Enacted NYS Budget Updates IAI Rules for Rent-Stabilized Apartments

The new IAI provision will go into effect in October 2024.

After months of negotiations, the NYS Legislature enacted the state’s 2024–2025 budget last month. Included in the enacted budget are significant housing-related state actions. One action affecting New York City landlords is the good cause eviction law, discussed in New York State Enacts Good Cause Eviction Law. And in an attempt to help bring vacant apartments back onto the rental market, legislators also included an increase in the cap for individual apartment improvements (IAIs) for rent-stabilized units. New requirements to the system will allow owners to recoup a reasonable portion of renovation costs over a 15-year period.

Individual Apartment Improvement Basics

One method owners can use to raise rent-stabilized rents is charging for IAIs. When an owner installs a new appliance or makes an improvement to an individual rent-stabilized apartment, the owner may be entitled to an IAI rent increase. The tenant’s written consent for the improvement and rent increase is required only if the apartment is occupied by a tenant at the time of the improvement. Written consent isn’t required for a vacant apartment, and owners have typically taken advantage of this during a vacancy. For IAI upgrades performed during a vacancy, a fraction of the costs can be passed onto the incoming tenant. DHCR Operational Bulletin 2016-1 (revised February 2020) identifies items that may and do not qualify as IAIs.

Acceptable improvements. Generally, apartment improvements, new equipment, or new services are considered improvements eligible for an IAI rent increase. Here are some examples of qualifying IAIs:

• Complete bathroom modernization or renovation, including fixtures installed as part of the project, and all painting and plastering if part of the modernization or renovation;
• Complete kitchen modernization or renovation, including fixtures and appliances installed as part of the project;
• New air conditioner purchased and installed by the owner, including wiring and outlet for the air conditioner where none previously existed;
• New washing machine and/or dryer, including wiring and outlet where none previously existed;
• New parquet flooring where none previously existed;
• New subflooring;
• New flooring, including linoleum and vinyl tiles, when a new subflooring is installed;
• New carpeting;
• New built-in clothing closets;
• New furniture;
• New lighting fixtures where none previously existed;
• New storm door;
• New storm windows;
• New windows if not part of a building-wide installation;
• New full-length screens where none previously existed;
• Balcony enclosure;
• Security alarm;
• New dropped and/or soundproof ceilings;
• Painting and plastering if part of a major renovation; and
• Installation of Sheetrock if done throughout the apartment.

In addition, the DHCR says the costs associated with the removal or demolition of the items being replaced may be included in the amount eligible for the rent increase when the removal or demolition is necessary and is performed contemporaneously with the completion of the work. Also, architectural or engineering services that are directly related to an IAI are considered part of the allowable costs eligible to be included in calculating a rent increase when the work requires approval by a Registered Architect (RA) or Professional Engineer (PE), for the issuance of a permit by the NYC Department of Buildings (DOB).

Nonqualifying improvements. Here are examples of improvements that are excluded when calculating an IAI rent increase:

• Any removal or demolition work performed by the owner or an employee of the owner during the course of assigned duties;
• Used equipment, furnishings, or items replaced through normal maintenance or repair;
• Installations or modifications made while a tenant is in occupancy without the tenant’s written consent; and
• Items that constitute ordinary repairs and maintenance (installing Sheetrock in less than the full apartment; plastering; painting; scraping, shellacking, or coating floors with polyurethane; replacing light fixtures, outlets, or switches; new ceilings) unless such work was done in connection with (and is a necessary component of) an allowable IAI.

With regard to nonqualifying apartment improvements, the DHCR points out that physical changes to the interior of an apartment that are reasonable accommodations and/or modifications for a disabled tenant in occupancy, such as installing grab bars in bathrooms, that in other instances might otherwise qualify for an IAI increase are not subject to a rent increase based on the provisions of the NYC Human Rights Law.

HSTPA Limits on IAIs

When the Housing Stability and Tenant Protection Act (HSTPA) went into effect in June 2019, it made dramatic changes to how rents can be raised and placed restrictions on IAIs.

Under the previous law, the amount of the rent hike was equal to 1/40th of the improvement’s cost if the improvements were done in apartments located in buildings containing 35 or fewer units. For buildings with more than 35 units, you were allowed to increase the legal regulated rent by 1/60th of the cost of the improvements. Increases were based on the total substantiated cost of an improvement including installation cost. In effect, there was no limit on how much could be spent on an IAI.

The HSTPA, however, capped recoverable costs at $15,000 over 15 years and limited the rent increase to 1/168 of the repair costs for smaller buildings and 1/180 for larger ones. Also, rent increases for IAIs became temporary. The temporary individual apartment increases could be collected for 30 years and, at that point, the rent had to be reduced. In effect, under the HSTPA, the maximum increase for a 15-year period came out to $89 per month for buildings with 35 or less apartments and $83 per month for buildings with more than 35 apartments.

New Raised Caps for IAIs

With the cost of renovating an apartment that has been occupied for an extended period of time greatly exceeding the HSTPA’s $15,000 cap and HSTPA’s imposed amortization schedule in New York City, an increasing number of rent-stabilized units have been kept off the market because they require renovations greater than can be financed with the returns from re-renting those units. To address this problem, as part of the state budget deal, legislators have raised the cap on IAI increases and have made the IAI rent increases permanent again.

With the enacted state budget, Part FF of the budget legislation amends the Emergency Tenant Protection Act (ETPA) and Rent Stabilization Law (RSL) with respect to the costs and caps of IAIs for rent-stabilized apartments. Here are the details:

New caps. Legislators introduced two new cap levels on IAI increases available to owners. For IAIs filed after June 14, 2019, the new cap is $30,000 over a 15-year period. The amortization schedule is the same as that imposed by the HSTPA with the rent increasing by 1/180 of the cost for buildings with more than 35 units and 1/168 for smaller buildings. As a result, the monthly increase for a $30,000 renovation is $166.67 and $178.57 per month, respectively. The increase for this cap level is permanent and available for vacant apartments as well as for occupied apartments with written consent in the tenant’s primary language.

However, for certain apartments there’s a cap of $50,000 over a 15-year period where a rent-stabilized unit was continuously occupied for 25 years or registered as vacant in 2022, 2023, and 2024, regardless of prior tenancy length. With this cap level, there is an amortization rate of 1/144 for buildings with 35 or fewer units ($347.22 per month) and 1/156 for buildings over 35 units ($320.51 per month). This level of increase is permanent and available only for vacant apartments.

If you plan to qualify for this by having an apartment registered as “vacant” by no later than Dec. 31 in each of 2022, 2023, and 2024, you may recover IAI costs no more than once under this criterion. But if you qualify because the apartment is vacant following a period of continuous occupancy of at least 25 years that occurred immediately prior to the commencement of the IAI, there is no limit on the number of separate IAIs in the 15-year period under this criterion.

The legislation also notes that a unit isn’t eligible for the $50,000 cap of IAI adjustments if within five years prior there has been a finding by the DHCR or court for treble damages for an overcharge in that building or a finding of tenant harassment by an owner.

Prior certification requirement. To be able to employ the $50,000 cap level, the legislation says the DHCR must provide prior certification that the unit is eligible for the higher IAI.

Also, these costs will be recoverable if immediately before undertaking the work the owner submits evidence to the DHCR demonstrating the improvement was necessary due to a substandard condition or an element that exceeded its useful life immediately prior to the work. According to the legislation, such evidence may be photos of any areas, aspects, or appliances in the apartment that will be improved and any necessary permits required to perform the improvements. The legislation also requires the owner to submit proof after the improvement, such as photos, receipts, and proof of payments that the work was done. Along with submitting the evidence, owners will pay a fee that equals 1 percent of the amount claimed for the IAI at the time of the filing.

The DHCR may audit the improvement work. And if the audit finds that the costs claimed by an owner can’t be substantiated, the increases with be considered willful overcharges, and the DHCR may issue fines and penalties as set forth in regulations.

This new IAI provision will go into effect in October 2024.