An Owner's Primer on High-Rent/High-Income Deregulation

When legal rents in rent-controlled and rent-stabilized apartments reach a level of $2,500 per month, two things occur. These apartments are now subject to vacancy deregulation. If the apartment is occupied, you are allowed to initiate an annual income certification process and deregulate the apartment if the household income exceeds the definition of “high income” in the rent laws.

The Rent Act of 2011 changed the thresholds for deregulation to $2,500 in rent and $200,000 in annual income. Prior to this, the thresholds had been $2,000 in rent and $175,000 in annual income. Because of this relatively recent change, the previous threshold amounts still applied in some of the high-rent/high-income deregulation rulings handed down by the DHCR this past year (see "Recent High-Income Deregulation Rulings," here.

This year in particular, with the rent laws up for renewal on June 15 and a pro-tenant de Blasio administration, administrators and legislators have been brainstorming and proposing ways to expand tenant protections. Most recently, Mayor de Blasio has recommended eliminating the high-rent vacancy deregulation option for owners. Among the various ideas put forth, thus far, no mention has been made about altering the high-rent/high-income deregulation process. In this issue, we’ll briefly go over high-rent vacancy deregulation and then look deeper into the high-rent/high-income deregulation process.

HIGH-RENT VACANCY DEREGULATION

When the legal rent of a regulated apartment reaches $2,500 per month the apartment is subject to vacancy deregulation. Whether the tenant moves, dies, or is evicted, the apartment is permanently deregulated unless a person who was residing with the tenant at the time of death or voluntary departure is entitled to succession rights.

If the owner makes renovations sufficient to bring the legal rent up to $2,500 per month, the apartment can be vacancy deregulated even if the rent was lower than $2,500 before the turnover. To get rents on vacant units up to this threshold, the owner can add the statutory vacancy bonus because the apartment was turned over. The owner can then make enough renovations to bring the rent up to $2,500. In a building with more than 35 apartments, the legal monthly rent can be increased by 1/60^th of any allowable amount the owner spends to improve the apartment. If the building contains fewer than 35 apartments, the percentage increase bumps up to 1/40^th of any allowable amount spent on individual apartment improvements.

This high-rent vacancy deregulation takes place regardless of the reason for the vacancy—whether the tenant moves voluntarily, dies, or is evicted. And it has nothing to do with anyone’s income, neither the income of the former tenant nor that of the tenant moving in. However, apartments that are subject to rent regulation solely because the owner’s receiving tax benefits pursuant to Section 421-a (421a tax abatement buildings) or 489 (421g buildings) of the New York State Real Property Tax Law, or pursuant to Sections 11-243 or 11-244 of the NYC Administrative Code (J-51 buildings) do not qualify for high-rent vacancy deregulation.

HIGH-RENT/HIGH-INCOME DEREGULATION

The tenant or tenants of these “high-rent” apartments don’t automatically lose their rent and eviction regulatory protections. But when the legal monthly rent reaches $2,500, the tenants are subject to an annual income certification process.

If the annual household income exceeds the statutory threshold—currently $200,000—for two consecutive calendar years, the apartment is subject to deregulation while still occupied by the regulated tenant, without a vacancy.

Annual Income Certification Process

The owner of a rent-controlled or rent-stabilized apartment that reaches a legal monthly rent of $2,500 on or before May 1 of that year can serve the tenant or tenants with an Income Certification Form (ICF) issued by the DHCR. Tenants whose monthly rents are below $2,500 cannot be required to go through this income certification process, and are not subject to high-income deregulation. Non-rent fees or surcharges for appliances such as washing machines, dryers, and dishwashers don’t count, according to DHCR Operational Bulletin 2005-1.

For rent-controlled apartments, the trigger is the Maximum Collectible Rent, not the Maximum Base Rent. In other words, the owner can implement the income certification process only when the MCR (the rent the tenant is actually paying) reaches $2,500, even if the MBR (the “economic” rent under the MBR formula) has been above $2,500 per month for some time.

Proper service. The owner is required to serve the ICF by at least one of the following methods: (1) by personal delivery (the owner must obtain and retain a copy of the ICF signed and dated by the tenant acknowledging receipt); (2) by certified mail (the owner must obtain and retain a United States Postal Service receipt stamped by the USPS); and/or (3) by regular first-class mail (the owner must obtain and keep a USPS certificate of mailing stamped by the USPS).

Tenant response. The tenant or tenants must return the completed certification to the owner within 30 days after service on the tenant or tenants. The tenant(s) must provide the following information on the ICF:

• A list of all tenants, cotenants, and other occupants (in most cases roommates who are not tenants) whose incomes must be reported as part of annual household income, including occupants who vacated the apartment temporarily, or who vacated permanently within the last two years, as well as those, such as a minor child, who are not required to file an income tax return. Where an apartment is sublet, it is the income of the sublessor (tenant or cotenant), not the subtenant (the person who is subletting from the tenant), which must be included in the ICF; and
• A certification whether the total annual household income is in excess of $200,000 in each of the two preceding calendar years. The tenant does not provide the actual annual income figure but merely checks a box to indicate that the total combined household income was above the $200,000 threshold in each of the two preceding calendar year, or a box to indicate that the total combined household income was $200,000 or less in either of the two preceding calendar years.

Annual income is defined as “federal adjusted gross income as reported on the New York State income tax return.” To be deregulated, the household income must exceed the $200,000 threshold for each of the last two calendar years. If the tenant is over the threshold in one year and under the threshold the next, the apartment is not deregulated.

If New York State income tax returns are not filed, the DHCR has taken the position that, other than an admission by the tenant on the ICF that the household income exceeds the threshold for both years, or a default whereby the tenant fails to answer the Owner’s Petition for Deregulation, the only basis for deregulation is verification by the New York State Department of Taxation and Finance  (DTF) that the New York State income tax returns show that the household income exceeded the threshold for two consecutive years.

Tenant Certifies that Income Exceeded the Threshold

If the tenant certifies that the annual household income exceeded the $200,000 threshold in each of the last two calendar years, the owner may file with the DHCR a Petition by Owner for High Income Rent Deregulation (Form RA-93 OPD) on or before June 30, and attach the ICF.

Within 30 days, the DHCR is required to issue an order deregulating the apartment. The DHCR is required to send this order to the tenant by regular and certified mail, return receipt requested, and to send a copy to the owner.

For rent-controlled apartments, the effective date for deregulation is June 1 of the following year.

For rent-stabilized apartments, the effective date of deregulation is the expiration date of the current lease. However, the owner is allowed to attach a rider to a renewal lease that permits cancellation of the lease 60 days after issuance of a deregulation order. This rider can be appended to a renewal lease only if there is a high-income deregulation proceeding pending at the time the renewal lease is offered, and the clause must contain certain required language. For a copy of this rider see Model Lease Rider: Sixty-Day Rider for Renewal Leases Offered While High-Income Deregulation Proceedings Are Pending.

If Tenant Certifies that Income Was Below Threshold

If the tenant certifies that the annual household income was $200,000 or less in either of the two preceding calendar years, the owner has the right to challenge the tenant’s certification by filing an OPD with the DHCR on or before June 30.

The DHCR must then verify with DTF whether the total annual income exceeded the $200,000 threshold in each of the last two calendar years, or was under the threshold in either of the last two calendar years. DTF is not allowed to tell the DHCR what the actual annual household income was for the last two calendar years; DTF reports only if it exceeded the $200,000 threshold in each year or was under the threshold in either.

But before the DHCR gets in touch with DTF, the DHCR sends the OPD to the tenant, accompanied by an answer form (Form RA-93N, Answer to Petition and Notice to Tenant to Provide for Verification of Household Income) for the tenant to complete and return to the DHCR. This answer form is several pages long and asks for considerably more information than the ICF. Also included in this package is a worksheet with instructions, to be used by tenants or occupants who filed a joint state income tax return in either or both of the calendar years in question with a spouse whose income should not be included in the total annual household income calculation—for example, where a tenant or occupant filed a joint return with a spouse who doesn’t live in the apartment.

The DHCR is supposed to send these documents to the tenant(s) within 20 days of the owner’s filing of the OPD. Within 60 days of receiving the OPD and RA-93N answer form from the DHCR, the tenant(s) must return the answer form to the DHCR, providing essentially the same information as in the original ICF, but also additional information, including detailed information about tenants and occupants and the filing or non-filing of New York State income tax returns for both of the calendar years in question.

The most common cause of deregulation by default is not returning this form to the DHCR, or returning it late. The answer form contains a warning, in bold face, that failure to return the form to the DHCR within 60 days will result in the issuance of an order deregulating the apartment.

The tenant(s) must send the DHCR new information as well: a photocopy of either the preprinted mailing labels used on the New York State income tax returns for the applicable years, or a photocopy of the first page only of the New York State income tax returns for the applicable years, for each tenant or occupant whose income must be included.

If neither the mailing labels nor income tax returns are available, the tenant must provide a written explanation indicating why such income tax returns were not filed for the applicable years.

For tenants or occupants who did not file tax returns, including minor children, the tenant(s) must list the names of all persons required to be listed, their status (that is, child, employee, subtenant), and state whether they were required to file tax returns for the relevant years, and explain why—if no return was filed—the reason (that is, no income, minor child, extension filed).

If an extension of the time to file a tax return has been obtained, the DHCR requires the tenant to attach a copy of the extension form, and will follow up later to request a copy of the address label or the first page of the return.

Results of Verification

If DTF determines that the total annual household income is in excess of the $200,000 threshold in each of the last two calendar years, the DHCR is required, by Nov. 15, to notify the owner and the tenant of the results of this verification. Both the owner and the tenant have 30 days to comment.

Within 45 days after the expiration of this comment period, the DHCR must, “where appropriate,” issue an order deregulating the apartment on March 1 (rent control) or at the end of the current lease (rent stabilization).

Note that the effective date of deregulation for rent-controlled apartments is March 1, not June 1 as it is if the tenant certifies that the household income was above the threshold on the ICF. The DHCR is required to send this order to the tenant by regular and certified mail, return receipt requested, and to send a copy to the owner.

If DTF determines that the $200,000 threshold has not been met for each of the last two calendar years, the DHCR must issue an order denying the owner’s petition. If DTF is unable to ascertain whether the $200,000 threshold has been met or not, the DHCR may issue an order denying the OPD, or “request additional information.”

The DTF sometimes has difficulty matching income to households, even though the taxpayer filed the return and paid the tax due. In such a case the tenant will probably be asked for a copy of the tax return or tax returns (for households with more than one taxpayer), or for her Social Security number.

If Tenant Fails to Returns the ICF to Owner

If the tenant fails to return the ICF to the owner by the 30-day deadline, the owner can, on or before June 30, file an OPD with the DHCR. The DHCR then follows the exact same procedures outlined above and sends the OPD and RA-93N answer form to the tenant(s). The tenant(s) must return this form to the DHCR within 60 days.

If Tenant Doesn’t Return the OPD Answer Form to DHCR

If the tenant fails to return Form RA-93N to the DHCR, the agency is required, by Dec. 1, to issue an order deregulating the apartment on March 1 of the following year (rent control) or at the end of the current lease (rent stabilization).

Appealing an Unfavorable Decision—Petition for Administrative Review

Any party who disagrees with a DHCR order can file a Petition for Administrative Review. A PAR is an internal agency procedure at the DHCR, established to provide for review of agency orders.

The PAR unit is separate from the district rent administrator units that process and rule on owner and tenant applications, including OPDs processed by the luxury deregulation bureau.

A PAR must be filed within 35 days after the date an order of deregulation is issued. The PAR must be filed on the DHCR-prescribed form. One original and a copy of the PAR must be filed with the DHCR Office of Rent Administration.

The party filing a PAR is limited to arguing the facts or evidence previously submitted. If the party filing a PAR submits new facts or evidence and establishes that this information could not reasonably have been obtained in the original proceeding, the PAR unit may send the case back to the district rent administrator for consideration of the new information.

The PAR is supposed to be decided within 90 days. But this rarely happens. The DHCR sometimes takes years to decide PARs. While the PAR is pending, the deregulation order is stayed or suspended.

Making an Offer to Deregulated Tenant

Upon receipt of a deregulation order, the owner must offer to rent the apartment to the tenant at market rent. There is no deadline for the owner to make this offer, which must be in writing. The tenant must respond in writing within 10 days. The law doesn’t require the owner to offer the tenant a lease, but merely to offer to rent to the tenant.

As there are no legal limits on how much rent the owner can ask for, the tenant whose apartment has been deregulated can attempt to negotiate a lower rent. But you do not have to bargain.

If the tenant declines the offer or fails to respond, or if the parties cannot agree on a negotiated rent, you may commence an action to evict the tenant by bringing a holdover petition, claiming that the tenant is holding over beyond the term of the tenancy and seeking an order awarding the owner possession of the apartment.

If the tenant loses the holdover, the judge is likely to give the tenant a month or two to move, during which time the tenant must pay use and occupancy for the apartment at the amount set by the court.