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Owners should consider hardship application.

Faced with rents that do not cover actual operating costs, multi-family building owners and cooperative corporations that own units should consider applying for hardship increases for low rent apartments.

Believe it or not, such increases are easier to obtain for rent controlled units than rent stabilized units.

"Rent control hardship is an amazing thing for landlords," said Jeffrey Turkel, a partner in Rosenberg & Estis who is representing owners who are seeking these increases. "It's one of the few instances when the law is on their side."

Although hardship increases are supposed to provide a cushion for owners so they can not only support their buildings but actually make a profit, in reality, these increases have been so hard to obtain in the past that they have provided little to no relief.

The Rent Guidelines Board, nevertheless, has consistently used the availability of these increases as a reason to keep rents artificially low.

Recently, Turkel helped win a challenge made by the sponsor of a cooperative building, and slowly, more owners have been able to achieve hardship increases, particularly for rent controlled units.

Applying for the increases is also more difficult for rent stabilized units. The State operated Division of Housing and Community Renewal (DHCR), which administers the increases, demands a great deal of minute documentation, including rent rolls and expenses, and auditors are known to request even more information.

"They want to see canceled checks and every bill, and insurance policies and real estate bills and water and sewer bills where they could just access it [on computers]," said Jack Freund, executive vice president of the Rent Stabilization Association (RSA). "To that extent, the proof is kind of excessive."

But the application for a rent control hardship increase is relatively easy. "You just need last year's records plus four years of maintenance records n said Turkel.

Dan Margulies, executive director of the Community Housing Improvement Program (CHIP), said the key to getting the increase is not to worry about actual repair expenditures, but to accept the rent control formula amounts on the application.

This provides an easy out for owners who just want to do it and get it done without sifting through shopping bags of receipts.

Depending on the size of the building, he said, you can take a percentage of rent for repair costs without documentation.

"The forms are not horrendously complicated," Margulies noted. "What hangs up the rent control application is a nitpicking review of every $15 can of paint that is purchased, along with requests for copies of cancelled checks and invoices. It's not worth it in most cases to spend two or three years putting together the documentation when you can take the formula that provides you with the maximum statutory increase anyway."

But there are no formulas for rent stabilized apartments, and Margulies says the owners have to go through a "horrendous" documentation process.

Unfortunately, rent stabilized units also have a 6 percent cap on all increases, whereas rent controlled rents can jump immediately to break even, "even if its a 100 percent increase in rent," and then there is a cap on further increases until the owner achieves a "fair return."

"But you break even on a operating basis in one leap, and that's very important for a hardship increase," explained Margulies. "For rent stabilization, you can get your increase and still lose money. If you need a 15 or 20 percent increase to break even, you won't get it. And by the time you get it, inflation and other costs will put it out of reach again."

While it can take years for the application to be approved, at least some owners are beginning to see these increases, and in the cases of rent controlled apartments, the increases are joyfully staggering to cash-strapped owners.

"We've had tenants that went from $400 to $4,000 over ten or fifteen years," reported Turkel, who litigated the Peter Sharp case.

He said DHCR issues the rent control hardship increase in two stages.

First, DHCR determines the dollar number needed to get the owner to the break even point. "These have been anywhere from $30 to $600 increases and are retroactive to four months after the application is filed, so by the time they issue the order it could be 20 to 24 months," Turkel explained.

After the break even, there is a return of 8.5 percent on the capital value. "That can also be quite large," said Turkel. "DHCR limits this increase to 7.5 percent per year, so if you have a tenant with an order of $3,000 per month this can be staggered over 15 years."

The RSA has been helping its small owner members apply for these increases. "They are still running owners through the mill to get them, but at some point they say, `Alright,' and are granting the increases," said Freund. "It's slightly gratifying to see a few of those hardship increases have been granted."

For rent stabilized units, there is a six percent limitation on increases and the only type of stabilization increase available is for "comparative hardship," where the owner would compare costs for a three-year period in the past and the present three years on a net income basis.

But Turkel notes the time frame doesn't work out to be the last six years. "The base period is 1968 to 1970," he said. "Unfortunately, most people don't have records for that. So we'll take the first three years after a bona fide sale of the building."

This scenario also works for a co-op sponsor like the late Peter Sharp. That hardship case, begun many years ago and finally decided in August of 1995 in favor of the estate, was a victory for owners.

Turkel was able to obtain an increase of 55.54 per room, capped at 6 percent per year, that will be retroactive to June 1, 1987, 30-days after tenants were notified of the original hardship application filing.

Under DHCR rules, after the rent increase order is received, tenants have 30 days to either begin paying the new amount or give a 60-day written notice to cancel the lease. They are allowed to pay the old rental amount during this time before they move out.

Sharp had purchased the 117-unit property at 203-205 East 72nd Street and an adjoining 33-unit building in 1977 and started offering apartments for sale in 1978. For purposes of the hardship application, 75 units were counted that remained in sponsor hands.

Turkel warned that DHCR treats unsold shares differently and there have been no DHCR rulings on such applications where a person bought the unsold shares for a block of apartments.

DHCR was not able to respond before deadline as to its policies.

The hardship rent increases are particularly beneficial for cooperative sponsors and buildings where the other shareholders own the rent regulated units. Margulies explained the jump in rent serves to concentrate the tenant's attention on their cost of living and often precipitates a move or sale.

"So even though the absolute dollar amount isn't dramatic in every case," he said, "just the fact of the increase makes people do things like move or buy."

The Senior Citizen Rent Increase Exemption is one of the safety nets available to the low-income elderly tenant if the rent is raised. But Turkel noted, "These increases are about landlord hardship, not tenant hardship. The tenants have had a tremendous break over the years."

If a sponsor owns several units, Margulies said, it would be in the corporation's interest to help apply for the increases because it would help these shareholders pay the maintenance charges and keep them financially stable.

Co-op attorney Edward T. Braverman agreed. "I would recommend that every co-op do it because if the sponsor is able to increase his cash flow, it will rebound for the benefit of the co-opt There will be a stronger sponsor and he will be less likely to default on maintenance or any loans secured by the unsold shares."

Freund believes the system could be streamlined, with an uneconomical rent level set at which the application should just automatically be granted, so long as the owner has been maintaining services.

There are many studies showing actual unit maintenance costs to run well over $400 to $500 a unit and yet owners are all too familiar with the many rent controlled and stabilized apartments where the legal rent is much, much less.
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Title Annotation:hardship rent increases for low-rent apartments
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Nov 29, 1995
Previous Article:Property improvements go with land.
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