ADM. APPEAL DOCKET NO. DB 430282-RT
STATE OF NEW YORK
DIVISION OF HOUSING AND COMMUNITY RENEWAL
OFFICE OF RENT ADMINISTRATION
GERTZ PLAZA
92-31 UNION HALL STREET
JAMAICA, NEW YORK 11433
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IN THE MATTER OF THE ADMINISTRATIVE : ADMINISTRATIVE APPEAL
APPEAL OF DOCKET NO. DB 430282-RT
D.R.O. DOCKET NO.
BD 410514-OM
201 EAST 19TH STREET TENANTS' :
ASSOCIATION, BEVERLY FRANCUS, PRES.,
P
PETITIONER :
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ORDER AND OPINION GRANTING ADMINISTRATIVE APPEAL,
IN PART
On February 14, 1989 the above-named petitioner filed an
Administrative Appeal against an order issued on January 17, 1989
by the District Rent Administrator, 92-31 Union Hall Street,
Jamaica, New York, concerning the housing accommodations known as
201 East 19th Street, New York, New York, Various Apartments.
Subsequent thereto, the petitioner filed a petition in the
Supreme Court pursuant to Article 78 of the Civil Practice Law and
Rules requesting that the Court direct the Division to determine
its administrative appeal.
On August 2, 1989, an order was signed by Justice David B.
Saxe directing the Division to expeditiously determine the
petitioner's administrative appeal.
On October 18, 1989, the Commissioner issued an order and
opinion denying the petitioner's administrative appeal.
Subsequent thereto, the petitioner filed a petition in the
Supreme Court pursuant to Article 78 of the Civil Practice Law and
Rules requesting that the Commissioner's order be annulled.
On December 3, 1990, an order was signed by Justice David B.
Saxe remitting the proceeding to the Division for further
consideration.
The Administrative Appeal is being determined pursuant to the
provisions of 9 NYCRR 2522.4.
The issue herein is whether the District Rent Administrator
properly determined the owner's application for a rent increase
ADM. APPEAL DOCKET NO. DB 430282-RT
based upon claimed major capital improvements.
The District Rent Administrator's order, appealed herein,
increased the rents for the subject housing accommodations by
$2.88 per room per month, effective as of September 1,1987, based
upon the installation of a new roof and pointing and waterproofing
at a total, approved cost of $85,585.00. It was noted in the
order that the owner's claimed expenditure of $108,882.23 for
replacement windows was disallowed as such windows were installed
piecemeal from 1977 to 1983 and no contract was submitted; that
$5,520.23 was deducted from the approved cost for purposes of
calculating the rent increase as said amount represented the
benefit from the major capital improvements received by the
commercial tenants of the subject premises; that various tenants
objected to the owner's application alleging that there were
active leaks from the roof and/or exterior walls and leak damage
to the walls of their apartments; that physical inspections
conducted on July 15, 1988 and July 22, 1988 revealed that repairs
had been made in all but two apartments, 17B and 17H; and that on
September 23, 1988, the owner submitted a work order indicating
that work was done to correct conditions in apartments 17B and
17H.
On appeal, the petitioner-tenants alleged, in substance, that
the owner's application was untimely by the standards of the Rent
Stabilization Code, and delayed beyond a reasonable time after the
work was allegedly completed, thus prejudicing the tenants'
ability to answer; that the owner made a "bare bones" application
on April 30, 1987 in order to evade the requirement that the
application be filed within two years after completion of work as
provided in 9 NYCRR 2522.4(a)(8) of the current Code; that the
owner's application was still substantially incomplete as of the
date of issuance of the District Rent Administrator's order; that
it appears that the owner failed to submit a completed
contractor's or vendor's certification with regard to the pointing
and waterproofing work; that the tenants were denied a meaningful
opportunity to rebut certain evidence submitted by the owner, most
notably the "work order" of September 23, 1988 referred to in the
District Rent Administrator's order; that the District Rent
Administrator failed to consider evidence that the roofing,
pointing and waterproofing were not performed in a workmanlike
manner as stated in an Engineer's Report submitted by the tenants;
that pointing and waterproofing should not be considered major
capital improvements as the costs therefor are not deemed
depreciable under the Internal Revenue Code, but rather are
deductible as ordinary operating expenses, citing a 1946 decision
of a District Court in Connecticut; that the rent increases should
expire when the owner's costs are fully amortized after five
years; and that since the owner's application is not complete, the
effective date of September 1, 1987 for the rent increase is
incorrect.
After a careful consideration of the entire evidence of
record as then comprised, the Commissioner was of the opinion that
the administrative appeal should be denied.
The Commissioner's determination was based upon the
ADM. APPEAL DOCKET NO. DB 430282-RT
following discussion:
It was the opinion of the Commissioner that a review of the
record indicated that the District Rent Administrator properly
determined the owner's application for a rent increase based upon
claimed major capital improvements, providing the tenants adequate
notice and reasonable opportunity to respond throughout the
processing of said application.
On appeal, the tenants characterized the owner's application
as being "bare boned." It was within the District Rent
Administrator's proper scope of authority and discretion to deem
the owner's application as filed on April 30, 1987 acceptable for
purposes of instituting these proceedings. It was not unusual for
the Division to request such additional information or evidence as
was requested herein from an owner to supplement its original
filing. Such requests did not alter the filing date previously
established.
Contrary to the tenants' allegation on appeal that the owner
failed to provide a completed contractor's or vendor's
certification with regard to the pointing and waterproofing work,
the record contained such completed certification which was filed
with the Division on September 15, 1987.
With regard to the "work order" filed on September 23, 1988
which referred to plastering work performed in two of the one
hundred and eighty-nine apartments in the subject premises, the
Commissioner noted that in response to several of the tenants'
complaints that their apartments displayed evidence of leak
damage, the District Rent Administrator directed two inspections
which revealed that leak damage in all but two apartments had been
adequately and systematically repaired. It was not improper for
the District Rent Administrator to accept said "work order" as
sufficient evidence that the remaining repair work had been
performed. In any event, considering that the outstanding surface
repair work involved only two of the one hundred and eighty-nine
apartments in the subject premises, the Commissioner found that
the District Rent Administrator properly determined that the owner
had sufficiently addressed the tenants' complaints so as to be
entitled to an appropriate rent adjustment for the major capital
improvements. The Commissioner's order and opinion was issued
without prejudice to the right of any tenant to file an individual
statement of complaint relating to conditions within his or her
apartment, and seeking a rent reduction therefor.
Also contrary to the tenants' claim that the District Rent
Administrator failed to consider the contents of their Engineer's
Report, the record revealed that said Report was duly considered
by the District Rent Administrator and resulted in further
processing of the owner's application, including the physical
inspections noted herein above. Said inspections revealed, among
other things, that the roofing, pointing and waterproofing work
performed was effective in stanching water seepage from the
building's exterior. Contrary to the tenants' assertion that
their Engineer found that the work was not performed in a
workmanlike manner, the tenants' Engineer noted in his report that
ADM. APPEAL DOCKET NO. DB 430282-RT
the roof "appeared generally in satisfactory condition" more than
four years after its installation.
With regard to the tenants' claim that pointing and
waterproofing should not be considered major capital improvements,
the Commissioner was of the opinion that the District Rent
Administrator properly applied the provisions of 9 NYCRR 2522.4
which specifically provides that pointing and waterproofing, as
necessary on exposed sides of a building, are major capital
improvements. In addition, the Commissioner considered that the
owner may have relied on the inclusion of pointing and
waterproofing in a schedule of major capital improvements made
part of 9 NYCRR 2522.4 and it is the long-standing policy of the
Division to encourage such work to preserve the housing stock by
allowing it to be the subject of a major capital improvement rent
increase application.
The tenants' claim that the rent increase should expire after
five years is not supported by the applicable laws and
regulations.
Lastly, the Commissioner held that the District Rent
Administrator properly established the effective date of the rent
increase as of September 1, 1987 in accordance with the provisions
of 9 NYCRR 2522.2.
In their Article 78 petition, the petitioner-tenants
requested that the Commissioner's order be annulled, maintaining
that the overall work performed was not comprehensive enough to
qualify as major capital improvements and that pointing is not
depreciable under the Internal Revenue Code and thus does not
qualify for MCI treatment.
In his order and decision remitting the proceeding to the
Division, Justice Saxe specifically directed the Division to
reconsider the following issues: 1) the comprehensiveness of the
overall work performed and 2) the tax treatment of pointing.
On April 16, 1991, the Division mailed a notice to the owner
and the tenants advising the parties that, in accordance with the
December 3, 1990 order and decision of Justice Saxe, they had the
opportunity to submit any additional material they wished to
submit regarding 1) the comprehensiveness of the work performed
and 2) whether the pointing work performed could be deemed
depreciable under the Internal Revenue Code.
On April 30, 1991, the owner submitted a response which
included the Tax Court's Memorandum and Opinion in the matter of
Bank of Houston v. Commissioner, 19 TCM 589 (1960) to support its
position that pointing is depreciable under the Internal Revenue
Code. No response from the tenants was received.
By letters dated March 5, 1991 and May 3, 1991, the Division
also requested from the Internal Revenue Service a formal written
interpretation regarding whether the complete pointing and
waterproofing, as necessary, of a multiple dwelling is depreciable
under the Internal Revenue Code. On May 31, 1991, the Division
ADM. APPEAL DOCKET NO. DB 430282-RT
received such formal written interpretation, dated May 28, 1991,
from the Internal Revenue Service.
As interpreted by the Internal Revenue Service, the relevant
sections of the Internal Revenue Code and accompanying
regulations, as applied to the matter at issue, provide as
follows:
"Payments for the purpose of keeping the property
in ordinary efficient operating condition, such as
replacement of short lived parts, and that do not
add to its value or appreciably prolong its life are
in the nature of incidental repairs. Subject to
specific facts and circumstances, examples of such
repairs and maintenance could include repainting,
mending leaks, patching a roof, replastering, etc.
Tuck pointing of limited, specific areas of a brick
wall showing weathering damage would generally not
prolong the life of the property, nor materially
add to its value, and would be currently deductible.
"However, if replacement, repair or renovation acts
to retard deterioration and prolong the life of a
property, then such expense should be capitalized
and depreciated. This is because there is a
resulting increase in value, extension of useful
life or improvement in useability of the property,
factors that tend to indicate a capital expenditure.
Examples of such expenditures would include a new or
resurfaced roof, complete waterproofing of brick walls
or roof (rather than repair of specific leaks), added
structural support, etc.
"Improvements made in anticipation of economic benefits
continuing over an indefinite period of time are capital
in nature. Thus, while a particular expense which by
itself would be a repair, when a component of a larger
overall plan of renovation, rehabilitation, or
improvement, are also in the nature of permanent
improvements and are capitalized.
"The complete pointing and waterproofing of a multiple
unit dwelling is in the nature of a permanent
improvement or betterment, and thus would appear
to be capital in nature and depreciable subject to
specific facts and circumstances. Repair of specific
leaks and limited tuck pointing of specific
trouble spots, if not part of some larger, overall
plan of renovation, rehabilitation or improvement of
the property, would likely constitute incidental
repairs and be a currently deductible expense."
The above-stated interpretation by the Internal Revenue
Service fully supports the Division's policy to consider
comprehensive pointing and waterproofing on exposed sides of a
ADM. APPEAL DOCKET NO. DB 430282-RT
building, as qualifying for treatment as major capital
improvements. The work performed, for example, must be greater
than mere spot patching to repair current leaks or trouble spots
so as to be in the nature of an improvement or betterment of the
structure. The tenant's administrative appeal to the extent that
it asserts, as a matter of law, that costs for pointing and
waterproofing are never depreciable under the Internal Revenue
Code should therefore be denied.
With regard to the remaining issue which the Court directed
the Division to reconsider, a review of the record in the instant
proceeding indicated that the record was not adequate to determine
the comprehensiveness of the overall work performed. The record,
for example, did not contain a diagram indicating the extent to
which the exposed sides of the subject premises were pointed.
Such diagram was previously requested by notices dated March 16,
1988 and August 17, 1988. As such the Commissioner was of the
opinion that further processing was required to determine the
comprehensiveness of the overall work performed in accordance with
the Court's directive. A determination could then be made as to
whether the work was comprehensive enough to qualify for treatment
as major capital improvements under the standards enunciated by
the Internal Revenue Service.
On August 1, 1991, the Division mailed a Notice of
Opportunity to Present Further Information and Evidence to the
owner advising it of the Internal Revenue Service's formal written
interpretation and requesting that the owner submit evidence
indicating the comprehensiveness of the pointing and waterproofing
work performed, such as the type of diagram which was previously
requested by the notices dated March 16, 1988 and August 17, 1988,
mentioned hereinabove. The owner was directed to serve a copy of
its response on the tenants who were afforded an opportunity to
submit evidence or comments in rebuttal thereto.
On August 14, 1991, the owner responded by letter stating
that the contractor, in his affidavit of April 4, 1988, which is
already part of the record, asserted that a thorough inspection of
the premises was made prior to the commencement of work and work
was actually performed, where necessary, on all elevations of the
premises; that in accordance with the Division's existing policy,
the work completed was therefore comprehensive in nature as it
addressed all exposed building elevations, as necessary; that the
Division's request for additional evidence, such as a diagram,
made more than ten years after the work was performed, is
unreasonable; that the contractor cannot now be expected to recall
and diagram the exact location and extent of the work on each
elevation; that the evidence already in the record clearly
substantiates the comprehensiveness of the pointing and
waterproofing in accordance with the definition provided by the
Internal Revenue Service and rent agency precedent; that the
District Rent Administrator and the Commissioner have both found
ADM. APPEAL DOCKET NO. DB 430282-RT
that the pointing and waterproofing work performed at the subject
premises qualified as major capital improvements in accordance
with the existing Division policies and procedures; and that no
factual question remains as the Commissioner may rely upon the
factual determination previously made.
On August 16, 1991, the tenants submitted their response in
rebuttal wherein they stated, in substance, that the Internal
Revenue Service's interpretation requires comprehensive
waterproofing as well as comprehensive pointing; that there was no
waterproofing performed in the instant proceeding whatsoever; that
the contractor's formal proposal of May 26, 1981 refers only to
tuck pointing operations (specific "necessary repairs") and makes
no reference to the application of any kind of waterproofing
materials; that the pointing work performed was simply maintenance
and would be so regarded by the Internal Revenue Service; and that
the owner, who filed its major capital improvement application
approximately six years after allegedly completing the work and
who has sought court adjournments, should not now be heard to
complain that it is "unreasonable" for the Division to require the
requested data after all this time.
After a careful consideration of the entire evidence of
record, the Commissioner is of the opinion that the administrative
appeal should be granted, in part, as provided hereinbelow.
The owner has failed to establish that the pointing and
waterproofing work performed at the subject premises was
comprehensive enough to qualify for treatment as major capital
improvements under the standards enunciated by the Internal
Revenue Service. The owner relies on evidence previously
submitted despite the Division's latest notice advising the owner
that additional evidence was necessary to determine the matter. In
view of the owner's recent default, the Division is unable to
ascertain the comprehensiveness of the work performed as
specifically directed to do so by the Court.
The Commissioner is therefore of the opinion that the owner's
application for a rent increase based upon claimed pointing and
waterproofing work performed at the subject premises should be
denied. Deleting the approved cost of the pointing and
waterproofing from the Administrator's calculations results in a
reduction of the per room per month rent increase from $2.88 to
$0.78. The owner is hereby directed to refund to the tenants
within thirty days of the issuance of this order and opinion any
overpayments in rent arising as a result of this order. The
Commissioner's prior determination of the remaining allegations of
the tenants' administrative appeal is hereby affirmed.
THEREFORE, in accordance with the provisions of the Rent
Stabilization Law and Code, it is
ORDERED, that this administrative appeal be, and the same
hereby is, granted, in part, as provided hereinabove, and that the
order of the District Rent Administrator be, and the same hereby
is, modified, to provide that the owner's application for a rent
increase based upon pointing and waterproofing is denied. The
ADM. APPEAL DOCKET NO. DB 430282-RT
Commissioner's prior determination of the remaining allegations of
the tenants' administrative appeal is hereby affirmed.
ISSUED:
ELLIOT SANDER
Deputy Commissioner
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