How to Get Rent Increases for Apartment Improvements
When you make improvements, such as installing a new refrigerator or replacing flooring, to your rent-regulated apartments, the owner may be entitled to 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. Fortunately for owners, the increase is permanent and does not expire after 40 months. 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, for improvements made while the apartment is occupied, the rules are different. If you and your tenant agree to an apartment improvement, the tenant must consent to the improvement and the rent increase in writing.
We will go over improvements that qualify for this rent increase and how to calculate the increase.
Also, while incoming tenants have no say over the scope or costs of the work performed, once they have signed a lease, they can challenge the rent increase if they think it was based upon inflated invoices or was improperly calculated. A tenant is allowed to challenge these rent increases for up to four years after the improvement. We will also cover what you should do to defend against these challenges.
As a general rule, an owner may not seek a rent increase for performing ordinary repairs, maintenance, or decorating work. Fixing a dishwasher or replacing a broken window sash does not qualify for a rent hike, because that type of work is considered ordinary maintenance.
Unfortunately, it's not always clear where the dividing line is between an improvement that qualifies for a rent increase and repair/maintenance work that doesn't qualify. It's important for you to be able to make this distinction. That's because if you guess wrong and collect a rent increase for an item that doesn't qualify and the tenant complains to the DHCR, the DHCR could find that you've collected a rent overcharge. It could even impose triple damages against you.
In one case, the DHCR disallowed a 1/40th increase for apartment repairs. The tenant claimed an overcharge and the district rent administrator (DRA) ruled for the tenant and disallowed part of the owner's improvement costs. The DRA ordered the owner to refund $20,000, including triple damages. The owner appealed and lost. The DHCR said the DRA had correctly disallowed any rent increase for plastering and painting the apartment, installing subflooring and floor joists in the kitchen, and replacing exterior brick joints on the apartment's exterior. These items were normal maintenance and repair work, and didn't qualify for 1/40th improvement increases [Fisher Assocs.: DHCR Adm. Rev. Docket No. UH210045RO (9/29/06)].
The DHCR has no comprehensive list of all the individual apartment improvements and new equipment items that qualify for rent hikes. However, here are examples of the kinds of improvements that the DHCR has said qualify for an individual apartment improvement rent increase, and ordinary repairs that do not:
Improvements that Qualify:
New appliances such as air conditioners, refrigerators, ranges, and dishwashers;
New kitchen cabinets, vanities, and/or countertops;
Bathroom improvements such as toilets, sinks, tubs, shower doors, faucets, medicine cabinets, and new tiling;
New light fixtures;
New windows, window blinds, or shades;
Replacement flooring (not repairs).
Ordinary Repairs that Don't Qualify:
Replacing light bulbs, door locks, or window panes;
Replacing cracked or broken tiles;
Refinishing wood floors.
Calculating Rent Increase
When figuring out the cost of the improvements, the owner is permitted to include charges for labor, materials, equipment, sales tax, and delivery fees. The costs for removing an old appliance before a new one is installed, or for demolition and debris removal, may also be included in the total, according to DHCR Policy Statement 91-1, but only if the removal or demolition work is done “contemporaneously” with the improvement. This means that it was done in connection with, and close in time to, the improvement. Financing charges, however, may not be included in the improvement's cost total.
In one case, a tenant complained to the DHCR of a rent overcharge. The owner had renovated the tenant's apartment before the tenant moved in, and he argued that he was entitled to a 1/40th rent increase for this work, including the demolition costs. Although the DRA initially disallowed demolition costs included in the owner's claim for improvement costs, on appeal, the DHCR ruled that the demolition costs should have been allowed. The demolition costs were necessary and were performed at the same time as the vacancy improvements. The owner showed that demolition costs totaling $7,000 included installation of Sheetrock and the taping, plastering, priming, and painting of all walls in the apartment. These costs qualified as allowable demolition costs for which the owner was entitled to a 1/40th rent increase [Fenton: DHCR Adm. Rev. Docket No. RD410011RP (7/28/03)].
Defending Against Tenant Overcharge Challenges
When challenged in a timely manner, any claimed individual apartment improvement cost must be supported by adequate documentation, which should include at least one of the following:
Canceled check(s) contemporaneous with the completion of the work;
Invoice receipt marked “paid in full” contemporaneous with the completion of the work;
Signed contract agreement;
Contractor's affidavit indicating that the installation was completed and paid in full.
Whenever it is found that a claimed cost warrants further inquiry, the DHCR may request that the owner provide additional documentation. If it is found that there is an equity interest or an identity of interest between the contractor and the building owner, then additional proof of cost and payment, specifically related to the installation, may be requested. A tenant may claim that you're not entitled to a rent hike because you and the contractor are somehow related. But even if true, this shouldn't automatically disqualify you from the rent hike.
DHCR Policy Statement 90-10 says that, if the owner and contractor are related, the DHCR may ask for additional proof to make sure that you were involved in an “arm's-length” transaction with the contractor. This means that the contractor actually charged you for the cost of the work and you, in fact, paid that cost. If you submit enough proof of cost and payment, the DHCR should allow you to collect the rent hike. Where the claimed cost is not adequately substantiated, the difference between that amount and the amount of the cost that is substantiated will be disallowed.
A tenant may also challenge your improvement-related rent hike by claiming that you paid too much for the improvement and could have gotten the work done for less money. But the DHCR has rejected this argument.
In one case, the owner submitted documents showing that it made apartment improvements costing $25,500 before the tenant moved into the apartment. The DRA ruled for the tenant and disallowed any rent increase for the owner's claimed apartment improvements. The DRA found that the tenant's legal rent was $1,493 and ordered the owner to refund $56,000, including triple damages. The owner appealed. The DHCR ruled for the owner in part. The owner submitted an invoice and canceled checks to document the claimed apartment improvements. The owner wasn't required to obtain the lowest cost for the work [Extell 516 East 13th St., LLC: DHCR Adm. Rev. Docket No. VD410049RO (9/27/07)].
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