Landlord MBR Lawsuit Dismissed Substantial Victory and Relief for Rent Controlled Tenants

A judge in the New York State Supreme Court in Albany has dismissed the real estate industry’s attempt to increase the 1996-1997 MBR factor. For the 1996-97 cycle, the Division of Housing and Community Renewal adopted 3.0 percent, the lowest MBR increase in the history of the rent increase program that started in 1972.The decision, rendered by Justice George L. Cobb of Catskill, represents a important victory for rent control tenants and a sharp setback for landlords. In suing DHCR, the landlords asked the court to set aside DHCR’s finding and employ numbers that would have increased the 3 percent factor, set in December 1995, to about six or seven percent.

The landlords’ suit was brought by the Community Housing Improvement Program, the Rent Stabilization Association, and some private landlords participating in the MBR program. As tenant reported in its April 1996 issue, the landlords brought the suit in Albany County to exploit the possibility of getting a conservative upstate judge assigned to the case and also avoid the media coverage that the case would attract in New York City. Attempts to contact Community Housing Improvement Program to discover if the decision will be appealed were not successful.

The court’s retention of the 3.0 percent factor means that for the 1996-97 MBR period, some rent controlled tenants will not have to pay the entire 7.5 percent annual increase. This saving will apply to those whose maximum collectible rents are at MBR already or close to it. The MBR, which is adjusted once every two years on the basis of a city-wide study of costs, provides the headroom for the collectible rent to annually increase, but never to exceed the current MBR.

The sole objection raised by the landlord suit was that DHCR had incorrectly set the component of the MBR formula that determines the profit landlords are guaranteed. No challenge to the operating and maintenance component was brought, even though the low costs of running buildings with rent controlled units was the reason that DHCR was able to set the MBR so low in the first place. In his decision, Justice Cobb acknowledged that on the law the landlords were correct in claiming that the agency had implemented an alternative section of the tax law that was not specifically authorized in the MBR law. The real property tax law required the agency to use the Article 12-A equalization ratio in the calculation of the capital value component of the MBR formula. The capital value component is the guaranteed profit mechanism in the formula. Unlike the rent stabilization law, the rent control law has a built-in guaranteed profit component.

Article 12-A of the tax law measures the equalization rate for all New York City buildings, without regard for their use, lumping together commercial, residential, and small homes. In setting MBR, DHCR, starting in 1986, instead used Article 12 ratios, that breaks down city properties into classes. Using class 2 residential properties excluded buildings that do not contain rent control units, such as small buildings of three or fewer units. DHCR argued that the use of the Article 12-A ratio would inflate rent control rents so much that it would defeat the purpose of the rent control law.

In finding against the landlords,, the judge said that although the statute required the use of Article 12-A, it was not unlawful for DHCR to use Article 12 when using Article 12-A would defeat the intent of the MBR law to limit the rate of return to 8.5 percent of assessed value and allow landlords a rate of return much higher than that.

Met Council and tenant advocacy groups were not able to intervene in this proceeding because of learning about it so late. They will be monitoring whether the landlords file an appeal and take appropriate action to protect this important decision for all rent controlled tenants.