1. Demolition Summary
One of the ways which a landlord may end rent regulation on their property is by demolishing the building (see also substantially rehabilitating a building). In order to demolish a rent regulated building which is occupied by rent stabilized or rent controlled tenants an owner must first obtain the consent of the Division of Housing and Community Renewal (DHCR). If the building is not occupied, the landlord does not need to involve DHCR and can proceed to demolish and rebuild the building as they see fit without rent regulation. The DHCR application process typically takes 2-4 years before the demolition can begin and it is not unusual for it to take longer if the tenants decide to fight. The landlord needs to establish two primary criteria in their application to demolish the building: 1) the building will be demolished, and 2) the applicant has sufficient financial ability to perform the work. The key for a landlord to evict the tenants and deregulate the building through demolition is to survive the application and approval period. A landlord will need sufficient capital to withstand the multi-year process to commence the demolition.
Demolition permits an owner to recover possession of rent stabilized apartments at the expiration of each apartment lease where the owner seeks to demolish the building in order to construct a new building. A demolition proceeding is commenced by the filing of the RA-54 application with DHCR. In addition to providing approved plans and establishing financial ability to construct the new building, the landlord also needs to allege and explain a good faith intention to demolish the building.
DHCR will typically schedule a hearing to determine the merits of the applications and one issue DHCR will address is whether the landlord is moving forward in good faith to demolish the building or is only filing the application to evict the tenants. At the demolition hearing, tenants will often argue that the landlord is not moving forward in good faith to demolish the building and does not have the financial capability to perform the work. Tenants will also challenge the plans as to whether they constitute a demolition in accordance with DHCR regulations.
2. Establishing a Good Faith Demolition
The test to establish whether the scope of demolition is sufficient to prove good faith is not whether a landlord intends to raze the structure to the ground, but rather whether the landlord intends to gut the interior of the building, and at most leaving the walls intact. Peckham v Calogero, 12 NY3d 424 (2009). DHCR rules provide that proof of financial ability may include a Letter of Intent or a Commitment Letter from a financial institution, or other evidence that DHCR may deem appropriate under the circumstances.
3. Demolition with Rent Control Tenants
In addition to the foregoing, landlords of buildings with rent controlled tenants must also perform and establish the following:
- They must establish a plan to provide at least 20 percent more housing accommodations in the construction plans, unless an exception applies;
- They must provide pre-notification to the rent-controlled tenants in the building; and
- In New York City, they must establish there is no reasonably possible way to make a net return of 8.5% of the assessed value of the building without recourse to demolition, unless three or fewer occupied apartments which constitute 10 percent or less of the total dwelling units in the building” or “one occupied apartment if the building contains 10 or fewer apartments.”
4. The Application Process
In essence, a Landlord Demolition application is a request to DHCR to refuse tenant lease renewals and evict the tenants of rent regulated units if they do not vacate.
First, landlords are required to obtain approved plans from the Department of Buildings before a demolition application can be filed. DHCR provides that the approved plans should relate to the zoning envelope, bulk and height of the proposed new building.
Second, the landlord must establish their financial commitment. DHCR requires that a financial commitment sufficient to construct the new building is a mandatory element of proof of good faith. That financial ‘commitment’ has two components, a cost-projection for the new building, and the nature of the commitment to fund that construction. The good faith case must establish the scope of the proposed building, a provable cost-estimate (hard construction plus soft costs) and commitment from a financial institution in that amount to fund the construction.
a. What happens to Tenant Leases After Filing a Demolition Application
Once the demolition application is filed, the tenants are permitted to remain in occupancy at the same rent until either a determination of the demolition application is issued by DHCR or the application is withdrawn. Owners should not offer renewal leases to the tenants and the owner must serve notices of its intent not to renew the leases. Once a demolition application has been filed with DHCR, the owner may elect not to renew the rent stabilized tenants’ leases pending the outcome of the Application. In addition, landlords must serve notices not to renew the tenants leases, which must be served between 90–150 days prior to the expiration of each of the tenants’ leases in New York City and 90-120 days outside of New York City. The landlord is not allowed to take any rent guidelines board increases during this process. Essentially, the landlord waives their right to these increases.
b. Tenant Compensation and Relocation
DHCR further requires landlord’s to relocate and compensate tenants who are subject to rent stabilization or rent control. DHCR provides three methods of relocation and compensation in addition to relocation expense stipends.
- Relocation to for Equal or Less Rent. The first method is to relocate the tenant to a suitable housing accommodation at the same or lower regulated rent in close proximate area, or in a new residential building constructed on the site, in which the new location will be provided at no additional cost. The landlord is also responsible for the payment of moving expense and to pay a $5,000 stipend. This is often a difficult task to find a relocation location acceptable to the tenant. (See Operational Bulletin 2009-1)
- Relocation for Higher Rent. The second method is to relocate the tenant to a suitable housing accommodation with a rent in excess of their current rent. The landlord is also responsible for the payment of moving expenses and the difference between the new rent and the current tenant’s rent for a period of 6 years (72 months). For example, if tenant’s current rent is $1,000 and the relocation rent is $1,100, the landlord must issue the tenant a stipend for $7,200. While this may seem tenable for the landlord, it rarely is this inexpensive. If the tenant has a rent of $1,000 and a suitable accommodation is $4,000 in the area, the landlord would have pay a stipend of $216,000 in addition to finding the relocation. (See Operational Bulletin 2009-1)
Stipend without Relocation. The third and most common method is to pay the tenants a stipend based on a calculation derived by DHCR. The stipend amount is calculated by subtracting the current rent from the reasonably expected alternative rent per room multiplied times 72. The calculation is based on a minimum of three bedrooms. As of 2009, the alternative rent per bedroom was $526. This amount is adjusted each year and is estimated to be $791 currently. Therefore, the calculation with the minimum number of rooms (3) and a tenant paying $1,000 per month in rent is as follows: ((3 Rooms X $791) – $1000) X 72) or $98,845.20. (See Operational Bulletin 2009-1). Here is the 2009 DHCR Stipend Chart for New York City:
The stipend amount may be adjusted downward if the tenant does not leave on or before the date set forth by DHCR. The stipend will be reduced at a rate of 1/6 per month for each month the tenant remains in possession of the premises. However, if the tenant vacates early they may be eligible for enhanced stipend benefits.
c. Evictions and When the Tenant does not vacate
A DHCR demolition order does not grant the landlord possession of the apartment. Therefore, if the tenant refuses to leave on or before the date set by DHCR, the landlord will need to commence a summary proceeding to remove that tenant. Unlike most summary proceedings, judgment will often be issued on summary judgment rather than trial decision. During the COVID-19 pandemic, landlords need to understand eviction restrictions.
An aggrieved party, typical the landlord or tenant, may challenge a DHCR order by filing a Petition for Administrative Review (“PAR”) to challenge the order and if that is unsuccessful, they can file an Article 78 proceeding in the New York Supreme Court. Appeals can take years to resolve and therefore should be expected when calculating the time to commence demolition.
5. Tenant Buyouts
Landlords who decide to endure the demolition process can also buyout tenants (also known as cash for keys) along the way. Tenants will often engage in these negotiations because they can extract a higher price than the stipends set by DHCR. Why would a landlord pay more to a tenant to surrender instead of wait to pay the stipend amount? Because the tenant can use the DHCR proceeding to hold up the demolition and prolong the landlords holding period. It also brings certainty to the termination of the tenancy. The DHCR demolition application acts as a stick and a carrot for tenant. The stick is that the tenant will be removed from the building at some point within the next several years. The carrot is the buyout amount or stipend they will received when the the tenant vacates. The key to buyouts for landlords is to have the wherewithal to wait out the tenants and demolish the building. If a landlord is unable to wait out the tenants, they will have cave and pay the tenants what they demand, which is often over $1,000,000.