How to Calculate Rent Increases for Temporarily Exempt Apartments

Rent-stabilized apartments are sometimes temporarily exempt from rent stabilization. For example, while they’re occupied by the owner they are considered exempt. But when a new tenant moves in, the apartment reverts back to stabilization. In addition, you can collect the rent guidelines increases you missed out on while the apartment was exempt by pretending you increased the rent during the exempt period. And in some instances you may be able to collect a first rent, which is not based on the prior rent history of the apartment. Here’s what you need to know to calculate the rent of a tenant who’s moving into an apartment that had been temporarily exempt.

What Units Are Temporarily Exempt?

An apartment can be temporarily exempt from rent stabilization for many reasons. Here are the most common:

1. Owner-occupied. Apartments occupied by the building’s owner.

2. Employee-occupied. Apartments occupied by a building employee (such as a super) who pays no rent.

3. Occupied by nonprimary resident. Apartments occupied by tenants who don’t use them as a primary residence, as determined by a court.

4. Professional use. Apartments rented solely for professional use without a certificate of occupancy (C of O) for professional use and not occupied by a residential tenant. If a tenant lives in the apartment, it’s not exempt. If the unit has a C of O for professional use and a tenant doesn’t live there, then it’s permanently exempt.

5. Commercial use. Units rented solely for nonprofessional business use without a C of O for commercial use and not occupied by a residential tenant. If a tenant lives in the unit, it’s not exempt. If the unit has a C of O for commercial use and no tenant lives there, then it’s permanently exempt.

If an apartment is temporarily exempt due to employee use, be sure that the employee pays no rent for the apartment. In one case, a tenant complained of a rent overcharge. He was the building super since 1983. The tenant claimed that the prior landlord paid him $220 per month. Of that amount $155 was apportioned as rent for the super’s apartment. The tenant received a check for the remaining $65. The tenant’s W-2 forms supported this claim.

When a new owner bought the building, in 2001, he gave the tenant a lease at $1,100 per month. The owner claimed that the tenant had received a salary of $220 per month and a free apartment from the prior owner. Rent registration records listed the apartment as temporarily exempt for more than four years. The district rent administrator (DRA) ruled for the owner and dismissed the tenant’s complaint.

The tenant appealed and won. The tenant’s W-2 forms proved that he didn’t have a free apartment. The tenant’s monthly rent of $155 was deducted from his monthly salary, and a separate check for $65 per month was issued to him. So the legal rent on the base date was $155, and the tenant remained a month-to-month tenant until he signed a lease with the new owner for $1,100 per month. The owner was ordered to refund $22,775 to the tenant, including interest [Lee: DHCR Adm. Rev. Docket No. SG410123RT, Sept. 2004].

How to Calculate New Tenant’s Rent

Here’s what to do when calculating the new tenant’s rent. Go back to the stabilized rent in effect on the Sept. 30th before the apartment became exempt. To perform the calculations, you’ll need to know the corresponding rent guidelines. For a chart with the permitted renewal increases, you can visit www.housingnyc.com/downloads/guidelines/aptorders2014.pdf. Then take the following steps:

Step 1: Add vacancy increase. Pretend that the apartment didn’t become temporarily exempt and that you instead signed a two-year vacancy lease for it. Add the appropriate rent increase for a two-year vacancy lease. Use the percentages permitted under the rent guidelines board order (RGBO) in effect when the apartment first became exempt.

Exception: If the apartment has been exempt for one year or less, add the rent increase for a one-year vacancy lease and then go directly to Step 3.

Example: Your super moved into a rent-stabilized apartment, rent-free, starting Nov. 1, 2010. The rent charged to the prior tenant on Sept. 30, 2010, was $1,500 per month. The super moved out on May, 1, 2013, and a new tenant signed a two-year vacancy lease starting June 1, 2013.

First, add a rent increase as if you’d begun a two-year vacancy lease on the date the super moved in—Nov. 1, 2010. At that time, RGBO #42 provided for a 20 percent increase for a two-year lease. That raises the rent to $1,800.

Step 2: Add renewal increases. When the pretend vacancy lease ends, follow up with a pretend renewal lease. Add a rent increase for a one-year renewal lease if there’s one year or less between the end date of the last pretend renewal lease and the Sept. 30th preceding the start date of the new tenant’s lease. Or add a two-year renewal increase if two years apply.

Use the percentage permitted under the RGBO in effect when the pretend renewal lease would have started. Keep adding two-year renewal increases until the last pretend renewal lease covers the Sept. 30th preceding the start date of the new tenant’s lease.

Example: Continuing with the example from Step 1, your pretend two-year vacancy lease expired on Oct. 31, 2012. So, you add a 2 percent renewal increase, which was the amount permitted for a one-year renewal lease under RGBO #44 for leases beginning on Nov. 1, 2012. The rent for your first pretend renewal lease would be $1,836 (a 2 percent increase over the prior rent of $1,800).

The one-year pretend renewal lease expired on Oct. 31, 2013. You stop there because the new tenant moved in on June 1, 2013.

Step 3: Add increase for new tenant. To get the rent of the last pretend renewal lease, add the RGBO renewal increase in effect on the date the new tenant moves in.

Example: Continuing with the example from above, add the renewal increase permitted under RGBO #44, which applies to the new tenant’s lease beginning on June 1, 2013. Since the new tenant signed a two-year lease, you can add a 4 percent renewal increase to the rent of the pretend lease. You can increase the rent to $1,909.44 from $1,836.

Step 4: Add other permissible increases. You can also add any other allowable rent increases such as a percentage of individual apartment improvements. Due to the Rent Act of 2011, effective Sept. 24, 2011, individual apartment improvements completed in buildings with more than 35 apartments allow the owner to permanently increase the legal regulated rent by 1/60th of the cost of the improvements. And for improvements done in apartments located in buildings containing 35 or fewer apartments, owners can pass along 1/40th of the cost of improvements.

Example: Assume, using the example above, that the building has fewer than 35 units and that you installed a new refrigerator, at a cost of $400, in the apartment during the month it was vacant. You can add 1/40th of the cost of the new refrigerator to the rent. Since the refrigerator cost $400, you can add another $10, for a total rent of $1,919.44.

Temporarily Exempt for Over Four Years

In cases where a rent-stabilized apartment has been vacant for over four years, the owner can collect a first rent from the incoming tenant. This is because Rent Stabilization Law Section 26-516(a) precludes the courts and the DHCR from utilizing any rental information that goes back more than four years before the filing of a rent overcharge complaint unless evidence of fraud exists.

If more than four years have passed, the new rent is whatever the new tenant and the owner can agree upon. And if the first rent is at or exceeds $2,500 and this amount is cited in the lease and paid by the tenant, the apartment is deregulated. However, a preferential rent of less than $2,500 cannot be collected. In other words, if a rent of less than $2,500 is actually paid by the tenant, this rent amount becomes the legal rent and the apartment remains subject to rent stabilization, even if a rent of $2,500 or more is cited in the lease.