[NYtenants-Online] Text of MBR Court Decision
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In this issue...
1. Text of the Court Decision: City of NY v. NYS DHCR
(see prior email for summary of this decision)
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IA PART 25
Justice DeGrasse
CITY OF NEW YORK v. NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL
The parties in these consolidated actions variously challenge and defend
the City’s Local Law 73 of 1997, which amended a portion of the City’s
Administrative Code that sets forth the method for determining maximum base
rents for rent controlled housing accommodations.
Intervenors Rent Stabilization Association of New York City, the Community
Housing Improvement Program, Inc., London Terrace Gardens, L.P., Barry
Martin, LLC, LRC Realty Associates, L.P., M&R Management Co., Forest
Longfellow Assoc. and Statenhart Assoc., (collectively referred to herein
as “Owners”) move for summary judgment on their causes of action declaring
that Local Law 73 is invalid and enjoining defendant New York State
Division of Housing and Community Renewal ("DHCR”) to compute the maximum
base rent for 1996-97 and 1998-99 according to the statutorily-mandated
procedure in place prior to the enactment of Local Law 73.
Conversely, in their cross-motions for summary judgment plaintiff the City
of New York (“City”) and various tenant groups that have intervened herein
(“Tenants”), seek an order declaring that local Law 73 is lawful and
enjoining DHCR to use the method mandated therein to compute the 1996-97
maximum base rent and all future biennial calculations of maximum base rent.
Background
History is a useful tool for exploring the “impenetrable thicket” of rent
control law [footnote 1], and, more particularly, for locating the roots of
Local Law 73.
In 1962, in an effort to reform rent control, the State Legislature passed
the Local Emergency Housing Rent Control Act (“LEHRCA”) transferring power
to New York City to regulate and control residential rents and evictions in
the five boroughs, and providing for the administration of rent control
programs by local agencies. Pursuant to this law, the City Council passed
Local Law 20 of 1962, which codified the City's assumption from the State
of jurisdiction over rent-controlled housing.
A. Local Law 30 and the MBR Formula
In 1970, after several years’ experience administering the rent control
law, the City Council determined that it was necessary to restructure the
system under which maximum rents were established for rent- controlled
apartments. Accordingly, it enacted Local Law 30 of 1970 (Administrative
Code §26-405[a]) which sets forth a formula for establishing maximum base
rents (“MBR”) for rent controlled apartments.
Section 26-405(a)(3) provides in relevant part:
(3) The city rent agency shall establish maximum
rents to be effective January first, nineteen hundred
seventy-two by dividing the maximum gross building rental
from all housing accommodations in the property whether
or not subject to or exempt from control under this
chapter by the number of such accommodations, after
giving consideration to such factors as may be prescribed
by formula, such as size and location of housing accommodations
and size and number of rooms. Such maximum gross building rental
shall be computed on the basis of real estate taxes, water
rates and sewer charges and an operation and maintenance
expense allowance, a vacancy allowance not in excess of two
per cent, and a collection loss allowance, both as prescribed
by such agency and an eight-and one-half per centum
return on capital value. (Emphasis supplied)
For purposes of this opinion, the calculation expressed in section
26-405(a)(3) shall be referred to as the “MBR formula." The MBR formula is
calculated for a sample of buildings in New York City. The product of the
formula is expressed in the form of percentage rental increase, known as
the “standard adjustment factor,” that is used City wide. However, each
yearly increase in rent in controlled units is subject to a 7.5 percent
cap. (Administrative Code §26-4O5[a][5].)
Local Law 30 also mandates that the MBR be established biennially “by
adjusting the existing maximum rent to reflect changes, if any, in the
factors which determine maximum gross building rental.” (Administrative
Code §26-405[a][4].) Crucially, it also provides that “the return on
capital may be revised from time to time by local law.” (Administrative
Code §26-405[a][4].)
At Issue in this lawsuit is Local Law 73’s modification of how “capital
value," which is roughly synonymous with market value, is determined for
purposes of the MBR formula. Prior to its amendment by Local Law 73,
Administrative Code §26-4O5(a)(3) provided that “capital value” was to be
determined for purposes of the MBR formula as follows:
Capital value shall be equalized assessed valuation
as established pursuant to article twelve-A of the
real property tax law."[footnote 2] (emphasis supplied)
Local Law 73, passed September 30, 1997, amended this section to provide that:
Capital value shall be equalized assessed valuation
based upon the appropriate tax class ratio which is established
pursuant to Article 12 of the real property tax law (emphasis supplied.)
The use of Real Property Tax Law Article 12—Instead of Article 12A — in
determining capital value for purposes of calculating MBR is at the crux of
this case. Owners argue that the City is constrained to use Article 12-A by
provisions of the State Legislature’s 1971 amendment to LEHRCA, commonly
referred to as the “Urstadt Law.” The City and Tenants maintain that the
Urstadt Law does not affect the proviso of Administrative Code §26-405 that
“the return on capital may be revised from time to time by local law.”
These arguments are discussed at greater length below.
B. Articles l2 and 12-A of The Real Property Tax Law
Articles 12 and 12-A both embody methods to provide equalized assessments
of the value of taxable real property in the City and thus can be used to
determine “capital value” for purposes of the MBR formula. Article 12A was
passed In 1968, before the devolution of rent control administration to the
City and before the passage of the MBR formula in Local Law 30 of 1970.
Article l2-A embodies an attempt to provide up-to-date valuation of
equalized real property values of taxable real property in the City so as
to expand the City’s taxing power. Its formulas allow for a projection of
estimated full taxable property values needed for tax and debt limit
calculations. Article 12A equalization ratios were based on an aggregation
of all properties within the City, and are not calculated for various types
of property.
When Local Law 30 was passed in 1970, Article 12A was incorporated into the
MBR formula as the measure of capital value. The City contends that this
was done because article 12A was thought at the time to be the best
available tool for ascertaining the value of real estate properties in New
York.
In 1981 Article 12 was amended to create a new set of measures for
assessing the value of taxable real property in the City. Unlike Article
12A, the amended Article 12 provides differing methods for assessing four
classes of property: Class One, residential property of one to three units;
Class Two, four or more residential units; Class Three, Utilities; and
Class Four, commercial, industrial, and other properties. Over 90 percent
of rent~controlled housing accommodations fall into Class Two.
According to the City, this classification system allowed for a more
specific determination of the actual capital value of rent controlled real
property. The equalization ratios for the four different classes have
differed markedly, and the City and Tenants have offered evidence that the
disaggregation of these classes allows a more calibrated determination of
capital value.
Pursuant to 1983 amendments to LEHRCA, the establishment of maximum rents
for rent-controlled properties passed from the City’s Department of Housing
Preservation and Development to the State Division of Housing and Community
Renewal.
Beginning with the 1986-87 rent cycle, DHCR began using the Article 12
equalization ratios — not Article 12As — in determining the capital value
portion of the MBR formula. DHCR persisted in this practice despite the
existence of Administrative Code §26-405{a)(3), which required the use of
Article 12A. In a subsequent lawsuit challenging this practice, which is
discussed below, DHCR defended its .use of Article 12 on the ground that
the equalization ratio provided In Article 12 provided a more accurate
measure of the value of rent controlled housing than did the ratio outlined
In Article 12A.
C. The Challenge to DHCR’s Use of Article 12
DHCR continued its use of Article 12 equalization ratios for several
biennial rent cycles. When DHCR issued the 1996/97 MBR orders, which were
again calculated using Article 12 to determine capital value, the MBR
increase was 3 percent, less than in previous years. This apparently
prompted various landlord associations and individual landlords, including
some of the parties herein, to challenge DHCR’s use of Article 12.
Though DHCR prevailed at the trial level, it lost on appeal before the
Third Department. In Community Housing improvement Program, Inc. v. New
York State Division of Housing and Community Renewal (230 AD2d 66), the
court struck down the 1996-97 MBR orders and held that DHCR could not use
Article 12 in its calculation of capital value because the plain language
of Administrative Code §26-4051{a)(3) provided that “[c]apital value shall
be equalized assessed valuation as established pursuant to article twelve-A
of the real property tax law.” The court noted that a “change in the
statute is the province of the Legislature, not the courts.” (Id. 230 AD2d
at 70.)
D. Local Law 73
In response to the Third Departments decision, in August, 1997 DHCR held a
public hearing where it proposed a standard adjustment factor of 32.4
percent based on its recalculation of the MBR formula using Article 12A.
Affected parties were given a chance to comment. On or about September 12,
1997 DHCR issued amended MBR orders for the 1996-97 cycle reflecting a 32.4
percent MBR increase. Actual rent increases were capped at the statutory
7.5 percent.
On September 18, 1997, the City Council passed Local Law 73, which, as
noted above, amended the City’s Administrative Code to provide that
“Capital value shall be equalized assessed valuation based upon the
appropriate tax class ratio which is established pursuant to Article 12 of
the real property tax law.” The Mayor signed this provision into law on
September 30, 1997. Based upon the enactment of Local Law 73, DHCR
suspended its earlier MBR order. DHCR's suspension orders stated:
On September 30, 1997, New York City enacted a local law that would
immediately affect all rent controlled apartments in New York City that
participate in the maximum base rent ("MBR") program.
* * *
DHCR is hereby suspending the 1996-97 amended MBR order of eligibility
Issued on
September 12, 1997 until further notice. Accordingly, until further
instructions
can be issued, owners shall charge and tenants shall pay - rent
equivalent to the
amount they were paying prior to the September 12, 1997 amended order
as adjusted by
any subsequent rental event.
A flurry of lawsuits ensued. Landlords brought suit in Albany County, and
later in Queens County. The City brought its declaratory action in this
Court, where all the actions were eventually consolidated. During the
course of these various proceedings, parties representing Tenants’ and
Owners’ Interests intervened.
The proper method of valuation remained unresolved as of the 1998-99 MBR
cycle, which should have taken effect on January 1, 1998. in July 1998 DHCR
began issuing what it denominated as the 1998-99 Maximum Base Rental
interim Orders of Eligibility, in which DHCR used Article 12 to calculate
the MBR Increase.
Discussion
Owners claim that Local Law 73 violates the Urstadt Law. The Urstadt Law
provides in relevant part:
No housing accommodations presently subject to regulation and control
pursuant to
local laws or ordinances adopted or amended under authority of this
subdivision
shall hereafter be by local law or ordinance or by rule or regulation
which has not
been heretofore approved by the State Commission of Housing and
Community Renewal
subject to more stringent or restrictive provisions of regulation and
control than
those presently in effect.
(local Emergency Housing Rent Control Act l. 1962, Ch. 21, Sec. 1,
McKinney’s Unconsolidated Laws §8605).
Owners claim that the use of Article 12 will decrease the capital value
component of the MBR formula and thereby reduce rents in rent controlled
apartments for 1996-97 and 1998-99 rent cycles. Owners assert that this
diminution in rent constitutes a violation of the Urstadt Law because it is
a “more stringent or restrictive provision of regulation and control than
those” in effect within the Urstadt Law was passed in 1971. In essence, the
Owners argue that the Urstadt Law is a ratchet that allows only those
changes to the MBR formula that result in an increase In the MBR.
The Urstadt Law does not define what qualifies as a “more stringent or
restrictive provision.” However, these terms may be given some content by
the fact that the Urstadt Law appears to have been a reaction to New York
City’s enactment of the Rent Stabilization Law in 1969. Rent stabilization
represented a new type of rent regulation affecting housing stock that did
not fall within the ambit of rent control laws. Rent stabilization thus
constituted an entirely new check on the profits that landlords could
realize from their properties. Similarly, the cases cited by Owners concern
attempts to introduce new restrictive provisions into the calculation of
rent increases for rent controlled apartments. In Mayer v City Rent Agency
(46 NY2d 139), the Court of Appeals reviewed the City’s attempt via local
law to make a category of expense, known as the labor cost pass-along,”
subject to the 7.5 percent annual rent increase cap. The labor cost
pass-along had hitherto been part of a different section of Local Law 30
that allowed for rent increases for extraordinary expenses not included
within the MBR formula. The court found that making the labor cost
pass-along subject to the 7.5 percent cap when it had not been before
imposed a more stringent or restrictive provision upon landlords.
In 241 East 22nd St. Corp. v. City Rent Agency (33 NY2d 134) the Court of
Appeals invalidated an amendment to the City’s rent control regulations
that attempted to limit the imposition of “hardship” rent increases. Such
hardship rent increases are designed to increase the return on a given
building where a landlords actual costs experience for an entire building
indicates a greater entitlement than that provided by the MBR formula. By
the amendment, the City sought to limit hardship rent increases to each
apartment’s Individualized MBR increase, even if that apartment's MBR
increase had not exceeded the 7.5 percent cap. In other words, any
apartment whose rent was at its MBR level could not be assessed an extra
increment of hardship rent. As in Mayer, the court held that this effective
nullification of a rent control provision designed to benefit landlords
constituted a more restrictive or stringent provision
In the final case relied upon by Owners, 210 East 68th Street Owners Corp.
v. City Rent Agency (76 Misc2d 425, mod. in part and affd. 43 AD2d 687,
affd. 34 NY2d 560) courts thwarted the City’s attempt to jettison Local Law
30 entirely and reinstate prior law. As the impetus for Local Law 30 -- had
been the housing deterioration caused by the prior rent control laws, the
trial court, summarily affirmed by the Appellate Division and the Court of
Appeals, held that the repeal of Local Law 30 would impose more stringent
and restrictive regulation upon landlords in violation of the Urstadt Law.
In each of these cases, the City attempted to alter Local Law 30 or its
rent control regulations by either jettisoning the law entirely or by
subjecting hitherto landlord friendly provisions to other rent control
provisions limiting the rents imposed upon tenants. The introduction of
Rent Stabilization, supposedly the catalyst for passage of the Urstadt Law,
similarly - imposed new regulations designed to curb landlord’s ability to
realize profits from their residential buildings.
By contrast, Local Law 73 seeks to amend how an existing input in the MBR
formula, capital value, is determined. Local Law 73 does not impose new
regulations, or shuffle existing regulations to thwart rent control
provisions designed to help Owners. It does not insert any new element into
the MBR formula. Instead, it mandates that an existing element shall be
determined in a more accurate way. The City and Tenants have brought forth
evidence that Article 12 yields a more accurate measure of the capital
value of rent controlled housing. DHCR’s use of Article 12 beginning in
1986 demonstrates that DHCR considered it to be a more accurate measure of
this input than Article 12A. Owners have made no colorable assertion
tending to rebut the City’s and Tenant's arguments that the use of Article
12’s equalization ratios results in a more accurate measure of the capital
value of rent controlled housing.
Given that the evidence indicates that a the use of Article 12 provides a
better estimate of capital value, an existing input in the MBR formula,
Owners may only prevail if they can demonstrate that any change to existing
rent control laws is invalid if it results in a diminution of rent
increases for rent controlled units. The language of the Urstadt Law does
not sweep so broadly. The Urstadt Law invalidates more “stringent” or
“restrictive” regulation. It does not invalidate, though it could have, any
new regulations that have the effect of generating an MBR increase that
does not reach the statutory annual rent cap of 7.5 percent.
Moreover, an amendment such as that a effected by Local Law 73 is clearly
contemplated by Administrative Code 26-405(a)(4) which provides that “the
return on capital may be revised from time to time.” Section 26.405(a)(4)
was law before the passage of the Urstadt Law. The Urstadt Law does not
purport to repeal this provision. “Repeal or modification of legislation by
implication is not favored In the law.” (Natural Resources Defense Council,
Inc. v. New York City Dept. of Sanitation, 83 NY2d 215. 222 [internal
quotation marks and cites omitted].) The quoted portion of §26-405(a)(4)
contemplates that the City may amend the MBR formula from time to time in a
way that may affect landlord’s return on capital. Therefore, even though
Local Law 73 mandates that an input used in the MBR formula may bee
measured in a way that may affect landlords’ return on capital, it does not
run afoul of the Urstadt Law.
Conclusion
For the reasons stated, the motion for summary Judgment of Rent
Stabilization Association of New York City, the Community Housing
Improvement Program. Inc., London Terrace Gardens, L.P., Barry Martin, LLC,
LRC Realty Associates, L.P, M&R Management Co., Forest Longfellow Assoc.
and Statenhart Assoc. is denied.
The cross-motions for summary judgment of the City of New York and
intervenors Met Council on Housing, New York State Tenants & Neighbors
Coalition, Inc., Queens League of United Tenants, London Terrace Tenants
Association, the Association of Rent Controlled Tenants of 425 Riverside
Drive, The Association of Rent Controlled Tenants of 250 Riverside Drive,
the Roxborough Tenants Association and the 246 West End Avenue Tenants
Association, are granted.
Settle judgment.
(1) The Court of Appeals characterization, made nearly 26 years ago,
remains valid today. (89 Christopher Inc. v. Joy. 35 NY2d 213, 220.)
(2) An equalization ratio is the ratio of assessed value to market value
for a class of property. By dividing a property’s assessed value by the
equalization ratio, one may arrive at an approxiimation of the property’s
market value.
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