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DHCR to loosen grip on tenant windfalls.

"Luxury decontrol" was the buzzword at the close of the legislative session but the resulting law will affect very few owners. The process of targeting apartments for decontrol, namely, verifying the existence of households with a total adjusted gross income of $250,000 for two consecutive years and renting an apartment for at least $2,000 per month on Oct. 1, 1993 is not going to make a significant impact in managing the vast majority of rent regulated buildings. The real bonuses to the real estate industry are that the legislature finally enacted into law the owner's right to collect 1/40 of the costs of individual apartment improvements and created an amnesty for owners who failed to file annual registrations.

40-Month Period for Return on Investment Part of the Law

Previously, Governor Cuomo and Angelo Aponte, commissioner of the Division of Housing and Community Renewal ("DHCR"), were rallying support for changing the monthly recoupment period for improvements to apartments from 1/40 of costs to 1/72 of costs. This wold have greatly reduced the owners' only significant means of increasing individual apartment rents. However, the Rent Regulation Reform Act of 1993 ("Reform Act") allows the industry to hold onto the 40-month recoupment period. This aspect of the law applies to both rent Stabilized and rent controlled apartments.

Moreover, the law allows these rent increases to be effective immediately for rent controlled tenants who consent in witing, adopting the existing procedure for rent stabilized tenants. Previously, owners of rent controlled apartments had to apply to DHCR and wait months or years before these rent increase could be charged.

Most improvements are eligible for increases. However, the caveat added by the legislature is that the owner cannot obtain rent increases for replacing items which have not exceeded their "useful life."

Registration Amnesty Created in New Law

One of the greatest obstacles in purchasing buildings has been the absence of complete records of annual rent registrations filed with the DHCR.

With the legislative approval of the "Reform Act", on July 7, 1993, the legislature eliminated the penalties for missing or late registrations, save for a $5.00 late fee, "provided that increases in the legal regulated rent were lawful except for the failure to file a timely registration."

In the past, a missing registration would result in a freeze in rents to the year prior to the missing registration year, plus the imposition of treble damages. It was not atypical to have treble damage assessments of $50,000 to $100,000 merely because a registration for 1987 couldn't be located by the owner or the agency.

This change in the law is an enormous victory for owners as it removes the DHCR's blanket presumption that every clerical filing error or missing document was evidence of a willful overcharge.

Now the law explicitly states as follows:

"In no event shall such treble damage penalty be assessed against an owner based solely on said owner's failure to file a proper or timely initial or statement."

This change in the law should mean that the value of buildings will increase and sales should pick up. Now, banks can more freely unload foreclosed properties and owners will not face debilitating treble damage assessments.

However, this change in the law does not mean complete amnesty. There are still limitations. First, this legislation only applies to DHCR matters docketed on or after July 1, 1991. Therefore, lingering Rent Overcharge complaints filed prior to July 1, 1991, will still have to be defended vigorously. The "easy cure" $5 penalty for now filing a late registration will not be available.

Owners are advised to identify any rent overcharge complaints commenced on or after July 1, 1993, which were already decided and are now pending on administrative appeal. If an overcharge was assessed against the owner, based upon missing registrations, the administrative appeal should be amended to seek to have the DHCR apply the new law and reverse the overcharge finding.

Owners who have gaps in their building registrations can now take the preventive measure of curing such missing registrations without penalty, avoiding future, protracted DHCR proceedings.

Roadmap Required for Luxury Decontrol

The good news is that the signing of the "Reform Act" plants the seeds for a plan to end the owners subsidizing those tenants who were never intended to be protected. However, only the seeds are planted. The real estate industry will have to wait for a future legislative session to see whether any realistic plan has taken root.

Under the current version of the law, if an apartment, renting for $2,000 or more per month on Oct. 1, 1993, becomes vacant, it is decontrolled.

Luxury decontrol, with tenants in occupancy, is trickier. Owners must initiate the procedure as follows: Target apartments with a monthly rent of at least $2,000 on Oct. 1, 1993.

Send income certification forms by May 1 of each year to "high rent apartments" to determine if the primary residents have an adjusted gross income in excess of $250,000 per year for the two prior years. The tenant has 30 days to respond.

It is doubtful that those occupants who meet this "luxury decontrol" test will respond within the required 30 days. The only route an owner has is to file a petition with the DHCR seeking such information or disputing information supplied by the tenants.

Absent this administrative appeal process, the owner has no other means to obtain luxury decontrol of an occupied apartment.

Ironically, the natural reaction of tenants will be to make every effort to minimize the presence of "all persons who occupy the housing accommodations as their primary residence" to reduce the reportable income. This then, will provide owners with more ammunition in both non-primary residence and succession cases.

It is also important to note that "luxury decontrol" applies to Rent Controlled tenants as well. These apartments may be ripe for non-primary investigations since the apartments have been continuously held by the same persons for decades. If an owner has religiously applied for and received MBR increases, these high rent control apartments will be likely targets for decontrol.

Specifically excluded from luxury decontrol are apartments "which became or become subject to [the Rent Stabilization or Rent Control Laws] by virtue of receiving tax benefits pursuant to [RPTL 421a, or, J-51] or by virtue of Article Seven-C of the Multiple Dwelling Law."

One has to view, with irony, the end result of "luxury decontrol."

The legislature only touched the tip of the rent regulation morass, affecting those tenants who can well afford to litigate the right to remain under rent regulation. Decontrolling a small number of apartments through luxury decontrol will not serve to balance the inequities imposed upon owners under rent regulation but rather, it leaves owners to struggle under 3 percent and 5 percent per year increases for the great majority of apartments in New York city.
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Title Annotation:Legal Review; Division of Housing and Community Renewal must follow provisions of Rent Regulation Reform Act of 1993 allowing New York, New York apartment building owners to collect 1/40 of costs of improvements to apartments and amnesty for owners failing to file annual registrations
Author:Schwartz-Sidrane, Karen
Publication:Real Estate Weekly
Date:Jul 21, 1993
Previous Article:The trend toward securitization.
Next Article:Not always better to give than receive.

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