On August 31, 2022, the DHCR proposed changes to various sections of the Rent Stabilization Code. While we will have a summary of those changes for you in the coming days, we thought it worthwhile to tell you immediately about the proposed additions to the Code that would govern the “First Rent” principle. In effect, these additions would eliminate the concept of “First Rent”, and replace it with numeric formulae that are strictly tied to the previous stabilized rents for the respective housing accommodations.
Recall: the existing “First Rent” principle has been in effect since the 1970’s , and is premised upon the elimination of a housing accommodation due to combining, splitting, duplexing, or providing additional space to the extent that the old housing accommodation no longer exists. As the unit no longer exists, its rental history is no longer relevant, and the rental history of the newly-created unit begins with the “first rent” charged to and paid by the first tenant of the newly-created unit. DHCR now proposes to eliminate this principle, with the following:
- When combining 2 vacant units or combining 1 vacant unit and 1 occupied rent regulated unit, the rent for the new unit is the combined legal rents for both previous units, plus applicable guideline increases and IAIs associated with those units.
- Combining a regulated unit with a deregulated unit results in the creation of a regulated unit.
- When taking space from a regulated unit and adding it to a deregulated unit, both apartments shall be regulated.
- When adding space to a vacant unit, the initial rent shall be the prior rent of that unit, increased by a % that equal to the % increase in the dwelling space, plus any applicable guideline increases and IAIs that “could be authorized” for the unit prior to the alteration of its outer dimensions.
- Any of the above increase may be denied if any applicable vacancy is due to harassment, fraud or other acts of evading the rent laws, in which case the rent would be sent in accordance with the DHCR’s default formula.
- Combinations, modifications, divisions, or changing dimensions pursuant to “preservation regulatory agreements” with governments or their agencies shall have rents established based on initial rents set by such government/agency.
When decreasing the size of a vacant unit, the initial rent shall be the prior rent of the unit, decreased by the same % the square footage of the prior unit was decreased by, plus any applicable guideline increases and IAIs that “could be authorized” for the unit prior to the alteration of its outer dimensions.
- When combining apartments, the “remaining IAI allowances” (the unused portion of the $15,000 maximum permitted every 15 years) for each of the units combined may be used for the newly-combined unit.
- When combining apartments, the owner must designate a “surviving apartment” for purposes of registration and use the designation of that “surviving apartment” when providing a designation for the newly-combined unit (e.g., if combining 1A and 1B, you must call the new unit 1 A or 1B).
- IAIs taken for a newly-combined unit must adhere to the existing rules pertaining to IAIs, including the notification requirements on the DHCR portal.
- Owners must maintain all records and rental histories of all combined units, both prior to and after the combination. Prior rental histories of the prior units are now fully-relevant in any overcharge or other rent-setting proceeding, pertaining to either the prior units or the newly-combined unit.
As with any proposed amendment, these proposed additions are subject to a 90-day public comment period, and are themselves subject to change. Moreover, as with certain of the 2014 Code amendments, the additions above will most likely be held to be prospective only, although this remains to be seen in the final text of the additions and/or in the results of relevant court proceedings where application of the additions are in issue. In any event, owners are advised to complete any on-going “First Rent” projects, and commence a lease for the new unit, as soon as possible.