Improving Rental Buildings’ Profitability Through Demolition
Adam Leitman Bailey and Dov Treiman discuss demolition proceedings before the DHCR.
By Adam Leitman Bailey and Dov Treiman
With the passage in June, 2019 of the Housing Stability and Tenant Protection Act of 2019 (HSTPA), owners are desperately seeking ways out of rent regulation in an attempt to recapture the profitability their buildings had on the eve of HSTPA’s passage. Two such exit strategies are “substantial rehabilitation,” available only to deteriorated buildings and “demolition,” generally available to rent stabilized buildings regardless of their condition. Since the HSTPA enables municipalities throughout New York State to bring their housing stock under a form a rent stabilization, these questions are not only of renewed importance in New York City and its suburbs, but potentially statewide, under the administration of the New York State Division of Housing and Community Renewal (DHCR).
Administering Rent Regulation
Governing the demolition process is DHCR’s Operational Bulletin 2009-1. This bulletin deals with demolition applications for three scenarios: rent control, rent stabilization, and non-New York City rent stabilization (The Emergency Tenant Protection Act of 1974 “ETPA”). The rules are radically stricter for rent-controlled apartments than for New York City rent stabilization and ETPA. In these matters, the courts grant extreme deference to the DHCR (Peckham v. DHCR, 12 NY3d 424 (2009).
This includes when the DHCR decides it wants to reconsider matters on its own after a case has gone up for Article 78 review. Porter v. DHCR, 51 AD3d 417, 857 NYS2d 110 (1st Dept. 2008) Under its administration, the DHCR has worked without a specific definition of “demolition,” but “an intent to gut the interior of the building, while leaving the walls intact, has been held as sufficient,” Peckham, supra. Use of the process is mandatory; self-help is prohibited. Lawlor v. 543 Second Ave. LLC, 49 AD3d 449, 854 NYS2d 125 (AD1 2008). The building need not be razed to the ground. Jack LaLanne Biltmore Health Spa Inc.. v. Builtland Partners, 99 AD2d 705, 471 NYS2d 854 (AD1 1984).
An essential part of the entire process is the system of stipends. As discussed below, the landlord has not only to be prepared to pay the stipends, but to prove to the DHCR the ability to do so.
Each tenant who is being evicted is entitled to receive from the landlord the tenant’s reasonable moving expenses. This means that in order to make the application, the landlord is going to have to come up with estimates as to what the moving expenses will be. While the landlord cannot know how much furniture and personal property is in the apartment or whether the tenant is actually going to be moving out of state, the landlord can and must obtain from a moving company estimated costs based on room count and the assumption that the move will be entirely within the City of New York. The moving expenses are in addition to the other stipend discussed herein.
There are provisions for reducing the stipends, but these are based on tenant conduct and the application process must assume that each tenant will receive the full stipend to which they are entitled. The deduction cannot be known at the time of the initial application because it consists of a reduction of one-sixth for each month the tenant stays past the time allowed under the order (and lease) to remain in the premises, a figure unknowable until the order has actually been issued.
In the stipending system, the landlord has three options:
The first option is moving the tenant to a new apartment at the same or lower regulated rent near or in the building being built. For such tenants, the stipend is $5000. This option entails the landlord finding the new apartment.
The second option is moving the tenant to a more expensive apartment where the landlord prepays six years worth of the difference in rent. This option also entails the landlord finding the new apartment.
The third option is using the stipend chart from the Operational Bulletin where the landlord pays the tenant for a minimum of three rooms, the difference between the current rent and the chart’s stipend amount, multiplied by the number of rooms and further multiplied by 72. This stipend is the same for rent control and rent stabilization. This option entails the landlord having no obligation to find the new apartment. It is also the option most landlords use.
The Operational Bulletin sets forth sample amounts for 2008 and directs that the stipend formula be adjusted by one year rent increases according to rent guidelines orders. Thus the 2008 figure has to be adjusted for the eleven rent increases since 2008. Those adjustments bring the amount from the 2008 figure of $526 to a 2019 figure of $639.21.
Thus the formula for a stipend is:
• Count the Number of Rooms in an apartment (but never less than 3) = NoR
• Multiply NoR by $639.21 (or the correct number for the year) = Max
• Subtract Max from the Current Rent = Monthly Allowance
• Multiply the Monthly Allowance by 72 = Total Stipend
• Tenants who would lose governmental benefits because of the stipends may waive them.
Special Consideration for Rent Control
Demolition is only a ground for removal from rent control if the landlord is putting up a new building.
The new building must have at least 20% more apartments than the old building, except if the cost of repairing the violations in the building exceeds the assessed value of the building, then it need not be more than one more apartment in the new building. This does not apply if the building is already largely vacant. The landlord must move the rent-controlled tenants to a new apartment. The stipends are the same as for rent-stabilized tenants. The building permits must already be in place. The landlord must demonstrate that there is no reasonable possibility that the landlord can make a net annual return of 8.5% of the assessed value of the subject property and that lower return is not the landlord’s fault. (Thus the landlord would not want to have the tax assessment reduced by means of certiorari proceedings prior to the demolition application.)
Not all buildings are well suited for a demolition application. Unlike “substantial rehabilitation,” there is no requirement that the building be in deteriorated condition in order to qualify for a demolition application. If a building is genuinely eligible for demolition treatment, the DHCR does not have the discretion to refuse the application.
Landlords will want to buy out rent-controlled tenants before anyone knows demolition is in the air. Experience with cooperative conversions in the 1980’s has taught us that it takes very little to start rumors circulating and rumors inflate buyout prices, create tenant meetings and bring in attorneys willing to work on a contingency. However, landlords must exercise extreme caution in these buyout negotiations as they can readily run afoul of the Antiharassment provisions of the law such as those found in the New York City Administrative Code (See, New York City Administrative Code §27-2004(48)(f-1, f-2 et seq).
It is not necessary to pre-approve loans, but the Owner has to be able to demonstrate that either the deed owner of the building has the financial wherewithal for the entire project or a closely related entity does. It does not require cash on hand for the project. The DHCR examines not only the ability to pay for the tearing down of the building, but all of the other expenses associated with the project. These include:
• Engineering and architects’ fees.
• Permitting, including the fees for the permits as well as the normal business expenses associated with applying for them.
• Demolition costs.
• Construction costs.
• The stipends to which the tenants will be entitled (as more fully discussed below).
• The tenants’ reasonable moving expenses.
• Payment of the tenants’ rent in alternative accommodations, where applicable.
• Attorney and accountant fees.
The application is actually a fairly simple form to which the owner’s attorney attaches such additional documents as appear useful. The agency’s discretion lies in determining whether to authorize a refusal to offer lease renewals based on whether 1) applicant has established financial ability to demolish building, 2) plans for the undertaking have been approved by appropriate agency, and 3) applicant has complied with statutory provisions for relocation of rent stabilized tenants, reimbursement of moving expenses, and payment of stipends. 220 CPS “Save Our Homes” Assn. v. DHCR, 60 AD3d 593, 877 NYS2d 21 (AD1 2009). Neither the DHCR nor the courts will allow extensive discovery in the proceedings before the DHCR. Calamaras v. 23rd Second Ave., LLC, 305 A.D.2d 216, 758 N.Y.S.2d 803 (AD1 2003).
Proof of financial ability can include a letter of intent or a commitment letter from a financial institution, but other proofs of financial capability are possible. If the financing is through a closely related entity, the landlord’s application should be explicit in setting forth that relationship. Enough copies of the application must be provided to the DHCR for them to serve each tenant. Since the attachments can get lengthy, this can mean significant printing expenses. It is not necessary that the actual building permits be attached to the application as it takes so much time for the DHCR to go through its procedure in approving the application that the permits would become stale.
However, where applicable, certificates of no harassment must be pulled as prerequisites to the permits and they too can become stale if pulled too soon. Such certificates are themselves a lengthy procedure, the details of which are outside the scope of this article. Any Golub or eviction notices already issued should be attached to the application. The application should include engineering and architectural plans with the financials including specific reference to those specific plans.
Once the application has been filed, the owner can immediately stop renewing leases. This requires issuing Golub notices to all the tenants. These are served in the normal rent stabilization methods, either by regular or certified mail. It should not be return receipt requested. The post office receipt for the mailing together with an affidavit of service is sufficient proof of the mailing.
The Golub notice must:
• Indicate that it references a proposed demolition.
• Set forth that the owner has the financial capability above described.
• Set forth the plans above described.
• Set forth that the tenant may remain in occupancy during the pendency of the application.
• Advise the tenant that they need not move out until the DHCR has issued its order approving the application, giving the move out dates, stipends, and other conditions DHCR imposes.
• Advise the tenant that if the application is withdrawn or denied, they will be offered a lease renewal.
Rents cannot be increased for any reason during the pendency of the application. If the application is denied, the owner loses the increases that could have been charged and lease renewals are made on the usual 90-day notice to the tenants, with rents frozen until the offer is accepted. The DHCR will direct such other proceedings as it determines which could even include evidentiary hearings, but will not necessarily include such hearings. The DHCR , in the past, has taken an inordinately long time to process the application but this firm has created ways to facilitate the process which are beyond the scope of this article.
The landlord selects apartments if using the two methods for calculating the stipends that entail selecting apartments. The tenant has a right to challenge the suitability of such selected apartment.
The landlord pays the stipends when the tenants move. tenants’ delay or refusal to move reduces or eliminates their entitlement to the stipend and subjects them to eviction proceedings. Tenants have until the later of the expiration of their lease or the date set forth in the DHCR’s order to move out. If they do not move out on their own, the actual eviction of the tenants is by way of an ordinary holdover eviction proceeding in Civil Court. However, if the owner has a favorable decision from the DHCR, there is nearly nothing to prove in that proceeding, making it amenable to summary judgment.
Demolition proceedings before the DHCR are extremely technical and require precise adherence to the exacting requirements of the various laws. Expect these applications to take years and be battled in the courts despite the number of our comrades retiring from the practice of law or taking different jobs. However, they are also one of very few options rent-regulated landlords have left to restore profitability to their properties and deregulate buildings with rent regulated apartment in the aftermath of the most punishing anti-free market rent laws in American and New York history.
Adam Leitman Bailey and Dov Treiman are partners at Adam Leitman Bailey, P.C.