Stop Collecting Retroactive MCI Increases If Tenants Appeal

Several new and re-elected state senators have made eliminating rent increases tied to major capital improvements (MCIs) important parts of their housing agenda. Last year, State Senator Mike Gianaris and Assemblyman Brian Barnwell introduced a bill in their respective chambers that would repeal the MCI program and instead provide building owners with tax credits to offset the costs of upgrades. Also, Governor Andrew Cuomo announced in his State of the State address that he would seek to at least “limit” the increases. With the changing political winds and in anticipation of potential housing reform, you may already have filed for an MCI rent increase.

Tenants often appeal when the Division of Housing and Community Renewal (DHCR) issues an order allowing an MCI rent increase. If yours do, you may be confused about what to collect while the appeal is pending. By law, the owner is entitled to collect the prospective/permanent rent increase. But the owner can’t collect the retroactive/temporary rent increase until the appeal is decided. It’s important to get it right or you’ll face costly penalties. We’ll go over what you need to know to avoid a problem.

MCI Basics

When owners make improvements or installations to a building subject to the rent stabilization or rent control laws, they can apply to the DHCR for approval to raise the rents of the tenants based on the actual, verified cost of the improvement or installation.

Qualifying MCI work. To qualify as an MCI, the improvement or installation must (1) be depreciable pursuant to the Internal Revenue Code, other than for ordinary repairs; (2) be for the operation, preservation, and maintenance of the building; (3) directly or indirectly benefit all tenants; and (4) meet the requirements set forth in the useful-life schedule contained in the applicable rent regulations.

For example, you may be granted an MCI rent increase if you install a new boiler in your building, but not if you merely repair or rebuild the existing boiler.

MCI increase amounts. If approved, the rent hike is permanent and allows owners to recoup the cost of an eligible MCI within seven years. The monthly rent hike is calculated by taking the total cost of the MCI as allowed by the DHCR and dividing it by 84, the number of months in seven years. That sum is then divided by the number of rooms (not units) in the building. This final calculation is the cost of the MCI the owner can collect per room per month.

The amount of rent increases the owner may collect in one year may vary depending on the following categories.

> Rent-stabilized units. The rent increase collected in any one year may not exceed 6 percent of the rent. Increases above the 6 percent cap may, however, be spread forward to future years. The MCI rent increase may not be collected until the end of the tenant’s current lease term unless the lease contains a clause that specifically allows for an MCI rent increase during the lease term.

> Rent-controlled units. The increase collectable in any one year may not exceed 15 percent of the rent as of the issue date of the rent hike order. There is no retroactive portion. The rent increase starts with the first rent payment following the date that the DHCR issues the rent increase order.

> Units occupied by senior citizens with a valid Senior Citizen Rent Increase Exemption. These tenants are exempt from paying the MCI over the amount of their exemptions.

Stop Collecting Retroactive Increase

An MCI increase is divided into two parts: what the DHCR refers to as the “prospective increase” and the “retroactive increase.” The type of increase determines what you can collect when tenants appeal.

Prospective increase. This portion of the increase is permanent and becomes part of the base rent. It goes into effect on the date the DHCR issues its order granting the MCI increase. When tenants appeal, you can continue to collect this part of the increase.

Retroactive increase. This increase is temporary and doesn’t become part of the base rent. It’s retroactive because it covers the portion of the MCI increase you were entitled to but unable to collect before the MCI order was issued. Once the order goes into effect, you collect this part of the increase over a limited period of time. The retroactive increase applies to rent-stabilized tenants only. Rent-controlled tenants don’t have to pay it.

When tenants appeal, you must stop collecting the retroactive part of the increase. If you continue to collect it when you’re not supposed to, the DHCR could find that you’ve overcharged the tenant, and hit you with triple damages.

Some Tenants May Get Refunds

If you start collecting the retroactive portion of the increase as soon as the MCI order is issued and you later find out the tenant has appealed, you’ll have to return what you’ve collected. That’s why some owners may find it easier to wait a while after the order is issued before starting to collect the retroactive increase. Tenants have 35 days from the date of an MCI order granting increases to file the appeal, and you should get a copy of the appeal from the DHCR within three weeks after it’s filed. If you wait two months, you’ll be sure you can safely collect the increase without worrying about a possible appeal.

If there’s an appeal, check to see which tenants signed it. You can continue to collect the entire MCI increase, including the retroactive portion, from any tenant who didn’t sign the appeal. But if the appeal was signed by an authorized tenant representative, such as the president of the tenants’ association, the appeal applies to all tenants who are members of the group. The representative should attach a list to the appeal, which contains the names, addresses, and signatures of all the tenants he or she represents.

Send Letter Setting Rent for the Appeal Period

When you find out about an appeal, for the sake of clarity, you should notify tenants that you won’t collect the retroactive portion of the increase until the appeal is decided. Send each of them a letter, like our Model Letter: Identify What Tenant Owes When Tenant Appeals MCI Rent Hike, stating exactly what they’ll be expected to pay while the appeal is pending.