What Landlords Need to Know About the Proposed Changes to the MCI Program

LandlordsNY Member

LandlordsNY Member

A new bill introduced in the New York State Senate by Michael Gianaris (D-Dist. 12) and in the state Assembly by Brian Barnwell (D-Dist. 30) will make a significant change to the major capital improvement program (MCI) as it is currently known. Specifically, it will change the way in which landlords recoup the costs associated with making improvements to their building.

Under the existing law, landlords are allowed to increase rents at a rate no greater than 6 percent per year in New York City and 15 percent outside of the five boroughs. DHCR Fact Sheet #24 also notes that, for rent controlled tenants, landlords cannot increase rent in excess of 15 percent of the tenant’s rent as of the issue date of the order. These increases then become part of the legal rent. There is also a temporary retroactive increase, which only applies to rent stabilized apartments.

If the bill becomes law, however, landlords will no longer be able to increase rents to offset the costs of upgrades and building-wide improvements. Instead, landlords and owners will receive tax credits from Albany (should the MCI be worth more than the property’s total tax bill for the year the credit will be treated as an overpayment). This change is meant to eliminate what many tenant advocates see as a loophole wherein landlords get to collect increased rents in perpetuity, even if the program was only meant to pay for the improvements. On top of allowing landlords to collect what some see as unwarranted profits, MCIs can also push rents past the luxury threshold for stabilized apartments.

The does not just end pending or future MCI increases. It retroactively eliminates the program, as well, and allows tenants one year from the time the bill becomes law to petition DHCR for a rollback on previous MCI increases. Furthermore, not every tenant needs to apply for a rollback. If one tenant from your building petitions to have the increase revoked, and the petition is granted, the approval will affect every unit that was subject to the MCI. As the Senate version of the bill (S9154) reads: “The department of homes and community renewal, upon repealing any increase in rent under the major capital improvement program, shall require that the rent is reduced by an amount equal to that of the increase allowed under the major capital improvement program in that instance for all current tenants affected by such increase. This rent shall be considered the legal rent and shall no longer by [sic.] a preferential rent.”

While landlords are going to be opposed to any bill that seeks to reduce rents for obvious reasons, there are other issues that could at least make this proposal more tolerable.

First, the bill does not acknowledge that landlords typically take out loans to finance these improvements, and that these loans can take years to pay off—even with the increased rent. An easy fix would be to extend the tax credit to cover any interest payments on these loans.

Secondly, the current bill doesn’t give landlords much time to make the necessary changes to avoid overcharges. The bill stipulates that the new legal rent goes into effect the next time the rent is due, which, in some cases, could mean just a few days. At the very least, a condition could be inserted into the bill to ensure that landlords get at least a few weeks to make the necessary amendments to their rent rolls.

Similarly, the bill will also require landlords repay any increases in security deposits they may have collected due to MCIs—within thirty days of when the rent rollback is granted. Extending the time to pay back the security deposit to 60 days would be more fair.

Finally, the bill also opens the door to at least one potential court decision that could lead to the type of chaos that came in the wake of Altman. Simply put: What if a recent MCI increase put an apartment over the luxury threshold, which then allowed it to be deregulated? More difficultly put: What if an MCI increase dating back thirty years ago caused the rent to jump, and then appreciate at a rate that later warranted a luxury deregulation that would not have been warranted had the MCI increase not taken place? This is the kind of Pandora’s Box we do not need to open for a myriad of reasons. The bill should include language that clearly states that the rollback cannot take an apartment back into stabilization.

While there are arguments for and against the impetus behind this bill, there is absolutely no argument to not draft another version that takes these issues into account.

  • LandlordsNY Member

    Just a coincidence or is DHCR intentionally delaying issuance of MCI docket #s to push any potential MCI approvals pass June 15th (& thus subject to the new MCI rules in place post-June 15th RS law renewal)???

    I have been applying for MCI's in the last few months. 2 applications I mailed out early Jan 2019 and I received a docket # in early Feb, so those two took about 1 month. Then I mailed out a 3rd application on 2/6/2019 and on 5/7/2019, which is 3-months later, I finally received a docket number. Part of the MCI application gives tenants 45 days to respond to the MCI application. Given this, no matter how quickly the application is reviewed and processed, this will push back the MCI approval to AFTER June 15th 2019, when the RS law is renewed.

    Anyone else notice the sudden delay in the issuance of MCI docket #s?

  • There have been a myriad of messy changes resulting from the rancor between the City and Albany (two being the J-51 snafu and the 421-a program implosion and subsequent restoration). It doesn't shock anyone that's been dealing with HPD and MCI that these two particular conflicts have gone as badly as they have, and yet a third situation is the dubious decision by the Department of Finance to (temporarily) rescind 421-a exemptions that were never awarded Final Certificates of Eligibility (FCE's). HPD approved benefits for 5,000 or more applications but never followed up to confirm these applications were formally (eg finally) signed off. So when DOF opted to pursue these cases HPD interacted with DHCR and pushed back. These 5,000 or so cases have been in limbo to varying degrees of severity. Most will be restored but the effort required to do so is equal to if not well in excess of that typically required to prepare, file and achieve a 421-a exemption, which is anywhere from a challenge to monumental.The point being that many of the DHCR-related backlog issues can also be attributed to the HPD/421-a mess that is currently being solved/resolved. We've personally rescued a dozen or so cases where the original developer/applicant sold the property to a third party and that third party was never advised or apprised of this specific wrinkle, so now we've been playing catch-up and dealing with three City agencies -- HPD, DHCR and DOF. None of these agencies are used to or comfortable with interacting with other agencies so since none of these agencies has autonomy over the others it's a matter of wait and hope. I've had clients repeatedly visit DHCR to file, re-file and re-re-file papers to ensure the amended intiial registrations are accurate and acceptable to both DHCR and HPD. And since most of these people are sequestered behind closed, locked doors, reaching them to expedite this process is an even more egregious process than it has been in the decades we've been handling these types of matters.

    My point isn't to lament the current state of City interagency politics so much as to highlight there are a lot of things DHCR has been forced to deal with and they are "backlogged" -- so this new MCI situation/development is only more gasoline on an already burning fire.

    Caveat emptor.

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