Major Capital Improvements:

An unjust system that enriches landlords at the expense of rent-burdened New Yorkers

Table Of Contents

Executive Summary

Major Capital Improvement (MCI) increases are one of several tactics that landlords exploit to raise rents and drive displacement. With monthly MCI rent hikes as high as $800 per apartment, the Upstate-Downstate Housing Alliance urges Albany to stand with tenants and eliminate MCI rent increases.

MCIs enrich large, corporate landlords and drive up rents for the working class rather than provide jobs.

  • MCI jobs are a tiny slice of the pie: In 2014, MCI costs amounted to only 0.003% of the total amount spent on construction in New York City that year.1 From 2003–2014, landlords spent nearly $115 billion maintaining rent-stabilized buildings. Of this $115 billion, only 1% of the expenditures went towards MCIs.2
  • Most MCI Increases Benefit Large Landlords: From 2000–2014, 70% of MCI applications received by DHCR came from owners of portfolios that are now greater than 150 units.3

Landlords have plenty of other reasons to improve buildings besides collecting MCI rent increases from working-class tenants.

  • Cost Savings: Replacing boilers, roofs, windows, and other weatherizing work reduces operating and maintenance costs by improving energy efficiency, sometimes cutting heating bills by more than half.4 According to the Mayor’s Office of Sustainability, a pair of Manhattan multifamily buildings that upgraded their heating system realized $551 in savings per apartment per year as compared to their old boiler.5 Landlords don’t need to be doubly compensated for these cost savings.
  • Government Subsidies: Landlords already receive hundreds of millions in State and local tax incentives to help cover the costs of building improvements. This year alone, New York City landlords will receive tax exemptions and abatements totaling $301 million for the same types of improvements that qualify for MCIs.6 In addition to these city expenditures, New York State’s Weatherization Assistance Program, the largest in the country, provides financing for boilers, entrance doors, and windows.7
  • Landlords are Reaping Record Profits: The median sale price of a rent stabilized building in New York City has increased over 600% in the past 15 years.8 Only 5% of New York City’s rent stabilized properties are considered financially distressed, and landlords’ net operating income has increased every year for the past 13 years.9

Simply put, a building is a landlord’s asset, investment, and responsibility. As with any asset, the owner has an inherent interest in ensuring the value of their asset does not depreciate. MCIs are investments landlords make not to improve the building, but increase the value to their asset and increase their overall profits. It should not be done at the expense and burden of New York renters.

MCI and IAI Expeditures Relative to Overall NYC Construction Spending in 2014

Sources:
New York Building Congress, “Construction Outlook,” April 2015. Retrievable at https://www.buildingcongress.com/advocacy-and-reports/reports-and-analysis/construction-outl

Urbanomics, “The Economic Impact of Capital Improvements and Annual Operations of Rent Stabilized Buildings on the Economy of New York City, 2003-2014,” February 2015. Retrievable at: https://rsanyc.net/urbanomics-report-february-2015.pdf


Introduction

Aisha Gomez, a LeFrak City tenant leader describes receiving MCI notices as “scary and intimidating. Each one feels like an eviction notice.”

New York is in the midst of a housing crisis.

  • More than 92,000 people are homeless across the state.10
  • New York City spends nearly $2 billion annually in homelessness services.11
  • New York State’s homeless population grew by a startling 46.8% from 2007–2018, by far the largest jump in the country.12

In light of this dire reality, New Yorkers formed the Upstate-Downstate Housing Alliance to build towards a future where all New Yorkers have a Homes Guarantee. As part of this state-wide organizing effort, the Alliance’s New York Homes Guarantee vision seeks to strengthen and expand New York’s tenant protection laws. The progressive platform’s goals include investment in social housing, taxing the rich to fund our homes, and enacting universal rent control. This report focuses on the outstanding need to eliminate unjust rent increases for Major Capital Improvements (MCIs), a legal loophole that solely exists to benefit corporate landlords at the expense of working-class tenants who are already rent burdened. Prior to 2019, MCIs have been responsible for an average of $140 million in permanent rent increases each year.13

MCIs refer to new building-wide system upgrades or installations like roofs, windows, boilers, wiring, or exterior work. MCI projects are building-wide and intended to impact all tenants. They are distinct from work done in individual apartments. Our current laws allow landlords to apply to New York State’s Division of Homes and Community Renewal (DHCR) for a rent increase that passes the cost of these improvements onto tenants in the form of ongoing rent increases that will continue for three decades, even after the improvements have been fully paid off by tenants in the first 12.5 years.

Tenants have the opportunity to contest an owner’s application, but the process is futile–DHCR approved MCI rent increases for 92% of applications filed between 2015–2017.14 Zara Realty tenants at 88-06 Parsons Boulevard were handed MCI increases of over $480 per month in 2017, despite tenants having flagged numerous irregularities in the application. In early 2019, DHCR approved an $800 per month rent increase for tenants on the Upper East Side for claimed facade work involving a “terra cotta rain screen”.15 The twenty Corona, NY buildings that make up LeFrak City have received an average of 15 MCI applications apiece.16 Virtually all of the applications at the complex have been approved,17 even though hazardous code violations persist in tenants’ apartments across the complex. Aisha Gomez, a LeFrak City tenant leader describes receiving MCI notices as “scary and intimidating. Each one feels like an eviction notice.”

Even in instances when MCI work was accompanied by severe tenant harassment or construction harassment, such as lengthy deprivations of bathroom or kitchen access, DHCR has still approved the increases. Once the rent increases hit, many tenants simply cannot pay. And the nightmare does not always end there. Some landlords even go after tenants who were already forced to move out by starting cases in small claims court for alleged retroactive MCI arrears.

While tenants struggle to make ends meet, landlords grow wealthier. MCI-eligible projects increase the value of buildings but shift the burden of paying for this additional value onto tenants. The families in the building essentially subsidize the landlord’s investment. When landlords sell their buildings, they recoup this added value, often making a significant profit. In fact, the median sale price of a rent stabilized building in New York City increased over 600% in the past 15 years.18 Yet, when tenants move out, or are worse forced out by steep rent hikes, tenants don’t get to take the windows, roofs, boilers, gas piping, or terra cotta rain screens that they paid for through MCI increases. They also don’t receive a payout when landlords sell their buildings, yet they are forced to subsidize the profits. This injustice is particularly acute for communities of color, especially Black communities, who, for generations, have been systematically barred from wealth-building opportunities through government sanctioned red-lining. Our current MCI system effectively requires that some of the same people who were historically denied access to wealth-building home equity must pay to improve the value of their landlords’ equity.

Imposed on tenants in approximately 1,000 rent-regulated buildings each year,19 MCIs transfer wealth from tenants to landlords, incentivize displacement, drive up legal rents, and pit habitability against affordability. After decades of fighting a losing battle against MCIs within the confines of the current system, New Yorkers are united in their belief that legislators need to eliminate MCIs once and for all.


1 ^ According to a report prepared for the Rent Stabilization Association, direct expenditures on MCIs in 2014 totaled $112 million. Urbanomics, The Economic Impact of Capital Improvements & Annual Operations of Rent Stabilized Buildings on the Economy of New York City, 2003–2014 (2015), available at https://rsanyc.net/urbanomics-report-february-2015.pdf (hereinafter “February 2015 Report for RSA”). Meanwhile, total construction spending in New York City in 2014 totaled $36 billion. New York Building Congress, NYC construction spending reached $36 billion in 2014; a 26 percent increase from 2013, Construction Outlook Update, April 2015, available at https://www.buildingcongress.com/advocacy-and-reports/reports-and-analysis/construction-outlook-update/NYC-construction-spending-reached-36-billion-in-2014-a-26-percent-increase-from-2013.html (hereinafter “April 2015 Construction Outlook Update”).

2 ^ See February 2015 Report for RSA, supra note 1, at 1.

3 ^ The referenced portfolio size analysis was performed by JustFix.nyc using December 2018 HPD Property Registrations and DHCR data on MCI applications 2000–2014 obtained through Freedom of Information Law (FOIL) request. A copy of JustFix.nyc’s analysis is on file with the authors of this report.

4 ^ See City of New York, Mayor’s Office of Sustainability, One City, Built to Last Technical Working Group Report 37, 69–70 (2014), available at https://www1.nyc.gov/html/gbee/downloads/pdf/TWGreport_2ndEdition_sm.pdf (“[i]n both commercial and multifamily buildings, buildings with the best performing one-pipe, two-pipe, and hydronic systems use less than half of the energy for space heating than the median building”).

5 ^ See id. at 69 (“[a]t 425 West 48th Street, the upgrade resulted in cost savings of $551 per apartment in the first year, while at 527 West 47th Street, the upgrades yielded $355 in savings per apartment in the first year”).

6 ^ City of New York, Department of Finance, Annual Report of Tax Expenditures: Fiscal Year 2020 15 (2020), available at https://www1.nyc.gov/assets/finance/downloads/pdf/reports/reports-tax-expenditure/ter_2020_final.pdf.

7 ^ See New York State, Homes and Community Renewal, Weatherization Assistance Program, January 12, 2019, available at https://hcr.ny.gov/system/files/documents/2019/03/weatherization-english-1222019layout-1-002.pdf.

8 ^ Calculated using median sale price data from New York City Rent Guidelines Board’s annual research reports available at https://rentguidelinesboard.cityofnewyork.us/research/.

9 ^ See New York City Rent Guidelines Board, 2019 Income and Expense Study 8–9 (2019), available at https://rentguidelinesboard.cityofnewyork.us/wp-content/uploads/2019/08/2019-IE.pdf.

10 ^ US Department of Housing & Urban Development, The 2018 Annual Homelessness Assessment Report to Congress 14 (2018), available athttps://files.hudexchange.info/resources/documents/2018-AHAR-Part-1.pdf (hereinafter “HUD 2018 Homelessness Assessment”).

11 ^ See Picture the Homeless Research Committee, The Business of Homelessness 3 (2018), available at http://picturethehomeless.org/wp-content/uploads/2018/03/PtH_White_paper5.pdf.

12 ^ HUD 2018 Homelessness Assessment, supra note 10, at 15 ex.1.8.

13 ^ See February 2015 Report for RSA, supra note 1, at 5 t.1, showing annual approved MCIs for 2003–2014. The calculation also includes additional data on approved MCIs for 2015–2017 obtained from DHCR through a Freedom of Information Law request.

14 ^ Calculated using data received from DHCR through a Freedom of Information Law request.

15 ^ Carl Campanile, Couple Could Face Over $800 Rent Hike in Stabilized Apartment, N.Y. Post, February 24, 2019, available athttps://nypost.com/2019/02/24/couple-could-face-over-800-rent-hike-in-stabilized-apartment.

16 ^ Average based on analysis of 12 LeFrak City buildings for which full case histories were obtained from DHCR’s Office of Rent Administration (on file with authors).

17 ^ See id.

18 ^ See supra note 8.

19 ^ See supra note 13.

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