Tenants Rip Program Tying Rent Hikes to Landlord Investments

Bronx resident Soledad Franco has lived in her apartment since 1972, moving in when she was ten. A 2011 fire precipitated by an unlicensed electrician caused her to lose all of her belongings and become temporarily homeless. There have been at least four fires in the building since 2007—despite that, the owner won approval from state regulators on four occasions for extra increases to her rent.

Loraine Dellamore’s building was allowed to deteriorate so badly and for so long that an organizer with the Flatbush Tenants Coalition (FTC) said the conditions were the worst she had ever seen, and included “sewage dripping on people’s heads.” As one of the tenant leaders, Dellamore spent two years fighting just to get basic repairs—and then contested the owner’s bid for a rent increase, which she says was based on dubious costs.

Ed Maloney’s Manhattan building converted to a condominium* in 2000. Soon after, the owner embarked on construction in some of the common areas. Much of it was done incorrectly or shoddily, which was well-documented by the tenant association, of which Maloney is president. Still, when the process was complete, Maloney’s rent went up $171.68 per month.

They are three New Yorkers with a lot in common: All are long-term tenants living in rent-stabilized apartments. All underwent the process known as Major Capital Improvements (MCIs), where landlords can institute building-wide construction and raise rents in perpetuity—that is, pass the costs on to tenants, even after the work has actually been paid off. And all three believe they were abused by this system.

As the state rolls towards a June deadline for renewing rent regulation laws, MCIs are one of a litany of loopholes affordable housing advocates say is undermining the current system from within, by giving landlords a way to augment rents and edge their apartments out of regulation. Landlords, meanwhile, say MCIs are critical to keeping them in the black when they make necessary building improvements.

System from the seventies

The premise for the MCI program evolved over state housing history, and was particularly applicable during the bad old days of the 1970s—where owners in droves abandoned their properties, or worse. Consensus amongst decision-makers was that landlords needed to be incentivized to invest in their buildings.

The state agency charged with oversight of MCIs is the Division of Housing and Community Renewal (DHCR); its website says the improvement must be “deemed depreciable by the Internal Revenue Service and [meet] the requirements set forth in the Agency’s useful life schedule.”

MCI rent increases for stabilized units are calculated by dividing the amount spent over 84 months and the number of rooms in each unit; theoretically, they cannot exceed 6 percent of a tenant’s annual rent**.

“Applications are first screened to ensure they are complete and the work qualifies as a Major Capital Improvement,” a DHCR spokesperson writes in an email. A full audit “is then performed with review of contracts, invoices and change orders. Checks for payments are reviewed and compared to the work performed. Any payments that are missing or are for work that does not qualify for MCI rent increases are deducted from the approved cost.”

If an MCI is challenged, a back-and-forth ensues between tenants and owner until DHCR’s Office of Rent Administration (ORA) makes a decision, which can range from granting the MCI in full to approving a modification or issuing a denial. Either side can then appeal the decision with a petition for administrative review, and after that, in the courts. Tenants must start paying the approved increases even during the appeals process.

Both sides have a beef

Almost as long as MCIs have been around, critics have assailed them. Some, like Manhattan State Sen. Liz Krueger, wonder why a landlord deserves an extra rent increase merely for doing work that’s required to keep a building viable.

“What is an MCI versus standard upkeep [to maintain] the warrant of habitability? Front doors, the roof, the boiler—these are basic things,” that can be covered by an MCI, she says. Krueger has sponsored legislation to reform the MCI program for more than a decade, “to ensure transparency through evidence of actual costs,” she says. (The rent law also includes*** “individual apartment improvements, or IAIs, which permits owners to raise rents for work within single units. Tenant advocates complain they garner even less oversight than MCIs, but in the end, both are used “to drive rents up in an unjust way,” Krueger says.)

DHCR itself has been the subject of criticism for decades. Both sides perceive it as favoring the other. “On various levels, it’s pretty clear DHCR’s agenda is pro-tenant… [and] a hostile environment for owners,” says Mitch Posilkin, general counsel for the Rent Stabilization Association (RSA ). The RSA is currently suing over the Tenant Protection Unit (TPU), established in 2012, which among other things has audited IAIs.

Tenant leaders like the TPU but think that, overall, DHCR is too landlord-friendly. “Many of the rent laws and regulations that DHCR is charged with enforcing are very pro-landlord,” writes Garrett Wright, senior attorney at the Urban Justice Center.

All agree DHCR is desperately underfunded, short-staffed, and has enormous backlogs, which can take years to decide. They currently have nine of the 11 inspectors for which they are budgeted.

A 2011 report from Make The Road New York elaborated: “Between 1996-2008, [ORA] lost more than 36 percent of its total staff. This cannot be explained simply by the declining number of rent regulated units requiring service.” The report notes that the staff cuts came as the city shed regulated apartments.”Cuts in tenant services,” it added, “have been disproportionately greater than cuts in landlord services.”

Changes to MCI rules were issued in January. DHCR is now required to check with the city’s housing agency for serious violations before approving MCIs. And the TPU has offset some of the disparity, activists say. But DHCR is constantly accused of a lack of transparency and consistency. In fact, the updated Rent Stabilization code in full is not available on DHCR’s website, making it challenging to understand the revisions out of context. Lax oversight has, many tenants say, created an environment ripe for dishonesty, if not outright fraud.

Slanted against tenants?

Meanwhile, tenants face obstacles to exercise their rights. A 2013 CASA/Urban Justice Center report claimed: “Few tenants are aware they can submit complaints and even if they do, the application process is complicated, slow and time-consuming…[L]andlords capitalize on the lack of oversight and enforcement.” Even Assembly Housing Committee chair Keith Wright is currently involved in a suit against his landlord alleging inflated rents and overvalued MCI costs.

There are penalties for landlords who lie. But prosecution is rare and fines are low. Cases of suspected intentional deception get “referred to the Enforcement Unit [at ORA] to prosecute the owner,” says DHCR. “The penalty is $250.00 per instance.”

Perhaps the most common complaints stem from the reactive way DHCR functions, and its propensity to ignore its own regulations or fail to enforce them. Until the TPU, the agency was exclusively complaint-driven, meaning the onus fell on tenants to prove an owner’s application was incorrect, misleading or even fraudulent. Tenants often have to hire experts at personal expense, while landlords consider it part of the cost of doing business.

“It’s massively technical, and really hard to monitor,” New Settlement Apartments Community Action for Safe Apartments (CASA) director of housing organizing Susanna Blankley observes.

The Urban Justice Center’s Wright believes that owners get an unfair advantage when they challenge decisions that go against them because the agency gives them “additional opportunities to remediate poorly done work that had initially resulted in the agency denying the MCI,” he says.

According to the Make the Road report, the entire process is inherently biased, manifested even in something as basic as paperwork. “DHCR is required to send a form to solicit objections. However, that form provides no information about the MCI process or the tenants rights,” the report read. “It doesn’t tell people what are the criteria for objection.” In contrast, the forms sent to owners “are actually really helpful, providing useful and detailed information.”

In Maloney’s building, the leaky roof on which there were city violations wasn’t properly fixed, and the landlord only replaced windows in some stabilized units, both against agency policy. “The tenants’ architect and the condo’s own management firm condemned… the quality of the work,” says Maloney. Surprise DHCR inspections confirmed piecemeal work, he says.

DHCR’s administrator also requested accounting and certified engineer evaluations, but the owner simply provided excuses. Tenants used as evidence the landlord’s own state conversion filings “that show there is a garage—which he denied—and then, when forced to admit there is a garage, he lied about the size,” Maloney emailed. Despite the lies, lack of cooperation, and verification from the agency’s own inspection, MCIs amounting to up to 18 percent were ultimately approved, almost five years after the owner filed for them. In the unsuccessful fight to halt the increase, Maloney reports the tenants association spent upwards of $40,000 on experts and a lawyer.

Dellamore’s landlord filed his MCI for her Brooklyn building, though she and other tenants suspect the application mostly covered work done in an adjacent one. They submitted a 100-page objection documenting that fact and proved many of the “improvements” in her building used cheaper materials than claimed. Nonetheless, DHCR approved the MCI, with an explanation that “totaled approximately 10 lines and failed to address most of the points that tenants raised,” she says.

Dellamore suspects her landlord deliberately allowed the properties to become totally dilapidated. Even though that would mean a far larger cost down the road, this approach could work to a landlord’s advantage because regular maintenance cannot be covered by an MCI, but a major overhaul necessitated by deferred repairs could be covered by one. Advocates say this is common. Attorney David Hershey-Webb says this occurs because “mechanisms were never built in” to discourage such willful delinquency. Tenants are “astounded by the intentional neglect of a building,” for which owners then receive MCIs. “There’s an innate sense of justice and fairness,” that’s violated, he says.

‘Perverse incentives’

The end result of an MCI is often to increase rents dramatically. Tim Collins, former executive director of the Rent Guidelines Board (RGB) and currently a tenant attorney, says that for landlords “there is great incentive to to beef up or pad costs… [there’s] perverse incentive” to cheat on MCIs.

Indeed, activists allege MCIs are sometimes pursued with the obvious goal of reaching the $2,500 monthly threshold permitting deregulation of vacant units through a mechanism called high-rent vacancy decontrol.

FTC organizer Aga Trojniak explained, “MCIs are systematically used to drive up rent (often) when a landlord is not doing what they should–to maintain apartments. They do immediate work for which they can get an MCI, and vacant apartments are renovated.”

Franco had four consecutive MCIs from 2004—when her current owner, Chestnut Holdings, purchased the building—to 2013. The MCIs boosted her monthly rent by a cumulative $200. One MCI granted was to “improve” what Franco says was a working elevator; the last was to repair the roof after the fire in Franco’s apartment, for which Franco believes the company also received insurance money. Calls to Chestnut Holdings were not returned.

Dellamore’s increase amounted to $69.39 per room per month, or just under $210 for a one bedroom apartment. “We went to a law firm, and the lawyer told us, ‘In all these years, I’d never come across such a high MCI application before.'”

Because landlords don’t have to report when a unit is destabilized, it’s unclear whether the changes in Dellamore’s building resulted in any units leaving the stabilization rolls through high-rent decontrol, but Trojniak suspects that thanks to the MCI increases, many units are but one vacancy away from getting deregulated.

Landlords, however, point to another side of the economics of MCIs—that they generate work for contractors and laborers in the city. “You can’t ignore the fact it’s an enormous industry. Where are the workers from?” Posilkin asks. MCIs are a boon to the city’s economy, because building assessments increase, generating extra revenue for the city. “It’s an entire synergy of benefits, not just theoretical, but the reality,” he adds. A 2013 RSA study quantified the direct impact of MCIs and similar expenditures at an estimated $10.6 billion in 2013. Between 2003 and 2013, the gross outlay was $104.2 billion.

But, Collins questions the RSA’s methodology. If the study doesn’t also consider the loss of tenants’ disposable income due to higher rents, “then it’s all garbage,” he says. Higher rents directly affect the local economy, Collins says, because tenants have less buying power, so they spend less. “When rents go up, money is transferred from tenants to owners. There is no clear evidence that the spending choices of owners (even for building improvements) are better for the economy than the spending choices of tenants,” he adds.

A question of incentives

Whatever the rationale at the inception of the MCI mechanism, affordable housing advocates argue the system needs a massive overhaul. Government officials may well have “panicked about the future,” when properties were being abandoned en masse in the 70s, and the city’s tax base was shrinking, Krueger says. “They may have been very real needs …[for] government to use its power to encourage improving the older housing stock.” But, the concern that hardships would drive property owners to abandon their assets is “so far from today’s reality,” she says. These days, the senator adds, New York City real estate, “is a more secure investment than anything else.”

Advocates are most concerned about the perpetuity charge—the fact that MCI projects paid for and completed in a finite period of time will boost rent levels forever. Misleadingly, DHCR calls this an “amortization” period, but to amortize means to pay off. And the benefits to landlords from an MCI continue long after a capital expense has been repaid.

Landlords, however, say it’s right for a property owner to get permanent benefit from major improvements to a building, as they likely would in an unregulated environment.

DHCR has also come under fire for relying too much on owner self-certification and for its perceived cozy relationship during the process. DHCR didn’t respond to repeated interview requests. But a lack of transparency at the agency makes it hard to confirm or rebut some criticisms against it. An April audit by City Comptroller Scott Stringer found that, “Comprehensive data from DHCR on MCI and IAI increases are not available, which prohibits an empirical analysis into the impact of these rent increases” but notes that “allegations made in a recent series of judicial proceedings suggest that there is a perception of fraudulent activity associated” with such increases.

Language obstacles also pose problems, including a lack of available multilingual staff, and correspondences in English only. A 2012 gubernatorial order required state agencies to “provide free language interpretation in six major non-English languages.”

But DHCR’s solution for its website isn’t exactly ideal, emailed Make the Road’s supervising attorney, Luis Henriquez. Besides the difficulty of navigating it, the site relies on Google Translate, missing “the mark on important, technical terms, especially when you move away from Spanish into other languages.”

Whether because of MCIs or other hikes to rent levels, more and more stabilized units are getting priced out of the system—about 100,000 units have left the rolls in the past decade.”Actual increases in stabilized rents,” read the Comptroller’s report, “generally increased at a faster annual rate than the nominal rates permitted by the RGB. This is because calculations that solely rely on rent increases passed by the RGB do not account for the possibility of [MCIs and IAIs].”

Tenant advocates see the loopholes in the rent laws—major capital and individual apartment improvements, vacancy bonuses and vacancy decontrol—combining with exponential effect on the stock of affordable housing.

“MCIs make a large dent. IAIs finish the job to end affordable housing. If this continues, none of us will have a place in NYC,” mused Trojniak.

* This was changed to correct a reporting error: Maloney’s building became a condominium not a coop. ** This was changed to clarify that the tenant cost cap is calculated annually. *** This was changed to correct an editing error that dated IAIs only to 1993; they’re older.