This deregulation method was often employed on half-vacant apartment buildings that were still too far away from reaching the 80% threshold required for Substantial Rehabilitation. Investors would begrudgingly take on partially occupied buildings and hope for Frankenstein units or to work other angles. The returns on such projects were not nearly as lucrative as those involved in Substantial Rehabilitation where it was common for operators to see 2x value upon completion.

Unlike the buildings that underwent Substantial Rehabilitation, the units created using this method usually take longer to lease and usually do not achieve rental prices as a normal apartment because they often feature harder-to-lease units laid out upwards of 3-4 bedrooms. You are simply not going to be able to get 2x the rent of a 2-bedroom apartment from a 4-bedroom apartment. Although a less optimal deregulation method, in comparison to Sub Rehabs, and the previous version of IAIs and MCIs, it remained a viable avenue for landlords to use to get out of RSL.

 

The Unsuccessful Landlords’ Advocacy Attempts

 

The landlords have continually attempted to seek relief through the judicial system, where iconic landlord advocacy groups like CHIP and RSA have been trying to “facially challenge” RSL through the New York State Court, the Second Circuit Courts, and ultimately the Supreme Court. Their challenge has been dismissed by all lower courts, and this regulatory effort is marked unsuccessful upon SCOTUS’s rejection to hear their case at the Supreme Court, where Chief Justice Roberts argued that RSL does not constitute takings of private properties when landlords have an array of methods to 1. Claim units for self-use 2. Legally evict tenants who are not paying. And that they bought into such properties knowing they are subject to future regulatory changes in the space. So the current Rent Stabilization Laws although does put serious

limits on the profitability of those landlords’ assets, they are not enough to constitute a violation of the Fifth Amendment that protects the takings of private properties.

 

One of the only statutory wins on the landlords’ side was heralded by the rent overcharge case of Regina Metropolitan Co. v. New York State Division of Housing & Community (Regina Metro) where the property management company Regina Metropolitan Co. argued that the extension of the statute of limitation on rent roll records (used to determine in court illegal rent raising schemes) from 4 years to 6 years, as outline in HSTPA 2019, would constitute retroactively punishing owners who were following the law at the time, that is they only had to keep records for 4 years, any record beyond that time frame was most likely destroyed, as advised by their attorneys.

 

This portion of the look-back time period provision was reverted back to what it was pre-HSTPA 2019. This case marks one of the only successful pushbacks from the landlord’s side so far. This win in 2020 bolstered the landlords’ determination to continue fighting the Rent Stabilization Law but was itself quite fruitless because it was not able to revert any of the other more substantial changes that limit the specific rent increases, as those were the provisions that truly limited the rent-stabilized properties’ future profitability.

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End of the De-Regulation Era

 

Just as the Rent Stabilized owners were slowly coming to realize that their effort to seek relief through the judicial system proved fruitless, bad news just kept coming.

 

In the DHCR’s newest version of the Rent Stabilization Code published on November 8th, 2023, they introduced a de facto ban on Frankenstein’s apartments and significantly raised the restrictions on which buildings can file for Substantial Rehabilitation.

 

With the last two loopholes amended, gone is the Wild West era of trading Rent-Stabilized portfolios and deregulating them to make 2x profits…And those who are caught still holding such assets in the hope of deregulation will soon see their judgment day.

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The De Facto Ban on Frankenstein’s Apartment

 

Combining two or more rent-stabilized apartments is now still possible, but doing so will be devoid of any economic incentive, constituting a de facto ban on such combinations. The key changes are as follows:

 

1. When two rent-stabilized apartments are combined, the new legal rent is the combined legal rent of the two apartments, plus applicable increases.

2. When a rent-stabilized apartment is combined with a non-regulated apartment, the combined unit is now rent-regulated.

3. Where the space of a non-regulated apartment is increased by adding space from a regulated apartment, both apartments are rent-regulated;

4. When the space of a regulated vacant apartment is increased, the rent for the new space shall be the prior legal rent, plus an increase equal to the percentage increase of the space, as well as other applicable increases; and

5. When the space of a regulated vacant apartment is decreased, the rent for the new space shall be the prior legal rent, plus a decrease equal to the percentage decrease of the space, as well as other applicable increases.

 

 

Changes Made to Substantial Rehabilitation

 

Similarly, with the Sub Rehab, the DHCR did not outright ban such practices because there are definitively genuine cases of buildings that are undergoing actual hardship, and need such incentives to justify any building-wide improvements.

 

 

The DHCR has:

 

1. Removed the presumption that a building that is at least 80 percent vacant is in significantly deteriorated condition and

2. Removed exceptions to the otherwise required replacement of building-wide systems where those systems were recently installed or structurally sound.

Now each building that files for Substantial Rehabilitation will be subject to DHCR’s review, and DHCR holds the discretion to determine whether a building is in fact in a “significantly deteriorated condition.”

 

The vast majority of the past Substantially Rehabilitated projects relied solely on the 80% vacancy presumption, meaning that the building itself did not in fact reach such “significantly deteriorated condition.” However, with the newly implemented change, such projects will no longer receive approval from the DHCR.

 

With these two new amendments in place, there is now little room for future deregulation schemes unless the buildings are in genuinely deteriorated conditions, and not too many buildings in NYC currently are eligible for this criteria.

 

 

Negligence and Cost Cutting Persists Despite New Regulations

 

With the possibility of deregulating rent-stabilized apartments out of the picture, are the rent-stabilized owners going to squash their pipe dreams of one day deregulating their building and start leasing out the vacant apartments?