Landlord TenantRent StabilizationHow do you deregulate a rent stabilized apartment? – Substantial Rehabilitation

October 8, 2021by Gregory Byrnes
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Subject to certain exceptions, buildings constructed on or before January 1, 1974, with six or more dwelling units which are not cooperatives, or condominiums are generally rent stabilized. Prior to the passage of the Housing Stability and Tenant Protection Act of 2019 (the “HSTPA”) there were four methods to deregulate a rent stabilized building: i) high income high rent deregulation, ii) high rent vacancy deregulation, iii) substantial rehabilitation, and iv) demolition. After the passage of the HSTPA, landlords can no longer deregulate individual apartments by high income high rent deregulation or high rent vacancy deregulation. This leaves landlords with only two options to deregulate apartments: demolition and substantial rehabilitation.

What is substantial rehabilitation?

If a landlord substantial rehabilitates a rent stabilized building all the apartments will become free market either upon occupancy or upon vacancy, if they are occupied during rehabilitation (“housing accommodations in buildings completed or buildings substantially rehabilitated as family units on or after January first, nineteen hundred seventy-four” are exempt from rent stabilization ETPA § 5(a)(5)). For all intents and purposes, the rent stabilization law treats a substantially rehabilitated building as being built after January 1, 1974. Substantial rehabilitation is intended to encourage the creation of new or rehabilitated housing (DHCR Operational Bulletin 95-2). There are a number of benchmarks a building owner must meet for the building to be deregulated.

What benchmarks does a landlord have to meet to exempt a building from rent stabilization?

A building is exempt from rent stabilization after substantial rehabilitation if i) at least 75% of building-wide and individual housing accommodation systems have been replaced and all ceiling, flooring, and plasterboard were replaced; ii) the building was in substandard or seriously deteriorated condition; and iii) the building complies with applicable codes and requirements.

What is considered 75% of building and apartment systems?

According to DHCR Operational Bulletin 95-2, at least 75% of the following systems must be replaced: 1) plumbing; 2) heating; 3) gas supply; 4) electrical wiring; 5) intercoms; 6) windows; 7) roof; 8) elevators; 9) incinerators or waste compactors; 10) fire escapes; 11) interior stairways; 12) kitchens; 13) bathrooms; 14) floors; 15) ceilings and wall surfaces; 16) pointing or exterior surface repair as needed; and 17) all doors and frames including replacement of non-fire-rates items with fire rated ones. If any of the 17 systems are missing, DHCR will calculate the rehabilitation based on 75% of the existing systems. For example, if the building does not have an elevator or interior stairway, the landlord will need to replace 75% of the remaining 15 systems, or 12 systems. In addition, the landlord must replace all ceiling, flooring, plasterboard or wall surfaces in common areas and all ceiling, flooring, plasterboard, and wall surfaces in apartments must be replaced or be made new as determined by DHCR.

If, for good cause shown, the landlord can establish that a particular component was recently installed or upgraded and does not require replacement or it was desirable to keep for aesthetic or historic merit, an exception may be maintained.

What is considered a substandard and deteriorated condition?

A building is considered substandard and deteriorated if the residential tenant vacancy rate at the commencement of the rehabilitation and the documents produced in support of substantial rehabilitation support such a finding. If the building is 80% or more vacant of residential tenants, there is a presumption that the building was substandard and seriously deteriorated.

When do the apartments become deregulated after a substantial rehabilitation?

Vacant apartments will be deregulated upon occupancy by the next tenant after the substantial rehabilitation. However, if an apartment is occupied during the rehabilitation, it will remain rent stabilized until the tenant vacates. When the next tenant takes occupancy, it will be free market.

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