How to Escape Rent Stabilization by Substantially Rehabbing Your Building

Although it’s currently a favorable rent regulatory environment for tenants in New York City, there are still a few ways to deregulate a rent-regulated apartment. One way that remains untouched by policy makers requires an owner to “substantially rehabilitate” their building to be exempt from rent stabilization.

If you make major renovations, your building may no longer be covered under rent stabilization. The substantial rehabilitation exemption law says that buildings “substantially rehabilitated” as “family units” on or after Jan. 1, 1974, are exempt from rent stabilization. We’ll go over the basic criteria for the Division of Housing and Community Renewal (DHCR) to deem a building as substantially rehabilitated as defined under Rent Stabilization Code Section 2520.11(e) and DHCR Operational Bulletin 95-2. And we’ll discuss the required documentation necessary for owners to support a claim of substantial rehabilitation.

Replace Building’s Major Systems

The DHCR will find that a building has been substantially rehabilitated if at least 75 percent of the building-wide and apartment systems contained on the following list have been completely replaced with new systems. Additionally, all ceilings, flooring, and plasterboard or wall surfaces in common areas must have been replaced; and ceiling, wall, and floor surfaces in apartments, if not replaced, must have been made as new as determined by the DHCR.

The list of Building-wide and Apartment Systems include: Plumbing; Heating; Gas Supply; Electrical Wiring; Intercoms; Windows; Roof; Elevators; Incinerators or Waste Compactors; Fire Escapes; Interior Stairways; Kitchens; Bathrooms; Floors; Ceilings and Wall Surfaces; Pointing or Exterior Surface Repair as needed; and all Doors and Frames, including the replacement of non-fire-rated items with fire-rated ones. In buildings that don’t contain all 17 of the systems listed, the owner need only replace 75 percent of the systems pre-existing in the building in order to be eligible for the exemption.

In one case an owner didn’t replace enough building systems for a substantial rehab. The DHCR found that the plumbing system wasn’t replaced because only horizontal plumbing was changed and problems with the existing plumbing system remained. Incinerators or waste compactors weren’t replaced. The boiler and fire escapes weren’t replaced. And, contrary to the building plans, kitchen cabinets, countertops, ranges, and refrigerators weren’t replaced. These five systems represented more than 25 percent of the total building systems that should have been replaced to qualify for a finding that the building was substantially rehabilitated [29 Avenue B Tenants Assoc., October 2012].

Building Was In Substandard Condition

In addition to a substantial rehabilitation classification requiring replacement of 75 percent or more of building-wide systems, the rehabilitation must also have been “commenced in a building that was in a substandard or seriously deteriorated condition.”

According to the DHCR, the extent to which the building was vacant of residential tenants is indicative of whether the building was in fact in such condition. If the rehabilitation was started in a building that was at least 80 percent vacant of residential tenants, the DHCR says that in this case, it will presume that the building was substandard or seriously deteriorated at that time.

In one case, an owner claimed that the building was exempt from rent stabilization based on substantial rehabilitation after Jan. 1, 1974. Although the District Rent Administrator (DRA) found that the owner had replaced at least 75 percent of the building-wide and apartment systems, the building wasn’t in a substandard or seriously deteriorated condition when the owner did the work.

The owner appealed, claiming that the DRA’s findings were mistaken. The owner said that the entire building was vacant and dilapidated on or before December 2005 and remained vacant until it started the rehab work in August 2006. The DHCR ruled for the owner. The owner had submitted to the DRA a statement that any remaining tenants had moved out of the building during 2005. In addition, the owner’s architect had submitted a statement that when construction started in August 2006, the building was vacant, in very bad condition, and needed major renovation. Because the building was at least 80 percent vacant at the time that work began, the owner met the requirements for exemption based on substantial rehabilitation [Cholakian, January 2008].

Obtain an Advisory Prior Opinion

It’s a big financial undertaking to begin a substantial rehabilitation process for a rent-stabilized building. As such, you can obtain an advisory prior opinion before you begin the rehabilitation project to see if it will qualify the building for exemption from rent stabilization laws.

The DHCR will evaluate your rehabilitation plan, based on your contracts, applications for building permits, blueprints, etc., and determine if it meets the scope of work necessary to constitute substantial rehabilitation.

In one case, instead of requesting an advisory prior opinion, an owner asked the DHCR to rule on whether its building was exempt from rent stabilization due to substantial rehabilitation. The DRA closed the case without making a ruling. The owner appealed and lost. The owner admitted that it hadn’t completed the work required for a substantial rehab. As such, it would be premature for the DHCR to decide on the building’s status at this time. The owner could reapply after finishing the rehabilitation work. A new Certificate of Occupancy must be issued before a substantial rehabilitation officially can be determined [Roberts, February 2014].

Required Documentation

The following documentation is required from owners in support of a claim of substantial rehabilitation. And owners are advised to maintain records related to the rehabilitation.

• Records demonstrating the scope of the work actually performed in the building. These may include an itemized description of replacements and installations, copies of approved building plans, architect’s or general contractor’s statements, contracts for work performed, appropriate government approvals, and photographs of conditions before, during, and after the work was performed; and
• Proof of payment by the owner for the rehabilitation work may be required.