On August 31, 2022, the New York State Division of Housing and Community Renewal (“DHCR”)
announced proposed amendments to the Rent Stabilization Code (“RSC”), Tenant Protection Regulations, and New York City Rent Control Regulations. Among the proposed amendments is an adjustment to the formula for calculating the legal regulated rent for apartments that have been reconfigured.
In short, it appears that the proposed amendment would limit the legal regulated rent of a newly created unit or units to a percentage increase or decrease based upon the change in square footage and the current legal regulated rent for the apartment or apartments. As such, the idea of a “first market rate rent” after reconfiguration would be abolished.
In light of that, is there anything that owners can do to increase legal rents now, before the proposed rules are adopted? Well, the proposed amendments are currently under consideration and are now open for public comment. There are several hearings scheduled for November 15, 2022, to further discuss the proposed amendments. It is still unclear if the rules would be applied
prospectively or retroactively, as many, but not all, of the proposed rules align with the Housing Stability and Tenant Protection Act of 2019 (“HSTPA”).
It is possible, though not guaranteed, that owners may be able to take one last opportunity to obtain a market rate first rent under the current rules if they (i) complete the work and obtain DOB sign-off, (ii) sign a lease for the new unit at the monthly market rate rent that is charged and paid, and (iii) have that lease commence, all before the code amendments become effective. It is possible that even fewer affirmative steps might suffice to create the new unit before the proposed code changes become effective. Of course, there is no guaranty that such a plan will comply with DHCR’s final ruling, as we are still unsure if or how the proposed rules could be applied retroactively. But, just in case, there follows below a reminder of the current policy, which is subject to retroactive change.
Pursuant to RSC §2520.11(r) as it is currently stated, where an owner has substantially altered the perimeter walls of an apartment so much so that the old apartment essentially ceases to exist, then a first rent may be charged for the “newly created unit.” The apartment will remain rent stabilized but the rent may be significantly increased and should accurately reflect the value added by creation of the new unit. Any legal rent increases thereafter will be based upon the newly established higher first rent.
The theory behind this “first rent” mechanism is that where the old unit no longer exists, the previous apartment’s rent history becomes meaningless and a new rent must be established for the newly created unit.
Please note that the newly created unit must be a significant change in the outer perimeter, such as a two-bedroom apartment being split into two onebedrooms or studios, or two smaller apartments being consolidated to form one large apartment. Courts have clarified that minor “enlargement” of an existing apartment without extensive rehabilitation or reconfiguration will not be sufficient to justify a first rent.
For more information about the proposed reconfiguration and other amendments, please contact your attorneys at BBG.