DHCR Issues Reasonable Cost Schedule for MCIs
When owners make improvements or installations to a building subject to the rent stabilization or rent control laws, they can apply to the DHCR for approval to raise the rents of the tenants. When the improvement or installation meets certain requirements it will be considered a major capital improvement (MCI). Some examples of MCI items include boilers, windows, electrical rewiring, plumbing, and roofs. To qualify as an MCI, the improvement or installation must:
- Be depreciable pursuant to the Internal Revenue Code, other than for ordinary repairs;
- Be essential for the preservation, energy efficiency, functionality, or infrastructure of the entire building;
- Directly or indirectly benefit all tenants; and
- Meet the requirements set forth in the useful life schedule contained in the applicable rent regulations.
The passage of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) greatly limited rent increases owners could get for MCIs and increased oversight by the DHCR. Before the HSTPA, MCI rent increases were permanent and were added to an apartment’s base rent. Now, MCI increases are temporary and must be removed from the rent 30 years after the date the increase became effective, inclusive of any increases granted by the local rent guidelines board. In addition, the HSTPA made the following changes with regard to MCI rent increases:
- MCI increases may be granted based upon reasonable costs.
- MCI increases are prohibited for buildings with 35 percent or fewer rent-regulated units.
- MCI increases are prohibited if there are hazardous violations on file with the local municipality in addition to immediately hazardous violations.
- Buildings with 35 or fewer units are amortized over 12 years; buildings with more than 35 units are amortized over 12.5 years.
- MCI increases are capped at 2 percent per year.
To help owners understand what are reasonable costs for MCI work, the DHCR recently released a reasonable cost schedule for MCI-eligible items (Operational Bulletin 2020-1). The reasonable cost schedule provides a maximum cost that can be approved for eligible MCIs.
Applying for a Waiver
It may be the case that the MCI work you plan to undertake will exceed the costs listed in the DHCR’s reasonable cost schedule. For these instances, the DHCR has outlined the circumstances in which an owner may apply for a waiver of the application of the reasonable cost schedule when applying for a temporary MCI. According to the DHCR, the waiver application must show either:
- Improvements are not identified in the reasonable cost schedule, or are necessarily and appropriately priced higher than those costs listed in the reasonable cost schedule; and such costs are accurate and reasonable under the circumstances; or
- Use of the schedule will cause an undue hardship, and the use of alternative procedures are appropriate to the interests of the owner, the tenants, and the public; and the costs of the improvement are accurate and reasonable under the circumstances.
The owner must request a waiver of the use of the reasonable cost schedule in writing, which must accompany the temporary MCI rent increase application with the requisite information and documentation. If an application for a waiver is denied, the owner’s recoupment will be limited to that required by the reasonable cost schedule, or the actual verified costs, whichever is lower, together with such other relief as may be appropriate.
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