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Tenants’ Voice: Fraud Common in Renovation Increases, Study Says

Steven Wishnia Mar 20, 2009

If your apartment has been renovated and you’re paying more than $1,000 a month, there’s a strong chance the rent is illegally high. Fraudulent rent increases for apartment renovations are a major reason affordable housing is disappearing from New York, claims a recent study by the Association for Neighborhood and Housing Development (ANHD).

The report, “The $20,000 Stove: How Fraudulent Rent Increases Undermine New York’s Affordable Housing,” examines the “1/40th rule,” which lets landlords raise the rent in rent-stabilized apartments by 1/40th of the cost of the improvements. For example, if owners spend $20,000 to put in new kitchen appliances, new bathroom fixtures and new floors, they can then raise the rent by $500 a month. They cannot claim such increases for ordinary maintenance such as painting.

ANHD estimates that such increases raised the rent to above $1,000 on 164,000 apartments between 2002 and 2005 — far more than the number of apartments that rose past that mark because of the normal rent increases allowed under rent stabilization. From 2002 to 2006, another 58,000 apartments went over $2,000 and were deregulated.

“It’s a core, core issue,” says ANHD Deputy Director Benjamin Dulchin. “We’re losing an incredible amount of affordable housing when apartments go from $600 to $1,800 a month.”

The system is lucrative for landlords even when they have legitimately done the renovations they claim, he says, because it lets them make back their investment within four years and then continue collecting a large and permanent rent increase. But there are almost no checks on fraud. “Landlords are allowed to universally impose 1/40th rent increases without prior approval, even documentation,” the study says.

No one knows how much fraud there really is, because the Division of Housing and Community Renewal (DHCR) “is doing absolutely no oversight,” Dulchin explains. “The chance of getting caught if you game the system is absolutely infinitesimal.”

The only way an illegal overcharge can be detected is if the tenant complains to the DHCR. Most tenants, however, have no idea of what the previous rent on their apartment was, what renovations were done and how much that work cost. Tenants in deregulated apartments may also worry that their landlords won’t renew their lease if they file a complaint.

The ANHD report cites eight cases that have come before either the DHCR or New York City Housing Court. In one, a Bronx landlord was found to have fraudulently raised rent by $400 a month by claiming he had spent $15,000 installing new floors, sinks and more. There was no evidence the work had actually been done and the landlord had no receipts for expenses. In another, a Forest Hills tenant paying $2,000 filed a complaint with DHCR after he found that the previous tenant had been paying $800. After pricing the new fixtures in the kitchen and bathroom, he concluded there was no way the landlord could have spent $40,000 on materials and labor.

“We respect the logic of encouraging landlords to make improvements,” Dulchin says, but the law must “make it reasonable and discourage fraud.” The law covering building-wide major capital improvements, he notes, requires landlords to document their expenses and inform tenants and the DHCR about them.

Assembly Speaker Sheldon Silver (D) has introduced a bill, A5316, that would give the DHCR authority to approve or disapprove rent increases for apartment improvement and limit them to 1/84 of the cost — the amount allowed for major capital improvements. Landlords could collect such increases only if they had given the tenant an explanation, had no major outstanding violations and had filed documentation with DHCR.

The bill was referred to the Assembly Housing Committee Feb. 12. It does not yet have a sponsor in the state Senate.

A longer version of this story appeared in Tenant.

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