DHCR Issues MCI Policy Statement Regarding Non-Construction Costs
When you get a major capital improvement (MCI) performed at your building, you may have non-construction expenses such as general contractor or architect/engineer fees related to the underlying MCI project. For example, you may hire an engineer when you get your building’s parapet replaced. But can you include the engineer’s or architect’s fees as part of the cost of the MCI when you calculate your rent increase?
The DHCR has allowed owners to include these fees as part of the cost of an MCI—but only in certain situations. The DHCR recently issued Policy Statement 2017-1 on the eligibility of certain non-construction costs to be included as part of a major capital improvement rent increase. The statement discusses which non-construction costs can and can’t be included in an MCI.
According to the DHCR, the cost of certain professional services such as architectural, engineering, or consulting expenses that are directly related to an MCI-qualifying installation and that are not otherwise duplicated may qualify for a rent increase. In order for such professional services to be included as an added MCI cost, the services at issue must be both necessary and customary to the accomplishment of the underlying MCI-qualifying installation.
If the underlying MCI is a relatively commonplace installation for which the owner can generally be expected to select a contractor of sufficient capability to ensure a quality installation, then it is presumed that the services of an architect, engineer, or consultant are not necessary, and any claimed costs for such services will generally be excluded from the approved MCI amount.
However, if the underlying MCI-qualifying work involves a complexity substantiating the need for an architect’s, engineer’s, or consultant’s expertise—such as correcting significant structural defects, obtaining the Landmark Commission’s approval, complying with requirements under New York City Local Law 11, or where the local building department requires plans—then the costs associated with preparatory inspections and with the drafting of plans and specifications performed by a licensed professional may be included as part of the approved MCI amount.
In addition, the policy statement notes that except when engaged professionally as noted above, construction supervision services performed by an architect, engineer, or consultant do not qualify as an added MCI cost.
Municipal Filing Fees and Sales Tax
Routine administrative costs including costs associated with municipal filing fees, such as for building permit applications or municipal sign-offs on completed work, are not MCI-eligible expenses. However, proof of the cost and payment for all associated municipal fees must be included in the application. This includes the cost of municipal fees themselves, as well as any professional’s or contractor’s costs associated with obtaining required municipal approvals and sign-offs. Sales tax that has been included in the purchasing cost of materials is not an MCI-eligible expense and will be excluded from the approved MCI amount.
Contractor’s Mobilization Costs, Profit, and Overhead
Contractor’s mobilization costs that are necessary to the accomplishment of a qualifying MCI installation are generally accepted as a legitimate project expense. Mobilization costs consist of the costs for the movement of materials and equipment necessary for the project to the job site. A reasonable amount of necessary mobilization costs may be included in the approved amount for a qualifying installation, provided these costs are not duplicative of other work performed by the contractor.
In cases involving extensive MCI work where the contracted cost includes a separate line item amount for the contractor’s profit and overhead, a reasonable amount of the contractor’s profit and overhead may be included in the approved MCI costs for a qualifying installation.