--it's designed to be updated annually to  respond to market changes of various capital improvement costs.

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

The passage of the HSTPA greatly limited rent increases owners could get for MCIs and increased oversight by the DHCR. Before the HSTPA, MCI rent increases were permanent and were added to an apartment’s base rent. Now, 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 may be granted based upon reasonable costs.
• 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.
• 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 are capped at 2 percent per year.

To help owners understand what reasonable costs are for MCI work, the DHCR recently released an update to the reasonable cost schedule for MCI-eligible items. The reasonable cost schedule provides a maximum cost that can be approved for eligible MCIs. The costs reflected on the schedule include installations that are MCI eligible and such related costs that are necessary and required to complete the installation of the eligible MCI item.

Maintenance costs or cosmetic costs that are not necessary for the eligible MCI item or costs unrelated to the eligible MCI item are not included in the schedule. And not every item on the schedule is considered an eligible MCI item in and of itself; some are for items considered necessary and related expenses to eligible MCI items. Only items that are either MCI eligible or necessary related expenses are included in the approved costs for an MCI rent increase.

Applying for a Waiver

It may be the case that the MCI work you plan to undertake will exceed the costs listed in the DHCR’s reasonable cost schedule. For these instances, the DHCR has outlined the circumstances in which an owner may apply for a waiver of the application of the reasonable cost schedule when applying for a temporary MCI rent increase. According to the DHCR, the waiver application must show either:

• Improvements are not identified in the reasonable cost schedule, or are necessarily and appropriately priced higher than those costs listed in the reasonable cost schedule; and such costs are accurate and reasonable under the circumstances; or
• Use of the schedule will cause an undue hardship, and the use of alternative procedures are appropriate to the interests of the owner, the tenants, and the public; and the costs of the improvement are accurate and reasonable under the circumstances.

The owner must request a waiver of the use of the reasonable cost schedule in writing, which must accompany the temporary MCI rent increase application with the requisite information and documentation. If an owner’s application for a waiver is denied, the owner’s recoupment will be limited to that required by the reasonable cost schedule, or the actual verified costs, whichever is lower, together with such other relief as may be appropriate.

Below are the updated types of improvements or installations that may qualify as an MCI in the most recently updated cost schedule. This updated cost schedule will apply to eligible improvements or installations that began on or after Jan. 1, 2022, for items that appeared in the previous cost schedule. This update includes categories and sub-categories that appear for the first time. We've listed the new ones below. And you can find the complete list of improvements and installations with the updated prices per unit at https://hcr.ny.gov/system/files/documents/2022/01/operational-bulletin-2021-1-update-1.pdf.