How to Use A Tenants’ Association to Defeat an MCI Application
By Adam Leitman Bailey and Dov Treiman
I. General Overview
Major Capital Improvement Increases (MCI’s) are a concept that parties can contract for if they are not subject to rent regulation. However, generally speaking, unregulated residential tenants rarely do contract for them. They are therefore, in a practical sense, uniquely belonging to the world of rent regulation and are a means whereby landlords can profit from the installation of new or replacement systems in the building complex.
In regulated housing, a landlord may only obtain an MCI upon application to the New York State Division of Housing and Community Renewal (DHCR).
While the Rent Stabilization Code (RSC) lists the most common of the systems eligible for MCI treatment, any building system can qualify, provided that it is:
- (a) deemed depreciable under the Internal Revenue Code, other than for ordinary repairs; and
- (b) is for the operation, preservation and maintenance of the structure; and
- (c) is an improvement to the building or to the building complex which inures directly or indirectly to the benefit of all tenants, and which includes the same work performed in all similar components of the building or building complex, unless the owner can satisfactorily demonstrate to the DHCR that certain of such similar components did not require improvement.
If the system is not on the RSC list, there is a procedure the landlord can employ for qualifying it as well. However, it is very rare that off-list systems are installed and therefore unnecessary to discuss them here.
MCI’s are written into the rent stabilization system as a means of incentivizing the landlord to upgrade the building as a whole as well as its individual apartments. The incentive is that most basic to capitalism – profit. Therefore, while some tenant advocate organizations in New York City seek to eliminate MCI’s as another means of landlord profit, it is so strongly part of the entire system one can assume that so long as there is rent stabilization, there will be MCI’s.
The profit, crudely on its face appears from the fact that an improvement appears to become 100% reimbursed to the landlord seven years after it is made. Actually, that is an over-simplification. The granting or denial of the application can take years before the DHCR and usually does. It therefore leaves inflation unaccounted for. On the other hand, once the rent increase is put through, it becomes part of the base rent and a means towards the landlord’s goal of achieving high rent deregulation when the legal rent exceeds $2,000 per month. Since it is part of the base rent, it is also subject to the annual or biennial rent increases as well as vacancy increases. Therefore, the recovery can be much faster than the seven years after approval of the application.
Buildings converted to cooperatives and condominiums present special issues. While the no longer rent-stabilized units are part of the arithmetic for computing the increase, they do not themselves generate increased revenue to the landlord from an MCI.
Therefore, the system is really designed for an MCI increase in a cooperative or condominium converted building to be just one more tool for the andlord to drive the rent regulated tenants out of the building prior to selling the apartments.
However, that does not mean tenants are without their weapons in such matters. The bulk of this article will explore that arsenal.
II. MCI’s A Highly Technical Application
Only a very foolish landlord would undertake an MCI application in a large building with a vigorous tenant organization without having all its ducks lined up. However, accidents and mistakes do happen and sometimes facts uncomfortable for the landlord are simply papered over. All of these create vulnerabilities for the tenant advocates to use to their advantage. It is the tenant advocate’s job to find these flaws.
III.The Requirements of MCI
a.The work must affect all residential units in the building.
In order to qualify for an MCI, the improvement must affect all residential units in the building. It need not have any effect on the commercial units at all.
However, “all” does not really mean “all.” If a building has, for example, 1000 windows, the replacement of 900 windows would not qualify for MCI treatment. However, the replacement of 997 windows would. These numbers are only given as examples. They are not fixed percentages, but merely an indication that the DHCR has the discretion to construe “almost all” to be “all” for the building. Also, windows are only given as one example of the many kinds of building systems that could be replaced. However, they are a very special system because:
i.They are easy to count; and
ii.They normally affect all units in the building.
Other examples of building systems that come down to a question of whether all of the apartments are affected would be the rewiring of the building. While there would not normally be a valid reason to skip a particular apartment for rewiring, there could be a valid reason for skipping replacement of a particular window where, for example, a window identical to the new ones going into the building had to be replaced a year before the MCI window replacement program started.
Therefore, the Tenants’ Association must count the building systems that were actually replaced. The count must be precise. If too few systems were replaced, the application for MCI treatment must be denied.
b.The things being replaced must be too old to be within their “useful life” as defined by the RSC.
The RSC sets forth a list of what is a “useful life” for any particular building system and in some cases distinguishes amongst various kinds of particular systems. The Tenant’s Lawyers can guide the Tenants’ Association to the particular RSC provisions to ascertain which useful life (or lives) apply to the particular building systems for which the landlord is laying claim.
Therefore, The Tenants’ Association must ascertain both the specific type and the age of the systems that were replaced. If the application for MCI overstates the age of the building system or misrepresents the type that was replaced, the application could be defeated.
c.The increase must be 1/84th of the actual cost.
It will be necessary for The Tenants’ Lawyers, sometimes with the assistance of certified public accountants, to scrutinize the actual MCI application to see if the costs set forth are reasonable, appropriate, and accurate, both as to the law, and as to standard accounting practices.
d.The leases must authorize the charge.
MCI’s are only authorized with respect to a particular apartment if that apartment is held by the tenant pursuant to a lease that actually includes a lease clause authorizing MCI increases. It is possible that the leases do not contain such clauses. It is also possible that neither the landlord nor the tenant is actually in possession of any lease.
It will therefore be necessary for The Tenants’ Association to gather copies of all the leases of all of the apartments fighting the increase.
It will also be necessary for staff at The Tenants’ Lawyers to study these leases to ascertain whether they have MCI clauses.
e.The application must have been filed within two years after the completion of the installation of the windows.
It will therefore be necessary for The Tenants’ Association to check the precise timing from the completed installation to the first application for MCI increase.
f.The improvements cannot have been funded out of a cooperative’s or condominium’s cash reserves.
While it is unlikely that such funding is used, The Tenants’ Lawyers will have to trace the funds.
g.The MCI application may not be granted if the landlord is failing to furnish essential services or if there are immediately hazardous conditions in the building.
It will therefore be necessary for The Tenants’ Association to inspect the entire complex to search for such breaches of services or violations. It is often prudent to hire engineers to do so.
h.The MCI application will not be granted if there is shoddy workmanship.
It will therefore be necessary for The Tenants’ Association to survey whether all of the claimed building systems are functioning properly and to identify those which are not.
i.The MCI application must contained detailed financial proofs of the expenditures the landlord claims.
It will therefore be necessary for The Tenants’ Lawyers to examine these proofs and determine if there are flaws in them that can be exploited to knock out the application.
IV.Special Equities
a.The RSC allows the DHCR to consider special or unique circumstances with regard to the entire building and with regard to individual apartments to ascertain if there is anything that makes imposition of an MCI with respect to a particular apartment inappropriate.
It will therefore be necessary to The Tenants’ Association to gather volunteers to interview individual tenants with respect to their peculiar situations that may make for unique circumstances excusing the imposition of the MCI increase.
It will therefore be necessary for The Tenants’ Lawyers to train these volunteers. Where it appears from a volunteer’s report that there is something special about a particular apartment, The Tenants’ Lawyers attorneys will have to re-interview the affected tenants. Training the volunteers entails:
i.Having the volunteers keep detailed records of who was interviewed, when, and where.
ii.Having the volunteers asking questions about health, income, economic hardships, special expenses, senior citizen status, disabilities, special reasons that the claimed improvement would be of no use to a particular apartment, any other unique circumstances the interviewed person can think of.
iii.Having the volunteers make and keep copies of all notes of all interviews and turning over one copy of the notes to the Tenants’ Association Interview Captain.
b.Certain senior citizens may be exempt from the MCI, particularly those who qualify for Senior Citizen Rent Increase Exemption (SCRIE) treatment.
It will therefore be necessary for The Tenants’ Association to ascertain if any of the affected apartments are subject to SCRIE. Generally speaking such Seniors or those who manage their affairs will be able to identify the affected Seniors to the Tenants’ Association.
V.Calculating the MCI
a.The RSC has MCI’s apportioned over the building by using a ratio based on the building’s total room count compared to the number of rooms in a particular apartment. The formula works approximately as follows:
ROOMSParticular Apartment x TOTAL COST OF IMPROVEMENT
84 x ROOMSEntire Building
Equals
Increase to Monthly Base Rent
For example:
If a landlord has a construction project which costs $42,000 which is in all other respects qualified for MCI treatment, and the tenant in question has a five room apartment and there are 1000 rooms in the entire building, and the tenant’s rent was, before the MCI, $500 per month, the formula would look like this.
ROOMSParticular Apartment = 5
TOTAL COST OF IMPROVEMENT = $42,000
ROOMSEntire Building = 1000
Initial Base Rent = $500
5 x $42,000 + $500 =
84 x 1000
$210,000 + $500 =
84,000
$2.50 +$500 = $502.50
Thus, under this example, the new base rent upon which all future increases would be calculated becomes $502.50.
We have purposely selected artificially low and round numbers to illustrate the formula. These numbers have nothing to do with any particular building complex. They have everything to do with how the calculations work. Note the number “84” is fixed directly in the RSC. Everything else is fictitious.
It should also be noted that the formula for calculation of MCI’s is meant to apply to any kind of improvement the landlord may make. So, although logic would seem to demand, standing in a vacuum, that the MCI rent increase with regard to windows, for example, would be based on how many windows are actually in a particular apartment, that is not part of the calculation. Since MCI’s are allowed for items like trash compactors that aren’t actually in particular apartments, the “room count” formula is used for all MCI’s, even if logic would seem to be out of whack with particular MCI’s that clearly benefit some apartments more than others.
b.What is a “room”?
The definition of “room” for purposes of the RSC for purposes of an MCI is highly technical and beyond the scope of this article.
On the subject, the DHCR states:
The definition of a room for MCI purposes only is as follows:
-
- A windowless kitchen containing at least 59 square feet or a kitchen of any size with window. In either case, a kitchen must be enclosed by at least three sides, excluding the side(s) that contain(s) the entranceway. or
- An enclosed area with window containing at least 60 square feet. or
- An enclosed area without window containing at least 80 square feet.
Bathrooms, walk-in closets, porches, terraces and hallways are not rooms.
There are more details to the qualifications. However, there are certain principles of which you should be aware:
“Rooms” include all residential rooms in the entire building, regardless of how many are rent regulated, unregulated, occupied, unoccupied. They do not include commercial space. They are also unaffected by alterations made to the building.
If, for a example, the original “G” line to a particular building, was architecturally designed to have seven “rooms” as the word, “room” is understood in this context, the fact that two bedrooms removed a partition so as to make one larger bedroom does not make a particular apartment into a six room apartment when it is a G line apartment. It still counts as seven. This is particularly important in building complexes where the sponsor of a cooperative or condominium conversion is, in fact, combining various apartments throughout the complex and changing the room counts of the original architecture.
It is therefore necessary that The Tenants’ Association undertake a study of the entire complex as originally designed to see how the total room count as designed compares to the room count set forth on the MCI application REGARDLESS OF STATUS OF PARTICULAR APARTMENTS.
It is also necessary that The Tenants’ Association provides to The Tenants’ Lawyers an analysis of the number of rooms for each line in the complex. This will enable The Tenants’ Lawyers to ascertain whether the individual apartments’ room counts as set forth in the MCI application is correct.
c.Maximum increases
i.All tenants
MCI increases cannot amount to a higher increase in any one year of more than 6% above the then current base rent. Extra increases are carried forward. The amount of an increase with any particular apartment therefore becomes calculated not only based on the room count as above described, but also on this 6% ceiling. We will illustrate.
An apartment has a base rent of $500 per month. The room count MCI increase calculation entitles the landlord to an increase of $45. However, 6% of $500 is only $30. The landlord is therefore entitled to a $30 increase per month in the first year of the MCI increase and a $15 increase in the second year of the MCI increase. Please note, these spread forward increases are calculated annually and have nothing to do with when the lease is set to expire. The spread forward rent increases take place on the anniversaries of the first increase which is unlikely to coincide with the lease’s expiration date.
ii.Senior citizens
Those senior citizens who are eligible for SCRIE cannot have their rents increased above 1/3 of their annual household income. The rest of the MCI increase simply passes to the landlord as a real estate tax credit instead.
iii.Disabled persons
There are no exemptions in the RSC from MCI’s with respect to disabled persons. However, one could argue that they have a special circumstance that the DHCR should consider before making an award. The Tenants’ Association interviewing team should carefully note all disabilities.
VI.Concluding Observations
a.There is nothing automatic about the granting of an MCI application. A strong showing on behalf of the tenants that the application should be denied has historically resulted in the denial of many of these applications.
b.While tenants acting individually can, on occasion, defeat an MCI application, they stand a vastly inferior chance of doing so, compared to the organized work of a good solid Tenants’ Association.
c.It takes a great deal of homework by and on behalf of the tenants to effect the denial of an MCI application.
d.MCI applications are rarely defeated by law firms who do landlord-tenant work only as a sideline, although firms doing exclusively tenant work or exclusively landlord work enjoy no advantage over those who represent either side, depending on who retains them first.
e.In order to maximize the chances of defeating an MCI application at minimum expense to the tenants, The Tenants’ Association and The Tenants’ Lawyers will have to develop a strong working relationship. To that end, all of the principles that make a good Tenants’ Association are most particularly true. The Association must be run fairly, transparently, and in a manner that earns the full faith and confidence of the tenants so that when Association leaders confer with The Tenants’ Lawyers, the lawyers can rely on what is being said and act accordingly. Such a system inevitably strengthens the collective position of the tenants in MCI applications so as to get the proper presentations prepared to make the MCI either denied or long delayed.