Several weeks ago I wrote about some of the more glaring unintended consequences of the legislature’s passage of the Housing Stability and Tenant Protection Act (HSTPA) in June. Today I write to discuss an HSTPA provision that simply defies any sense of logic or rationality.
Major Capital Improvements (MCIs) have been an essential part of rent stabilization since its inception. Owners were incentivized to undertake expensive improvements, rather than perform mere maintenance and repair, by being allowed to pass on some of the costs to tenants over a period of time. The HSTPA changed both the amortization rate and the annual cap on rent increases, significantly diminishing owners’ incentive to improve. But at least there was some sense as to the legislature’s intent: Reduce the rent increase that tenants would face when such improvements were made.
One aspect of the new MCI rules contained within the HSTPA has received little notice, but it deserves attention. The HSTPA provides that even if the improvement that the owner undertakes would otherwise qualify for MCI treatment and the resultant rent increase, the MCI is completely barred if the building has 35 percent or fewer rent-stabilized apartments. They question is, Why? Did the legislature believe that a rent-stabilized tenant living in a lesser regulated building would pay more than one who lived in a largely stabilized building?
An example shows just how utterly bizarre this new rule is: Assume a building has 100 apartments. Assume each apartment contains three rooms—300 total rooms in the building. Assume that a capital improvement is made that costs $100,000. Let’s assume that 70 percent of the apartments are rent stabilized. The MCI increase would be $6.66 per month.
Now, assume that there are only 10 rent-stabilized apartments in the building. If the small number of rent-stabilized units didn’t bar the increase, how would the MCI increase be calculated? It would be $6.66— exactly the same!
The difference is that in the largely stabilized building the 70 stabilized tenants pay an increase, whereas in the less stabilized building, under the new law, if the owner proceeds with the exact same MCI, the rent-stabilized tenants pay nothing. The entire cost of the improvement is placed squarely on the owner’s shoulders alone.
Is there a reason why one group of tenants should be asked to pay why another group isn’t? I have tried to find some rationale for the disparate results, without success. The only explanation I can find is that the legislature simply didn’t understand how the math worked. Essentially, the legislature created a “solution” for a non-existent problem. I suggest that this is symptomatic of much of the HSTPA.
Sherwin Belkin is a founding partner of Belkin Burden Wenig & Goldman, LLP
(This article was published in Crain’s New York Business on October 28th, 2019 –