How to Beat Five Common Challenges to MCI Rent Hikes

March 11, 2013

When you apply to the Division of Housing and Community Renewal (DHCR) for a major capital improvement (MCI) rent hike, it’s likely that one or more of your tenants will challenge your right to the rent hike. Tenants may return an answer form, giving reasons why they think you’re not entitled to it. Or they may appeal the order granting you a rent hike.

The same types of tenant challenges to MCI rent hikes come up again and again. Fortunately, if you know how to respond to these challenges, you can defend your right to the rent hike. We’ve identified five common tenant challenges. We’ll tell you the DHCR rule on each type of challenge and the argument you should make to avoid losing out on the rent hike.

MCI Basics

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 based on the actual, verified cost of improvement or installation.

Qualifying MCI work. To qualify as an MCI, the improvement or installation must be depreciable pursuant to the Internal Revenue Code, other than for ordinary repairs; be for the operation, preservation, and maintenance of the building; directly or indirectly benefit all tenants; and meet the requirements set forth in the useful-life schedule contained in the applicable rent regulations. (See “Use-Life Schedule for Major Capital Improvements,” below)

For example, you may be granted an MCI rent increase if you install a new boiler in your building, but not if you merely repair or rebuild the existing boiler.

MCI increase amounts. If approved, the rent hike is permanent and allows owners to recoup the cost of an eligible MCI within seven years. The monthly rent hike 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. That sum is then divided by the number of rooms (not units) in the building. This final calculation is the cost of the MCI the owner can collect per room per month.

The amount of rent increases the owner may collect in one year may vary depending on the following categories.

> Rent-stabilized units. The rent increase collected in any one year may not exceed 6 percent of the rent. Increases above the 6 percent cap may, however, be spread forward to future years. The MCI rent increase may not be collected until the end of the tenant’s current lease term unless the lease contains a special clause that specifically allows for an MCI rent increase during the lease term.

In one instance, an owner made the mistake of not including a clause advising a new tenant of a pending MCI application in the vacancy lease. The owner applied for MCI rent hikes based on an elevator upgrade. As a result of the oversight, the owner couldn’t collect any retroactive MCI rent hike for the tenant’s vacancy lease term. However, as long as the tenant’s form renewal lease contained language stating that the rent was subject to any additional adjustment authorized by a DHCR order, the DHCR ruled that the owner could collect the MCI rent hike under the tenant’s renewal lease term [350 West 55th Street:DHCR Adm. Rev. Docket No. TK430073RT (3/6/08)].

Here’s a sample lease clause that satisfactorily notifies the tenant of a pending MCI application and specifically describes the improvement for which the increase was sought.

Model Clause

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.

> Rent-controlled units. The increase collectible in any one year may not exceed 15 percent of the rent as of the issue date of the rent hike order. There is no retroactive portion. The rent increase starts with the first rent payment following the date that the DHCR issues the rent increase order.

> Units occupied by senior citizens with a valid Senior Citizen Rent Increase Exemption. These tenants are exempt from paying the MCI over the amount of their exemptions.

Challenge #1: Claims Made for First Time on Appeal

After the District Rent Administrator (DRA) grants a rent hike to an owner, tenants often appeal the ruling, citing various defects or issues with the MCI installation. But if the tenants never raised those claims before the DRA, the DHCR has consistently refused to consider them on appeal.

For example, the DHCR refused to revoke an MCI rent hike granted to an owner for an apartment/hallway door installation project. On appeal, the tenant claimed that the work didn’t constitute an MCI, that the installation was performed without the tenants’ consent, and that the cost of the installation was excessive. But because the tenant raised these issues for the first time on appeal, her Petition for Administrative Review (PAR) was dismissed [1741-1755 Ocean Parkway: DHCR Adm. Rev. Docket No. YI230069RT (9/12/12).]

Argument to make. A tenant shouldn’t be able to raise any claims on appeal that weren’t made before the DRA. If tenants appeal an order granting you an MCI rent hike by claiming for the first time that there were defects in the installation or take issue with the rent hike on some other issue, your answer to the appeal may contain language like this:

The DHCR should not consider the tenants’ claims about defects in the installation because the tenants did not raise these claims before the DRA. They were raised for the first time on appeal. This agency has refused to consider tenant claims about defects raised for the first time on appeal. See 1741-1755 Ocean Parkway: DHCR Adm. Rev. Docket No. YI230069RT (9/12/12).

Challenge #2: Minor Defects in Installation

Individual tenants may complain about defects in the installation of the MCI in building. But the DHCR has refused to deny building-wide MCI rent hikes based on minor defects. If the percentage of apartments that have not benefitted from an MCI is reasonably small, the DHCR will probably grant the MCI increase but may permanently or temporarily deny the increase for the non-benefitting apartments.

For example, in one case an owner had applied for MCI rent hikes based on building-wide gas and water repiping. The DRA ruled for the owner. The tenants appealed, claiming that the piping work was defective. The DHCR ruled against the tenants. The claimed defects, such as mismatched tiling and protruding pipe ends, could be corrected through ordinary repairs and maintenance. These conditions didn’t call for disallowing the repiping costs. If warranted, the tenants could file an application for a rent reduction based on decreased services [66 West 9th Street Tenants Association: DHCR Adm. Rev. Docket No. PG410086RT (4/28/09)].

In another case, the DHCR granted an MCI rent hike based on the installation of new windows building-wide. The tenants challenged the rent hike based on seven apartments with defective windows. Although no increase was allowed for the seven apartments that had defective windows, the tenants appealed and lost their challenge to the building-wide MCI. The court and appeals court found that the DHCR’s decision to permit MCI increases for all the other apartments was reasonable. It was also reasonable that the DHCR exempted only those apartments identified by tenants as having defective windows [219 East 69th Street Tenants Association v. DHCR, July 2011].

Another example involves complaints of leakage after a new roof was installed. The owner applied for MCI rent hikes based on the installation of a new roof, asbestos removal, exterior restoration including pointing and waterproofing, and architect fees. The DRA ruled for the owner and the tenants appealed, claiming that there were new or continuing leaks despite the claimed work. The DHCR ruled against the tenants. DHCR inspection showed leak damage in the form of peeling paint and plaster, and stains, in four out of 59 apartments. But moisture readings in the four apartments were dry, and there was no proof of active leaks. Thus, there were insufficient grounds to deny the MCI rent hikes [135 Central Park West: DHCR Adm. Rev. Docket No. RH430067RT (4/6/11)].

Argument to make. If tenants challenge your MCI rent hike based on minor defects with the installation, your response to their challenge might say something like this:

The DHCR should grant the MCI rent increase despite the tenants’ claims about minor problems with the installation. The DHCR has ruled that these types of minor problems should not result in the denial of an MCI rent hike. See 66 West 9th Street Tenants Association: DHCR Adm. Rev. Docket No. PG410086RT (4/28/09).

Challenge #3: Violations on Record

Tenants may ask the DHCR to deny your application because there are violations on record for the building. The DHCR won’t grant an owner an increase, in whole or in part, if the owner isn’t maintaining all required services, or if any immediately hazardous violations are outstanding from any municipality, county, state, or federal law relating to the maintenance of such services.

In addition, an MCI rent increase won’t be approved if there’s a DHCR finding of harassment outstanding on the building or if there’s a DHCR-issued building-wide rent reduction order in effect, based on a decrease in services. A tenant whose apartment has an individual rent reduction order in effect, based on a decrease in service, will be exempt from the MCI rent increase until the rent is restored by the DHCR.

Before your tenants can challenge your MCI application, you should try to get any violations involving safety dismissed before you file your application. If that’s not possible, submit proof with your application that you’ve corrected any violations and certified their correction with the agency that issued the violations. That should prevent your application from being denied.

In one case, the owner applied for MCI rent hikes based on elevator upgrading. The DRA ruled for the owner. The tenants appealed and lost. They argued that there were hazardous violations on record for the building at the time the DRA ruled on the application. But before the order was issued, the owner’s architect had submitted a sworn statement that the Class “C” HPD violations had been corrected. So the DRA properly granted the owner’s application [200 East 27th Street: DHCR Adm. Rev. Docket No. VC410035RT (4/4/12)].

Argument to make. If tenants challenge your MCI rent hike based on violations they thought existed at the time of the application, your response to their challenge might say something like this:

The DHCR should grant the MCI rent increase. The owner has submitted a sworn architect/engineer affidavit to the DRA stating that the conditions had been corrected.

Challenge #4: Claims of Poor Workmanship on Agency-Approved Work

If an MCI installation received the required approval from another government agency, the DHCR will consider tenant responses that claim that the installation is defective, but the responses may not result in a denial of the application. In such instances, the tenants may be referred to the other government agency for action. In New York City, installations of boilers, plumbing, and rewiring require Department of Buildings’ (DOB) approval.

In one case, an owner applied for MCI rent hikes based on a number of improvements. The DRA ruled for the owner and granted MCI rent hikes for an intercom, service entrance door, boiler/burner, elevator upgrading, water tank, scaffolding, exterior restoration, and consultant fees. The tenants appealed. Among other things, they claimed that the elevator and boiler/burner work wasn’t done properly. The DHCR ruled against the tenants. The owner submitted the required governmental approvals and sign-offs indicating that the elevator and boiler/burner work were properly performed. And the DRA reasonably relied on these documents to approve the owner’s application [20 5th Avenue: DHCR Adm. Rev. Docket No. UD430073RT (5/20/10)].

Argument to make. If tenants challenge your MCI rent hike based on complaints of poor workmanship of installed equipment that need government agency approval, your response to their challenge might say something like this:

The DHCR should grant the MCI rent increase. We have submitted the required governmental approvals from the DOB’s elevator division and the inspection and test results indicating that the elevator work was installed properly and is functioning correctly.

Challenge #5: MCI Work Doesn’t Directly Benefit All Tenants

Sometimes tenants will claim that MCI work benefits only a certain subset of overall tenants, and as a result, a rent hike should not be applied to them. But the DHCR has consistently ruled that preservation work or improvements made to building structures benefit all tenants.

For example, an owner applied for MCI rent hikes based on the installation of a new garage roof. The DRA ruled for the owner, and the tenants appealed. The tenants claimed that they didn’t have cars and didn’t use the garage, which was separate from the apartment building. The DHCR ruled against tenants. The garage was attached to the building, so preservation of the garage roof was needed in order to maintain the structural integrity of the building. The work benefited all tenants whether they used the garage or not [1035 Clarkson Avenue: DHCR Adm. Rev. Docket No. WE210004RT (6/10/11)].

In another case, a first-floor tenant objected to paying an MCI rent hike for an elevator upgrade. The DHCR ruled that MCI rent hikes are permitted under Rent Stabilization Code Section 2522.4 for building-wide improvements required for the operation, preservation, and maintenance of the building structure. And the benefits of the MCI are shared by all tenants, directly or indirectly, so all tenants must pay the increase [96-02 57th Avenue: DHCR Adm. Rev. Docket Nos. YA110055RO, YB110019RT (7/23/10)].

Argument to make. If tenants challenge your MCI rent hike based on complaints that the MCI doesn’t benefit them, your response to their challenge might say something like this:

The DHCR should grant the MCI rent increase. This agency has affirmed that major capital improvements indirectly benefit all tenants even though an improvement might not directly benefit tenants on its face. See 1035 Clarkson Avenue: DHCR Adm. Rev. Docket No. WE210004RT (6/10/11); 96-02 57th Avenue: DHCR Adm. Rev. Docket Nos. YA110055RO, YB110019RT (7/23/10).

Useful-Life Schedule for Major Capital Improvements

When an owner files an application to increase the legal regulated rents of a building or building complex on the grounds that there has been a major capital improvement, the item being replaced must meet the requirements set forth on the following Useful-Life Schedule, except where the Division of Housing and Community Renewal (DHCR) has approved a waiver.

Replacement Item or Equipment Estimated Life in Years

1) Boilers and Burners

(a) Cast-Iron Boiler 35

(b) Package Boiler 25

(d) Burners 20

2) Windows

(a) Aluminum 20

(b) Wood 25

(d) Storm 20

(e) Vinyl 15

3) Roofs

(a) 2-Ply (asphalt) 10

(b) 3-4 Ply (asphalt) 15

(d) Shingle 20

(e) Single-Ply Rubber 20

(f) Single-Ply Modified Bitumen 10

(g) Quarry Tile 20

4) Pointing 15

5) Rewiring 25

6) Intercom System 15

7) Mailboxes 25

8) Plumbing/Repiping

(a) Galvanized Steel 25

(b) TP Copper 30

(d) Fixtures 25

9) Elevators

(a) Major Upgrade 25

(b) Controllers and Selector 25

10) Doors

(a) Apartment Entrance 25

(b) Lobby/Vestibule 15

11) Bathroom Upgrading

(a) Toilets and Valves 20

(b) Bathroom and Sinks 20

12) Kitchen Upgrading

(a) Metal/Wood Cabinets 20

(b) Ranges 20

(d) Sinks 20

13) Water Tanks

(a) Metal 25

(b) Wood 20

14) Waste Compactors 10

15) Air Conditioners

(a) Individual Units/Sleeves 10

(b) Central System 15

16) Aluminum Siding 25

Vinyl Siding 15

17) Catwalk 25

18) Chimney

(a) Steel 25

(b) Brick 25

19) Courtyards / Walkways / Driveways

Cement 15

Asphalt 10

20) Fire Escapes 25

21) Fuel Oil Tanks

(a) In Vaults 25

(b) Underground 20

22) Water Heating Units

(a) Hot Water/Central Heating 20

(b) Hot Water Heater (Domestic) 10

23) Parapets

Brick 25

24) Resurfacing Exterior Walls 25

25) Solar Heating System 25

26) Structural Steel 25

27) Television Security 10

Topics

Rent Increases