Another blow to landlords: New MCI rules are made retroactive, nixing some rent hikes

Landlords who rushed to apply for rent hikes before the new rent stabilization law took effect may not be able to escape new restrictions on the major capital improvements program.

Under the Housing Stability and Tenant Protection Act of 2019, which was signed on June 14, properties can only qualify for MCIs — rent increases granted in exchange for building-wide improvements — if more than 35 percent of their apartments are rent stabilized. In the months leading up to the law’s passage, some landlords scrambled to apply for MCI increases, fearing that the program would be eliminated. The legislature ultimately kept MCIs but limited annual rent increases to two percent in New York City. MCI increases also now expire after 30 years.

However, in a setback for landlords, the state’s division of Homes & Community Renewal says applications that were pending at the time the HSTPA went into effect must abide by the 35 percent rule. Still, both landlord and tenant attorneys anticipate challenges to this new restriction to play out in court in the coming years.

David Hershey-Webb, a partner with Himmelstein, McConnell, Gribben, Donoghue & Joseph, said “pending” should not only apply to new MCI applications but also to those that are being challenged. He pointed to a recent New York Appellate Division decision that found that because overcharge claims were active when the HTSPA — which extended the statute of limitations on such claims — was passed, the claims could move forward.

“The rationale for the 35 percent rule is the same whether it’s a new application or an application on appeal,” he said, noting that the MCI program was intended to incentivize renovations in rent-stabilized buildings — an incentive that isn’t necessary if most units are market rate.

Martin Heistein, partner at Belkin Burden Wenig & Goldman, said HCR has indicated that in cases where a tenant had an active petition filed with the state challenging an MCI, the 35 percent rule may apply.

“I think that is completely outrageous and completely violates any notion of fairness or due process,” he said. “To apply this rule retroactively, I think HCR is wrong, and it’s going to result in a great deal of litigation.

David Shurin, a real estate consultant who specializes in MCI applications, said he’s already seen clients have their applications denied due to the 35 percent threshold rule, even though they were filed before the HSTPA was enacted.

“That’s the problem. I have one application, it could’ve been approved last February, last April, but they didn’t do it,” he said. “They just waited for the law to change.”

He noted that applications can take several months or even years to be processed. He anticipates challenging additional application rejections in the coming months.

The industry is waiting for the state to provide additional guidance on other elements of the HSTPA. HCR Commissioner RuthAnne Visnauskas indicated on Friday that a request for proposals would be issued in the near future for a consultant to help create the “schedule of reasonable costs” for MCIs, which will provide guidelines for acceptable prices for certain types of renovations. The schedule should be ready by June 2020.

Correction: An earlier version of this story misstated the MCI caps. It’s two percent.