How to Calculate RGBO #47 Vacancy Lease Increases

If you sign a vacancy lease with a tenant between Oct. 1, 2015, and Sept. 30, 2016, the new order issued on June 29 by the Rent Guidelines Board (RGB)—RGBO #47—lets you collect the vacancy increases permitted under the Rent Regulation Reform Act of 1997 (RRRA).

This year, the Rent Law of 2015 applies, so you need to take note of the number of vacancy allowances you may take in a calendar year and take special care if the outgoing tenant was paying a preferential rent. Also, depending on the number of apartments your building contains, your rent increase from individual apartment improvements may be affected. The Rent Law of 2015 will remain in effect until June 15, 2019.

We’ll go over these changes, and to help you calculate the rent hike you may charge when you sign a vacancy lease with a rent-stabilized tenant, we’ve included a rent increase calculation form, Insider’s RGBO #47 Rent Computation Form for Vacancy Leases.

Remember that you calculate any vacancy lease increases permitted under the RRRA based on the legal regulated rent the prior tenant was paying immediately before the apartment became vacant. That rent may be greater than the rent charged on Sept. 30, 2015.

Here’s how to calculate your rent increase.

Rent Increases Permitted

Leases affected. Vacancy leases beginning any time on or after Oct. 1, 2015, through Sept. 30, 2016.

Number of increases you can take. Rent increases legally permitted upon vacancy may not be taken more than once in any calendar year (Jan. 1 – Dec. 31).

Increases you can take. RGBO #47 doesn’t let you collect a vacancy allowance. But RGBO #47 does let you collect the appropriate vacancy increases permitted under the RRRA.

Under that law, you may collect the following increases during RGBO #47:

> Vacancy bonus. For a two-year lease, you may collect a vacancy bonus of 20 percent of the legal regulated rent the prior tenant was paying immediately before he vacated the apartment unless the vacating tenant was paying a preferential rent.

For a one-year lease, you may collect a vacancy bonus of 18 percent of the legal regulated rent the prior tenant was paying immediately before he vacated the apartment unless the vacating tenant was paying a preferential rent.

> Preferential rent considerations. A preferential rent is an amount an owner agrees to charge that’s lower than the legal regulated rent that the owner could lawfully collect. Owners can decide to terminate the preferential rent and charge the higher legal regulated rent upon renewal of the lease or when that tenant permanently vacates the apartment. However, rent laws impose a condition on an owner’s right to charge the claimed legal regulated rent. The legal regulated rent must have been written in the vacancy or renewal lease in which the preferential rent was first charged. In addition, the DHCR recommends that the legal rent be indicated in all subsequent renewal leases.

Also, the terms of the lease itself may affect the owner’s right to terminate a preferential rent. If there’s language in either the lease or rider stating that the preferential rent was only for that lease term, then an owner may revoke the preferential rent and charge the “legal regulated rent,” plus allowable increases, when the lease is renewed.

If the lease or rider says that the preferential rent is for the length of the tenancy, the owner must continue to offer the preferential rent, plus allowable rent increases, every time the lease is renewed.

Where the outgoing tenant was paying a preferential rent, the Rent Act of 2015 provides that the vacancy increase shall not exceed 5 percent if the last vacancy lease commenced less than two years ago, 10 percent if less than three years ago, 15 percent if less than four years ago, and 20 percent if four or more years ago. (For examples of these calculations, see “Preferential Rents Now Decrease Vacancy Increases,” on our website at https://www.apartmentlawinsider.com/blogs/adam-leitman-bailey/preferential-rents-now-decrease-vacancy-increases.)

> Long-term prior tenant increase. If you haven’t collected an RGBO vacancy allowance or any RRRA vacancy increase in the eight years prior to the start date of the vacancy lease, you may collect an additional increase.

To calculate this increase, multiply six-tenths of 1 percent (.006) by the legal regulated rent the prior tenant was paying immediately before he vacated the apartment. Then multiply that number by the number of years since you’ve gotten a vacancy allowance or vacancy increase for the apartment. If you’ve never gotten a vacancy allowance or other vacancy increase for the apartment since it first became subject to rent stabilization, multiply your long-term prior tenant increase number by the number of years since the apartment first became subject to rent stabilization. The result is the additional amount you can collect from the tenant.

> Low-rent increase. If the legal rent the prior tenant was paying was less than $300 per month, you can also collect an additional $100 per month.

To calculate this low-rent increase, first multiply the rent the prior tenant was paying by 18 percent or 20 percent, whichever is appropriate. Add that amount to the prior tenant’s rent. Then add the $100. This increase becomes part of the permanent rent for the apartment. Include it in the rent amount you use to calculate future rent increases.

A special rule applies if the prior tenant was paying a legal rent of at least $300 but no more than $500 per month. If the rent increase you’re entitled to collect by calculating items 1 and 2 above is less than $100, you may substitute a flat $100 increase. This guarantees you a minimum $100 rent increase for these types of apartments.

When you’re eligible for vacancy increases permitted under RRRA. You’re eligible for the vacancy increases permitted under the RRRA when a tenant moves out—leaving the apartment vacant—and a new tenant moves in.

You’re also eligible for vacancy increases in these two situations:

> Roommate’s name added to lease. If you sign a new lease with the tenant and add a roommate’s name to the lease, you can charge the vacancy increases permitted under the RRRA. But you can’t charge the vacancy increases when adding the name of the tenant’s spouse to the lease.

> New co-tenant replaces old co-tenant. You can charge vacancy increases when one co-tenant moves out and the remaining tenant gets a new roommate who wants to be named on the lease, and you sign a new lease with the incoming roommate and the remaining tenant.

How to Calculate New Equipment Increases

Oftentimes, owners choose to make improvements to an apartment while it’s vacant. Doing so makes the apartment more attractive to prospective tenants and allows you to collect an additional rent increase based on a percentage of the cost of the improvements.

Leases affected. Vacancy leases beginning any time on or after Oct. 1, 2015, through Sept. 30, 2016, where the owner installed new equipment or made improvements in the apartment while it was vacant.

Increase you can take. The amount of the increase is dependent on building size. 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.

For improvements done in apartments located in buildings containing 35 or fewer units, you would pass along 1/40th of the cost of improvements.

To calculate the increase, you must first figure out your total vacancy increase permitted under the RRRA. Then add the 1/40th or 1/60th figure.

Example: A tenant signs a two-year vacancy lease that starts on Dec. 1, 2015. You haven’t collected a prior vacancy increase within eight years of this date. And your building contains 50 apartments. The prior tenant had lived in the apartment for 10 years and the legal regulated rent paid by the prior tenant immediately before he vacated was $800 per month.

While the apartment was vacant, you installed a new refrigerator that cost $600 including installation costs.

First, add the 20 percent vacancy bonus permitted under the RRRA. This brings the rent up to $960. Then add the long-term prior rent increase (0.6 percent x 10 years x $800) to get $1,008. Add the 1/60th increase of $10 ($600 equipment cost divided by 60). Ultimately, you can collect $1,018 per month from this tenant.

Special Guideline for Previously Rent-Controlled Apartments

Like RGBOs in previous years, RGBO #47 includes a special guideline that covers units that were rent controlled on Sept. 30, 2015, but become rent stabilized during the RGBO #47 period.

When a rent-controlled tenant moves out, the owner can charge the next tenant a fair market rent. The new tenant can accept that rent or challenge it by filing a fair market rent appeal with the DHCR. In general, the DHCR will then use the greater of two figures to arrive at what it considers to be the apartment’s fair market rent:

• The highest rent of a comparable rent-stabilized apartment in the building at the time the tenant took occupancy; or
• What the rent would be using the RGBO special guideline.

This year, the special guideline sets the fair market rent as the greater of:

• 33 percent above the maximum base rent (MBR); or
• The Section 8 fair market rent set by the federal Department of Housing and Urban Development (HUD) for the same size apartment, as adjusted by the New York City Housing Authority’s utility allowance schedule. (This schedule adjusts the HUD rents based on whether the tenant pays for gas and/or electricity.)

Each year, HUD sets fair market rents for apartments covered under its Section 8 program. It sets a different fair market rent for apartments of different sizes (studios, one-bedrooms, and so on).

The new RGBO says that the new Section 8 rents that will take effect on Oct. 1, 2015, will be used to set the fair market rent. For example, HUD’s fair market rent for a two-bedroom apartment would apply to a two-bedroom apartment after a rent-controlled tenant moves out.