How to Deregulate Apartment by Renting to Professional or Commercial Tenant
If you have a vacant rent-stabilized apartment, you may be able to take advantage of a money-making opportunity. If you rent the apartment to a commercial or professional tenant who will use it solely for nonresidential purposes (for example, as a medical office), the apartment will no longer be covered by rent stabilization. In other words, you can negotiate with the professional tenant and charge whatever rent the market will allow.
Before you rent the space to a professional or commercial tenant, there are some initial steps you should take. You should first find out if the apartment is marketable as a professional space and whether it's zoned for professional use. If the answer is “yes,” you'll have to get the building's certificate of occupancy (C of O) changed. You also want to make sure that any tenant you rent to will actually use the apartment only for professional purposes. Otherwise, you may discover that the apartment is still rent stabilized and that you're overcharging the tenant.
Professional Units Exempt from Stabilization
Section 2520.11(n) of the Rent Stabilization Code exempts units that are used “exclusively” for commercial or professional purposes from rent stabilization coverage. If you rent an apartment to a tenant who uses it solely as a professional office, it won't be covered under rent stabilization.
For example, an owner rented an apartment to a tenant for commercial use. After the lease ended, the tenant claimed that the owner had consented to her residential use of the premises and that she was rent stabilized. The court ruled for the owner, and the tenant lost her appeal. The owner showed that it never consented to residential use of the unit and that it was used solely as a professional office. Building staff testified that they never saw the tenant in the building after business hours, and no witnesses testified that the tenant stayed overnight in the unit [Benroal Realty Assocs. v. Lowe, July 2005].
Take Initial Steps
Before renting a vacant apartment to a professional tenant:
1. Check marketability of renting to professional tenant. Check with your local real estate broker about whether there's a market for professional apartments in your area for the type of space that you have to offer. It doesn't make sense to convert an apartment to professional use if you won't be able to rent it.
2. Comply with zoning law. The city's zoning law limits which apartments may be used for professional purposes. Check with your attorney and architect before renting the apartment to be sure it complies with the law.
Sections 22-13 and 22-14 of Article II of the New York City Zoning Resolution contain the regulations that permit certain community facilities such as medical offices in a residential building if:
The office is located on or below the first floor; or
The office is located on the second floor and there's a separate entrance to the apartment from the outside.
For the purpose of this zoning law section, a medical office is an office that consists of ambulatory diagnostic or treatment health care facilities licensed by the State of New York.
Change C of O
By renting to a professional tenant, you're changing how the apartment will be used. So you must change the C of O for your building to reflect that the apartment will now be used for professional purposes.
In one case, the Department of Buildings (DOB) issued a violation notice to an owner for the occupation of altered premises without a valid C of O. The owner had obtained a permit to convert a first-floor apartment into commercial space. But after doing so, the owner didn't file for DOB sign-offs or the new C of O. The owner was fined $1,000, and he lost the appeal. The owner had no valid excuse, and lack of knowledge about DOB procedure wasn't an excuse [Sobola: ECB App. No. 1000084, July 2010].
Changing the C of O can be a complicated and costly procedure. To change the C of O, hire a licensed architect or engineer to file an application called an “Alt 1” with the DOB. Also, when you change to the professional use, the new professional space must comply with city and federal laws on accessibility to the handicapped. You may have to make structural changes like installing a ramp or widening doorways. You'll have to hire a contractor to do the necessary work. Before the DOB will give its final approval on the new C of O, it will inspect the space to make sure you've made all the required changes.
Watch Out for Mixed Use
It's important to make sure the professional tenant doesn't plan to move into the apartment and use it as a residence. If a tenant uses an apartment as both a professional office and a residence, the apartment remains covered under rent stabilization. It doesn't matter if the tenant signed a lease restricting the apartment's use to professional space. If the tenant violates the lease and uses the apartment as a residence, the apartment is rent stabilized.
In these mixed-use situations it also becomes more complicated to evict a commercial tenant because residential landlord-tenant laws may apply. For example, in one case, the owner sued to evict a tenant in the commercial landlord-tenant part of civil court. The tenant asked the court to dismiss the case. The tenant argued that it was improper to bring the case in the commercial part of the court because he lived in the apartment. The court ruled against the tenant. But the tenant appealed and won. The tenant showed that the owner and prior owner knew that the tenant lived in the apartment, even though he signed a commercial lease. The owner therefore was required to start the eviction proceeding in the housing part of landlord-tenant court [Freeman Street Properties, LLC v. Coirolo, December 2007].
How to Avoid Mixed Use
Unfortunately, there's no way to guarantee that a tenant won't live in an apartment you've rented for professional use only. But these suggestions may tip the odds in your favor:
Check if prospective tenant has other residence. Before renting the apartment, ask the prospective tenant where he lives—and get proof. For example, if he says he's renting an apartment somewhere else, get a copy of the lease. If the prospective tenant has no other residence, or is renting an apartment with a lease that expires next month, there's a good chance that he'll move into the professional apartment.
In one case, the owner was able to show that the tenant had bought a house on Long Island, and documents showed that it was used as her residence [Benroal Realty Assocs. LP v. Lowe, July 2005].
Scrutinize prospective tenant's business. Get information from the prospective tenant about the business he plans to operate in the professional space. Make sure he actually has a bona-fide professional practice. For example, if the prospective tenant wants to use the space for a medical office, find out if he really has an active medical practice. If not, you should have reservations about renting the apartment to him.
Remove kitchen facilities. When deciding if an apartment is being used residentially, the DHCR and courts often look at whether the apartment has kitchen facilities. The presence of a kitchen is evidence that a tenant is living in the apartment. If you rent an apartment without a kitchen, you're more likely to be able to show that the tenant didn't use the apartment as a residence. In the mixed-use example in the section above, the apartment had full residential fixtures when the prior landlord rented it to the tenant, and this was indicative to the court that the owner knew that the tenant lived in the apartment [Freeman Street Properties, LLC v. Coirolo, Dec. 2007].