DHCR Issues New Operational Bulletin on Individual Apartment Improvements

When you make improvements, such as installing a new refrigerator or replacing flooring, to your rent-regulated apartments, you’re allowed an “Individual Apartment Improvement Rent Increase.” This increase is in addition to vacancy increases allowed by law or the regular annual Rent Guidelines Board adjustments for rent-stabilized apartments, and biennial adjustments to Maximum Base Rents for rent-controlled apartments.

The amount of the rent hike is equal to 1/40th of the improvement’s cost if the improvements are done in apartments located in buildings containing 35 or fewer units. For buildings with more than 35 units, you may increase the legal regulated rent by 1/60th of the cost of the improvements. Increases are based on the total substantiated cost of an improvement including installation cost but excluding finance charges.

If the apartment is vacant, this rent increase is easy for owners to obtain. No consent is required from the Division of Housing and Community Renewal (DHCR) or from the incoming tenant to improve a vacant apartment. You may simply perform the work and raise the rent. However, if there was a tenant in occupancy of the apartment when the improvements were installed, then no rent increase is permitted without the tenant’s written consent to the rent increase.

On May 6, the DHCR issued Operational Bulletin 2016-1, which replaces Policy Statement 90-10 for Individual Apartment Improvements (IAIs). The new bulletin provides guidance to owners on how the DHCR will review the installation of IAIs when a tenant files a rent overcharge complaint or there is an investigation with respect to IAI installations. Overall, it establishes stricter requirements to substantiate IAI costs. We’ll highlight these requirements and give examples provided by the DHCR on items that qualify as an IAI.

Proof of Payment

The new operational bulletin requires a higher standard of proof than found in Policy Statement 90-10. Before, adequate documentation was one of the following forms of proof unless the DHCR requested additional proof. Now, the bulletin states that you should submit as many of the listed forms of proof as you’re able to provide with the initial submission/answer. The documentation includes:

• Cancelled check(s) (front and back) contemporaneous with the completion of the work or proof of electronic payment;
• Invoice receipt marked paid in full contemporaneous with the completion of the work;
• Signed contract agreement; and
• Contractor’s affidavit indicating that the installation was completed and paid in full.

The DHCR notes that consideration may not be limited to these four items as its review of IAIs is fact intensive and an individualized process regardless of whether it is part of an administrative proceeding or the subject of an independent investigation. The DHCR, in every case, has the authority to request information it believes is necessary to reach a proper determination including requests for additional evidence indicating the installation was completed, paid in full, and otherwise appropriate to support a rent increase.

Lump-Sum Costs

For each individual apartment improvement project that involves more than one item of work, a lump-sum bill to show proof of payment may not suffice. Owners should be able to provide itemized proof of these multi-item projects. 

The DHCR has discretion to accept a lump-sum bill under certain circumstances where, for example, it concludes that the evidence submitted establishes that all of the work claimed to have been done as a coordinated project and was satisfactorily completed; and each item of work was either an “improvement” or an ordinary repair and maintenance that was done in connection with, and as a necessary component, of an allowable IAI.

According to the DHCR, even such coordinated projects are best supported by itemized proof and the absence of such itemization may result in additional scrutiny or denial. When proof is not adequate in the DHCR’s view, the IAI increase may be denied in its entirety or the difference between the claimed cost and the substantiated cost will be disallowed depending on the result of the DHCR’s review of the documentation.

Useful Life

If your IAI project involves replacing old equipment or furniture, you’ll need to be able to prove that items being replaced have passed their useful life. The rent stabilization law provides that an owner who receives an increase for an IAI is not entitled to a further increase based upon the installation of similar equipment or furniture within the useful life of such equipment or furniture. Unlike major capital improvements, which have a useful life schedule in the rent stabilization code, the DHCR’s determination of whether an IAI’s useful life has been met will be based on the facts of each case. Where the useful life of an IAI is at issue and the installation was completed during a vacancy or included on a vacancy lease, the DHCR may require the owner to submit documentation to prove that the useful life of the old equipment or furniture had been exhausted.

Identity of Interest

There are circumstances that will require additional proof. The costs for an IAI paid to a person or organization sharing an identity of interest with the owner or managing agent may require additional evidence relating to cost and payment. Identity of interest means any other relationship (such as based on family ties or financial interest) between the owner/managing agent and the contractor, supplier, or installer(s) who did the installation or supplied the improvement, the cost of which is calculated into the IAI increase. These relationships include:

• When the owner or managing agent appears to have a financial interest in any entity receiving payment for the IAI (either the improvement or labor) that is included in the requested rent increase;
• When the owner or managing agent (or one or more of its officers, directors, stockholders, or partners of a corporation or partnership) appears to have a family tie or is an officer, director, stockholder, or partner at any entity receiving payment for the IAI (either the improvement or labor) that is included in the requested rent increase;
• When there appear to be side deals, agreements, or contracts that have been made or contemplated that could alter or cancel any of the costs of the IAI (either the improvement or labor) or where there appear to be side deals, agreements, or contracts that were entered into in proximity with the IAI;
• When any other relationship appears to exist between the owner/managing agent and the contractor, subcontractor, or any person receiving payment for the IAI (either equipment or labor) included in the requested rent increase other than the contract for equipment or labor with respect to the IAI, which could give the owner/management agent control or influence over the contractor or installer; and
• When the person or persons receiving payment for the IAI (either equipment or labor) appear to be employees of the owner/managing agent but such payments to them are in addition to such salary or payments for other work provided to the owner/managing agent.

If it is alleged or found that improvements to an apartment were made by an employee of the owner or managing agent, and/or new equipment was installed by an employee of the owner or managing agent, payroll records including hours worked on the IAI and the schedule of payment for the work will be requested. The owner will be required to prove that the employee was paid for the work separately from, and in addition to his or her normal salary.

Cash Payments

Where there are total cash payments for an IAI in an amount that exceeds $10,000, stricter scrutiny of the evidence supporting a rent increase is warranted. The DHCR will request further proof of payment in the form of bank documentation proving the withdrawal of such funds including evidence as to how funds were transferred. This proof would be in addition to affidavits of receipt by the vendor/contractor where normal receipts issued in the course of business are not available.