Old Rules vs. New Rules: Anatomy of HSTPA's Effect on Rent Increases

The Housing Stability and Tenant Protection Act (HSTPA) of 2019, which went into effect on June 14, 2019, made dramatic changes to how rents can be raised. It changed formulas for vacancy leases, major capital improvements (MCI), and individual apartment improvements (IAI). Before HSTPA, rent increases eventually allowed an owner to deregulate rent-stabilized apartments after their rents had passed a certain threshold ($2,774.76). Once an apartment was deregulated owners could charge market rents and the tenant would no longer be protected by rent stabilization.

To illustrate the differences between the old and new rules with regard to rent increases, we’ll consider a hypothetical rent-stabilized apartment with a monthly rent of $1,400. The apartment is in a building with 30 apartments and all of them are rent stabilized. The number of apartments and the percentage of rent-regulated apartments in a building affects the amount of rent increase for an IAI and the length of the amortization period for an MCI. For simplicity’s sake, in our example, we’ll exclude the annual rent increases permitted by the Rent Guidelines Board to be able to focus on rent increase rules around preferential rents, vacancy leases, IAIs, and MCIs.

Preferential Rents

A preferential rent is any rent charged to a rent-stabilized tenant that’s lower than the legal rent. Every rent-stabilized apartment has a maximum legal rent based on its unique history. Owners are required to register the legal regulated rent of rent-stabilized apartments with the DHCR every year, but may offer the apartment for a lower amount called a preferential rent.

In our example, let’s assume the $1,400 per month the tenant is paying is not the “legal rent” but rather the preferential rent. The owner could legally be charging $1,600 but chose to charge a preferential rent instead.

Old rule. In most cases, before HSTPA, the owner could charge the higher legal rent at lease renewal. To maintain the right to charge the higher legal rent when the lease is renewed, the initial lease or the first lease that had the preferential rent must have stated that the rent was preferential and must have also stated the amount of the legal regulated rent. Assuming the preferential and legal rent was clearly stated in the original lease, the rent could now be raised to $1,600 at renewal.

New rule. Pursuant to HSTPA, tenants who were paying a preferential rent as of June 14, 2019, retain the preferential rent for the life of the tenancy. In other words, a rent-stabilized tenant with a preferential rent now gets renewal of the preferential rent as long as he or she remains the rent-stabilized tenant, no matter what the preferential rent rider says. Therefore, in our example, the rent at renewal under HSTPA stays at $1,400.

Major Capital Improvements

An owner is permitted rent increases to recover the costs of building-wide major capital improvements, such as the replacement of a boiler or new plumbing. The owner must file an application with the DHCR, which may issue an order denying the increase or granting an increase in part or in whole. After review of an MCI application the DHCR will issue an order and serve it on the owner and all tenants in the building.

Old rule. Before HSTPA, the rent increase collected in any one year couldn’t exceed 6 percent of the rent. If approved, the rent hike was permanent and allowed owners to recoup the cost of an eligible MCI within seven years.

In our example, let’s assume the owner spends enough on an MCI to reach the cap in a year. So, after making eligible building-wide improvements, the owner could raise the rent by 6 percent to $1,696. This number represents the 6 percent cap added to the maximum legal rent charged at renewal to our hypothetical rent-stabilized tenant who had been paying a preferential rent.

New rule. Under HSTPA, there are limitations on future MCI increases, such as only reasonable costs are recoverable, and MCI rent increases are prohibited in buildings that contain 35 percent or fewer rent-regulated apartments. The collection of the increase is limited to a 2 percent cap/yearly phase-in.

In buildings with 35 or fewer units, the cost of the MCI is amortized over a 12-year period. In buildings with more than 35 units, the cost of the MCI is amortized over 12 and a half years. The MCI rent increase is temporary, and it must be removed from the rent in 30 years.

In our example, the new rent would be $1,428 after applying the 2 percent cap. And this increase expires in 30 years.

Vacancy

HSTPA made big changes to raising rents through vacancy leases. Historically, owners could maximize rent increases at this stage to get closer or be able to cross the deregulation threshold “finish line.”

Old rule. A vacancy bonus is the additional rental increase allowed for apartments that become vacant after a rent-stabilized tenant has moved out. For a two-year vacancy lease signed with a new tenant after a rent-stabilized apartment became vacant, the vacancy bonus could be as much as 20 percent for a new two-year lease. In our example, this puts the new rent at $2,035.20.

Before the enactment of HSTPA, the Rent Law of 2015 applied. If the vacating tenant was charged a preferential rent, the full 20 percent vacancy increase applied only if the last vacancy was at least four years prior.

New rule. HSTPA did away with the statutory vacancy bonus. But since the previous tenant was paying the preferential rent, you’re allowed to raise the rent to the full legal rent with the new tenant. In our example, the rent is now $1,632 with the MCI applied.

Individual Apartment Improvements

Another rent increase avenue available to owners is through IAIs. When an owner installs a new appliance or makes an improvement to an apartment the owner may be entitled to an IAI rent increase. The tenant’s written consent for the improvement and rent increase is only required 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.

Old rule. 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.

In our example, suppose the owner spends $40,000 in expenses. One-fortieth of that cost or $1,000 could be added to the incoming tenant’s monthly rent, which would now be $3,035.20, bringing the rent over the vacancy deregulation threshold.

New rule. With the passage of HSTPA, rent increases for IAIs became temporary. The temporary individual apartment increases can be collected for 30 years and are then to be removed. And the IAI costs that can be recouped are capped at an “aggregate” of $15,000 over a 15-year period, during which no more than three IAI increases may be collected.

In addition, IAI rent increases are limited to 1/168th of the cost if the building has fewer than 35 units, and 1/180th of the cost if the building has 35 or more units. In other words, in our example for IAIs costing $40,000, instead of collecting $1,000 per month, an owner may now collect only $89.29 (1/168 of the $15,000 cap) per month.

With the new rules implemented by HSTPA, vacancy deregulation and luxury deregulation, where an apartment could be deregulated if the tenant made over $200,000 a year, have been repealed. In our hypothetical, as shown in the chart below, the current monthly rent is $1,721.29, which is below the old deregulation threshold, and the owner has used up all available methods to increase the rent. The hypothetical owner used MCI expenses, a vacancy lease to impose legal rent over a preferential rent, and IAI expenses to increase rents. Beyond these, the owner can rely only on Rent Guidelines Board-approved rent hikes to increase rents further.