How to Get DHCR to Waive Useful Life Requirements for MCIs

If you’re planning to do work at your building and expect to get a major capital improvement (MCI) rent increase for it, you probably know that the work must meet the Division of Housing and Community Renewal’s (DHCR) useful life requirements. Those requirements are set out in Section 2522.4 of the Rent Stabilization Code (RSC). But what if you need to replace something before its useful life has expired? For example, say your building’s roof collapses before its useful life expires and you need to install a new roof. Are you barred from getting an MCI increase for the installation?

Fortunately, RSC Section 2522.4(a)(2)(i)(e) gives conditions under which you can apply to the DHCR for a waiver of the useful life requirements. If you meet one of the DHCR’s conditions, you may be able to replace equipment before its useful life has ended and still get an MCI rent increase for it. However, your increase might not be based on the full cost of the equipment. You may also need to submit proof that you qualify for a waiver. Here’s what you should know.

Who’s Eligible

You may seek a waiver if your MCI fits into one of the following four categories:

1. Emergency. You must replace equipment destroyed by a fire, vandalism, or a similar emergency. For appropriate proof to submit, give the DHCR a copy of the police or fire report, if any, or other documents you would use to support your claim with an insurance company.

2. Impossible to repair. You need to replace, rather than repair, the equipment because the equipment is beyond repair; the spare parts needed to repair the equipment are no longer available; or repairing the equipment would cost more than 75 percent of the cost of replacing it.

The best proof is a “certification” by a licensed architect or engineer who has no relationship to the owner. A certification is a signed statement from the architect or engineer that has her seal or license number. The statement should detail the equipment’s condition and confirm the facts you have given as your reason for seeking a waiver.

You may also submit receipts for repairs and parts of maintenance logs or other proof to show that you properly maintained the equipment being replaced.

3. Replacement to satisfy government requirement. You need to replace the equipment to qualify for a government housing program or for a New York State or local government long-term or insured loan.

If this is the case, give the DHCR a copy of the application form for the loan or program, which should indicate that the replacement is required to qualify for the loan or program.

4. Faulty equipment. You need to replace faulty equipment that’s inadequate through no fault of yours. If you got an MCI rent hike for the equipment you’re replacing, you won’t qualify for a waiver under this exception.

For example, say you installed a waste compactor five years ago but got no MCI rent hike for it. Because of a manufacturing defect, the compactor is constantly breaking down. Although it hasn’t exhausted its useful life of 10 years, you decide to replace it. You’re eligible for a waiver because the equipment is defective through no fault of yours and you never got an MCI rent hike for it.

For proof, under these circumstances, you would give the DHCR maintenance logs or receipts for repairs.

When to Apply

You must ask the DHCR for a waiver of the useful life requirements before you start work on the replacement. Don’t wait until the DHCR has denied your MCI rent hike for failure to meet the useful life requirements.

However, if you’re replacing equipment because of an “emergency, which causes the building or any part thereof to be dangerous to human life and safety or detrimental to health,” you can seek the waiver when you file your MCI application. For example, the DHCR would consider a collapsing roof or a boiler that’s exploded to be an emergency.

In one case, an owner applied for MCI rent hikes based on pointing and waterproofing. The DHCR ruled against the owner, which had spent $1,780,125 on pointing, waterproofing, and related architectural costs. The DHCR found that a prior DHCR order granted increases for pointing and waterproofing and that the work’s useful life hadn’t expired. The owner appealed and lost. The owner submitted a request for waiver of the useful life requirement with its MCI application. But, unless the work was done on an emergency basis, such application must be filed and approved before the MCI work is done. Although the owner submitted an architect’s sworn statement that the work was needed to remove potentially dangerous conditions, this didn’t amount to an emergency condition such as falling bricks [Envoy Towers Associates/Envoy Towers Stabilized Tenants Group, April 2016].

How to Apply

The DHCR has no application form for a waiver. To apply, send a letter to the DHCR’s MCI Unit, Gertz Plz., 92-31 Union Hall St., Jamaica, NY 11433. In the letter, include your building’s address and describe the work you need to do. Also, give the reasons you qualify for a waiver and attach any required evidence. It’s also a good idea to include a statement from an architect or professional engineer that explains why the equipment deteriorated before its useful life expired.

The DHCR will treat your application for a waiver as a request for a prior opinion. The DHCR will notify you of its decision by sending you a document that looks like an order.

What to Do if Application Denied

If the DHCR denies your application for a waiver, you can still perform the MCI and then apply for an MCI rent hike. Since you applied for a waiver before starting the work—even though your application was denied—you’re allowed to reargue this issue in your MCI application. And if the DRA then denies your MCI application because you didn’t meet the useful life requirements, you can argue—in your petition for administrative review or in any appeal you may file in court—that your request for a waiver was improperly denied.

How DHCR Will Calculate Amount of Rent Increase

If the DHCR lets you waive the useful life requirements, you’ll be eligible for a rent hike, assuming you’ve met all the other requirements for an MCI rent hike. But, depending on the circumstances of your case, your rent hike may be less than the hike you would have gotten if you met the useful life requirements.

No prior rent hike, repair cost exceeds replacement cost. The DHCR will grant a full rent hike if you meet these two requirements:

• You got no prior MCI rent hike for the equipment being replaced; and
• It would cost you the same or more to repair the equipment as it would to replace it.

For example, say you installed a new steel boiler tank 15 years ago but got no MCI rent hike for it. A fire seriously damages the boiler. It would cost you $14,500 to repair the damage, and $14,000 to replace the boiler. You decide to replace it. Since the boiler hasn’t exceeded its useful life, you apply for and get a waiver of the useful life requirements.

If the DHCR grants your application for a rent hike, it will give you the full amount because you got no prior MCI rent hike for the damaged boiler and the cost to repair it exceeds the cost of replacing it.

No prior MCI rent hike; repair cost at least 75 percent of replacement cost. The DHCR will prorate the increase based on the remaining useful life of the equipment being replaced under these circumstances:

• You got no prior MCI rent hike for the equipment being replaced; and
• The cost to repair the equipment is more than 75 percent of the cost of replacing it.

For example, suppose you installed a new steel boiler 15 years ago for which you didn’t get an MCI rent hike. Due to a fire in your building, the boiler is severely damaged. It would cost you $10,600 to repair the damage and $14,000 to replace the boiler. You decide to replace the boiler. Since the boiler hasn’t exceeded its useful life, you apply for and get a waiver of the useful life requirements.

If the DHCR grants your application for a rent hike, it will prorate the increase based upon the remaining useful life of the replaced boiler. The useful life of a steel boiler is 25 years, so your boiler had 10 more years, or 40 percent, of its total useful life to go. The DHCR would reduce your replacement cost by 40 percent when calculating your MCI rent hike. So it would base your rent hike on $8,400, or 60 percent of $14,000.

Prior MCI rent hike. If you got a prior MCI rent hike for the equipment you’re replacing, the DHCR will subtract the following from the total proven cost of the equipment when calculating your rent hike:

• Any money you got from another source (for example, insurance proceeds); and
• The cost of the equipment installed earlier (minus any amounts disallowed in calculating the earlier MCI rent hike) if the equipment being replaced hasn’t exhausted at least 75 percent of its useful life. If the equipment has exhausted 75 percent to 99 percent of its useful life, the DHCR won’t subtract the cost of the earlier improvement from the total proven cost of the new equipment.

For example, suppose you installed a new steel boiler 15 years ago at a cost of $10,000 and got an MCI rent hike based on that cost. You now decide to install a new steel boiler because the old one is constantly breaking down. Your insurance doesn’t cover the cost of a replacement boiler. Your old boiler has exhausted only 60 percent of its useful life (15 out of 25 years). You apply for and get a waiver of the useful life requirement and spend $15,000 to replace the boiler.

If you get an MCI rent hike for the new boiler, the DHCR will calculate the rent hike based on the cost of the new boiler minus any money you got from other sources to replace the boiler ($0) and minus the MCI cost ($10,000) it used to calculate the rent hike you got for the old boiler. So the DHCR will base your rent hike on $5,000, instead of $15,000.

Equipment replaced during substantial rehabilitation has at least 25 percent of its useful life left. If you replace equipment that hasn’t exhausted 75 percent of its useful life but do so as part of a substantial rehabilitation of a building for which you were allowed to raise rents to market rate, the DHCR may reduce the rent hike by the percentage that remains of the equipment’s useful life. But if the equipment has exhausted at least 75 percent of its useful life, the DHCR won’t reduce the rent hike.

For example, you installed a new steel boiler 15 years ago at a cost of $10,000. You now replace the boiler, at a cost of $15,000, as part of a substantial rehabilitation of your building. Your old boiler has exhausted only 60 percent of its useful life (15 out of 25 years). You apply for and get a waiver of the useful life requirements.

If you get an MCI rent hike for the new boiler, it will be reduced by 40 percent (the portion that remains of the old boiler’s useful life). So your rent hike will be based on a cost of $9,000, instead of $15,000 (40 percent × $15,000 = $6,000; $15,000 – $6,000 = $9,000).