Proposed Legislation Seeks Radical Changes

Michael Littman

On June 7, 2021 a bill was introduced in the New York State Senate which may have a profound impact on the industry’s understanding of what is required to charge a “first rent” or obtain exemption following substantial rehabilitation. It has been long rumored that changes were to come. THE BILL IS NOT YET A LAW. However, it may become law in the near future.

FIRST RENT

“First rent” is the concept that allows owners to charge a market rent for newly created units, or after unit configurations are totally changed thus making the rent histories of the prior existing units meaningless. “First rent” is one of the only ways left available to owners to charge market rents. The new bill proposes to greatly impact what can be charged as “first rents”:

  1. For combined units, the bill states that the legal regulated rent cannot be larger than the sum of rents for the previously separate units.
    • Example: Unit A has legal rent of $1,500.00 and Unit B has legal rent of $1,000.00. Combined Unit AB will have a legal rent of $2,500.00.
  2. If a unit is reduced in size the legal rent should be reduced based on the decrease in size of the units.
    • Example: Unit A was 1000 square feet with a rent of $2,000.00. Unit A is now 500 square feet and the rent will be $1,000.00.
  3. If a unit is increased in size by taking area from another unit the legal rent cannot be increased.
    • Example: Unit A was 1000 square feet with a rent of $2,000.00. Unit A was expanded to 1500 square feet but rent remains at $2,000.00.

The effect of this proposed law would be to essentially eliminate “first rent” in most scenarios. What is left open is when new apartments are created out of nonresidential space, or when new units are added to buildings.

SUBSTANTIAL REHABILITATION

For substantial rehabilitation, the proposed law does not attempt to repeal exemption but it adds more requirements:

  1. The proposed law appears to require applications be filed before the DHCR. For new projects owners are required to apply to DHCR within one year. For jobs that were completed, owners would be required to apply within six months of the passage of the law.
  2. Owners will have to show that they have not harassed tenants in the five years prior to the substantial rehabilitation.
  3. Owners will have to show that the deterioration of the building was not the result of acts or omissions by owners or their predecessors.
  4. Owners will have to show that work was not performed piecemeal.
  5. Owners will have to show that work was completed within a reasonable amount of time.
  6. Owners will have to show that the building was at least 80% vacant while being renovated.

These new parameters would require an owner to apply for a determination whether its building was substantially rehabilitated within a relatively short period of time, and the new requirements will make that much harder to have an application granted.

We would encourage Owners to take these proposed bill into consideration before engaging in renovation of buildings. Owners who have rehabilitated their buildings in the past should evaluate what evidence they have regarding the renovation.

Please contact us regarding any questions you may have regarding these recent developments.

 
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