475 W. 145th St., LLCv.State Div. of Hous. & Cmty. Renewal

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART 35May 9, 2019
INDEX NO. 101802/2018 (N.Y. Sup. Ct. 2019)
INDEX NO. 101802/20182019 N.Y. Slip Op. 31306

INDEX NO. 101802/2018

05-09-2019

In the Matter of the Application of 475 WEST 145TH STREET, LLC, Petitioner, For a Judgment Pursuant to Article 78 of the Civil Practice Law and Rules v. THE NEW YORK STATE DIVISION OF HOUSING AND COMMUNITY RENEWAL, and ROMNEL PRIOLEAU, Respondents.


NYSCEF DOC. NO. 29 DECISION/ORDER HON. CAROL R. EDMEAD, JSC :

In this Article 78 proceeding, petitioner 475 West 145th Street, LLC (landlord) seeks a judgment to overturn an order of the respondent New York State Division of Housing and Community Renewal (DHCR) as arbitrary and capricious (motion sequence number 001). For the following reasons, landlord's petition is denied and this proceeding is dismissed.

FACTS

Landlord is the owner of a residential apartment building located at 475 West 145 Street in the County, City and State of New York (the building). See verified petition, ¶ 1. Respondent Romnel Prioleau (Prioleau) is the tenant of apartment 1B in the building, a rent stabilized unit. Id., ¶¶ 2, 5. The respondent DHCR is the state agency charged with the registration and oversight of all rent stabilized apartments located in the City of New York. Id., ¶ 4.

On March 22, 2013, landlord filed an application with the DHCR for a "major capital improvement" (MCI) rent increase to apartment 1B's rent in order to obtain compensation for the $776,936.00 that landlord claimed to have spent on building-wide renovation work in 2011-12. See verified petition, ¶ 12. On February 17, 2015, a DHCR rent administrator issued an order denying landlord's MCI application (the RA's order). Id., ¶ 14; return, exhibit A-10. The RA's order stated, in pertinent part, as follows:

"After consideration of all the supporting documentation submitted, the tenant's responses, and pursuant to the applicable provisions of the codes and regulations set forth above, the Rent Administrator determines that the application for rent increase, based on MCI, is denied and/or this proceeding is terminated for the following reasons:


"Other - The owner is advised to file an 'Application by Owner to Determine Whether Building/Apartment is Exempt From the Emergency Tenant Protection Act [ETPA] or the Rent Stabilization Law [RAL]' to determine the apartment's status. [and]

"Other - In addition, the owner was notified to provide a breakdown consisting of proof of payments, contracts, [and] invoices for each MCI item. The owner did not comply."

See
return, exhibit A-10. Landlord eventually filed the above-mentioned application on January 25, 2017. See return, exhibit B-3. The DHCR eventually issued a decision on that application on August 10, 2018 (the second order). See verified petition, ¶ 16; return, exhibit B-3. The DHCR's second order contained the following pertinent findings:
"The owner stated that apartment 1B was not vacated during the renovation, and that the tenant remains in occupancy. The said apartment therefore remains regulated until the current tenant vacates.

"There is no indication that the owner received any government financing or tax abatement for this project. Therefore, the subject building is exempt from regulation pursuant to Section 2520.11 (e) of the Rent Stabilization Code [JSC]."

Id
., exhibit B-3. Much earlier, on March 24, 2015, landlord had requested a "petition for administrative review" (PAR) of the original RA's order. Id., exhibit B-1. After issuing the second order, the DHCR also issued a separate order on October 18, 2018 which denied landlord's PAR request (the PAR order). See verified petition, ¶ 18; return, exhibit B-4. The PAR order states, in pertinent part, as follows:
"The claim that the owner is not required to file an application for deregulation of rent stabilized building/apartments based on substantial rehabilitation is without merit. [RSC § 2520.11 (e)] exempts from regulation those housing accommodations in buildings completed, or buildings substantially rehabilitated as family units, on or after January 1, 1974, assuming that evidence is provided by the owner that all necessary criteria required by the DHCR have been met. The DHCR has promulgated Operational Bulletin 95-2 as a point-by-point guide for owners to follow when applying for an exemption under a particular category. A review of the record reveals that the tenants schedule/rent roll submitted with the owner's MCI application listed all the apartments in the building as decontrolled except apartment 1B. Therefore, the MCI application was denied on the advisement that the owner should file an 'Application by Owner to Determine whether Building/Apartment is Exempt from the [ETPA] or the [RSL]' to determine the apartment's status. However, the record now shows that the owner subsequently filed an application for the deregulation of the building based on substantial rehabilitation, and that on August 10, 2018 the DHCR . . . granted the application and determined that the subject building is exempt from regulation based on substantial rehabilitation pursuant to [JSC § 2520.11 (e)]. The order further determined that apartment 1B remains regulated until the current tenant vacates, based on owner's statement that apartment 1B was not vacated during the rehabilitation and the tenant remains in occupancy.

"Accordingly, since the building is exempt from regulation, the work performed is not eligible for an MCI rent increase. The claim that the owner is still allowed to have an MCI granted as there remains a rent stabilized tenant in the building is without merit. As the subject building is no longer subject to rent regulation, the Commissioner finds pursuant to Operational Bulletin 95-2 that the owner is not entitled to an MCI rent increase for the one remaining rent stabilized tenant in the building."

See
return, exhibit B-4.

Aggrieved, landlord commenced this Article 78 proceeding on December 12, 2018. See verified petition. The DHCR filed a verified answer on February 8, 2019. See verified answer (DHCR). Prioleau also filed a verified answer on February 19, 2019, in which he stated that he continues to reside in apartment 1B, as he has for the past 17 years, since the New York City HIV/AIDS Services Administration (HASA) originally placed him there with the building's previous owner. See verified answer (Prioleau), Prioleau aff, ¶¶ 1-16. Landlord's Article 78 petition is now before the court (motion sequence number 001).

DISCUSSION

The court's role in an Article 78 proceeding is to determine, upon the facts before the administrative agency, whether the challenged determination had a rational basis in the record or was arbitrary and capricious. See Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222 (1974); Matter of E.G.A. Assoc. Inc. v New York State Div. of Hous. & Community Renewal, 232 AD2d 302 (1 Dept 1996). A determination is only considered arbitrary and capricious if it is "without sound basis in reason, and in disregard of the facts." See Century Operating Corp. v Popolizio, 60 NY2d 483, 488 (1983), citing Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d at 231. On the other hand, if there is a rational basis for an administrative determination, there can be no judicial interference with it. Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d at 231-232. Further, it is well settled that "[t]he interpretations of a respondent agency of statutes which it administers are entitled to deference if not unreasonable or irrational." Matter of Metropolitan Assoc. Ltd. Partnership v New York State Div. of Hous. & Community Renewal, 206 AD2d 251, 252 (1 Dept 1994), citing Matter of Salvati v Eimicke, 72 NY2d 784, 791 (1988). Here, review of the administrative record clearly shows there was a rational basis for the DHCR's PAR order, and that the Commissioner applied the controlling RSC rules in a reasonable manner.

At the outset, it is striking to note that neither landlord's petition nor its reply papers cite any case law whatsoever. Instead, landlord's counsel baldly asserts that the PAR order was arbitrary and capricious because "there is no legal basis or any legal precedent why an owner cannot receive an MCI increase for one rent regulated tenant." See notice of petition, ¶¶ 19-31. Counsel also avers that DHCR Operational Bulletin 95-2 does not preclude an owner from receiving such an increase when the remainder of its building is exempt from rent regulation. Id. Insofar as landlord commenced this Article 78 proceeding to seek this relief, it would have behooved counsel to present some legal authority that landlord is entitled to it. Counsel did not. Insofar as counsel claims that Operational Bulletin 95-2 permits landlords to claim both "substantial rehabilitation" exempts from rent regulation and MCI rent increases, counsel is wrong. The relevant portions of that document provide as follows:

"V. Individual Apartment Improvements, Major Capital Improvements and First Rents Distinguished From Substantial Rehabilitation.

"Where the work performed fails to meet the criteria set forth above for exemption from coverage under the ETPA or RSL on the basis of substantial rehabilitation, the owner may still qualify for rent increases based upon work performed on building-wide systems or individual apartments.

"In the event a substantial rehabilitation exemption is not found, the improvements will be considered for an MCI order provided the substantial rehabilitation application was made within two years of the completion of the work, and all MCI filing criteria are met.

"It should be noted that the term 'substantial rehabilitation' . . . refers to work that is in the nature of an individual apartment improvement [IAI] or a major capital improvement [MCI], . . . and not to the type of substantial rehabilitation which results in the exemption of an entire building from rent stabilization. It is the latter which is the subject of this Operational Bulletin.

"[IAIs] . . . provide for an increase in the rent of an individual housing accommodation where there has been a substantial increase in dwelling space, or an increase in the services, or the installation of new equipment or improvements, or new furniture or furnishings provided in or to such individual housing accommodation.

"[MCIs] . . . permit owners to apply for an increase in legal regulated rents, based upon the proven costs of building-wide major capital improvements."

See
notice of petition, exhibit E (emphasis added). This language clearly describes an "either or" process. The point is reiterated: 1) that renovation work may be treated as MCIs if it "fails to meet the criteria . . . for exemption from coverage . . . on the basis of substantial rehabilitation"; and 2) that renovations may be deemed to be MCIs "in the event a substantial rehabilitation exemption is not found." The converse is obvious: where renovations are found to constitute "substantial rehabilitation" of a building, they are not also MCIs. Thus, because the instant building was found to have been substantially rehabilitated, landlord may not also request that the renovation work be treated as building-wide MCIs. Had landlord's application to deregulate the entire building on grounds of substantial rehabilitation been denied, Operational Bulletin 95-2 indicates that landlord's MCI request might have survived. It did not, however, as the Commissioner correctly found, and landlord is in error to assert that Operational Bulletin 95-2 provides otherwise. Landlord also argues that it was "not . . . permitted" to collect a rent increase from apartment 1B. Operational Bulletin 95-2 clearly does permit landlords to collect rent increases resulting from qualifying IAI work performed in individual apartment units. However, the record is devoid of any evidence that landlord ever performed any IAI work in Prioleau's unit. Rather, the administrative record demonstrated that: 1) the work landlord performed in the building could not be the basis for an MCI rent increase because that work instead qualified the entire building for a "substantial rehabilitation" exemption from rent regulation; and 2) landlord did not perform any work in apartment 1B that might qualify for an IAI rent increase. Therefore, the DHCR Commissioner correctly concluded that agency regulations mandated the dismissal of landlord's MCI application, and that the RA was right to dismiss it. Accordingly, the court rejects landlords' assertion that the PAR order was arbitrary and capricious.

For its part, the DHCR explains that the Commissioner's review of the agency record included: 1) the February 17, 2015 RA's order; 2) the January 25, 2017 "Application by Owner to Determine Whether Building/Apartment is Exempt From the Emergency Tenant Protection Act or the Rent Stabilization Law" that the RA's order advised landlord to file; and 3) the August 10, 2018 second order that disposed of the foregoing application. See respondent's mem of law, at 3-4. The DHCR further explains that the PAR order found that: 1) the RA's order correctly denied landlord's MCI application; and 2) the second order properly granted landlord's application to deregulate the building on the ground of "substantial rehabilitation"; but 3) the second order also properly found that apartment 1B remained rent stabilized, and would continue to retain that status until Prioleau vacated it. Id. Finally, the DHCR argues that the Commissioner's ensuing decision to deny landlord's PAR was rationally based on both the foregoing agency record and the applicable provisions of the RSC. Id., at 3-20. After reviewing those provisions, the court finds that the Commissioner's determination was indeed rational.

MCI rent increases are governed by RSC § 2522.4, which provides as follows:

"(2) An owner may file an application to increase the legal regulated rents of the building or building complex on forms prescribed by the DHCR, on one or more of the following grounds:


"(i) There has been a major capital improvement, including an

installation, which must meet all of the following criteria:


"(a) deemed depreciable under the Internal Revenue Code, other than for ordinary repairs;

"(b) is for the operation, preservation and maintenance of the structure;

"(c) is an improvement to the building or to the building complex which inures directly or indirectly to the benefit of all tenants, and which includes the same work performed in all similar components of the building or building complex, unless the owner can satisfactorily demonstrate to the DHCR that certain of such similar components did not require improvement; and

"(d) the item being replaced meets the requirements set forth on the following useful life schedule, except with DHCR approval of a waiver, as set forth in clause (e) of this subparagraph."

RSC § 2522.4 (emphasis added). Here, the DHCR asserts that the Commissioner was correct to uphold the RA's denial of landlord's MCI application on the ground that "all the apartments in the building are decontrolled except apartment 1B." See respondent's mem of law, at 3-19. The DHCR notes that, since MCI rent increases only apply to the rents of rent stabilized apartments, and there was only one rent stabilized apartment in the subject building, 1B was the only apartment subject to the RSC. Id. It therefore follows that the Code did not apply to any of the building's other - decontrolled - apartments. The tenants of those units certainly "benefitted directly or indirectly" from the landlord's renovation work, and the landlord was certainly free to raise their rents; however, since all of those units are unregulated, landlord did not need to satisfy the RSC's MCI procedure in order to justify any such increases. It could impose them at any time, and may well have done so. As the Appellate Division, First Department, held long ago in Matter of Ansonia Assoc. v State Div. of Hous. & Community Renewal, Off. of Rent Admin. (157 AD2d 583 [1 Dept 1990]):
"The cost of any major capital improvements could have been included by the landlord in the calculation of its free market rents, without limitation. Such charge should not be imposed upon free market tenants, but should be left for negotiation between the landlord and such tenants."

157 AD2d at 585. Moreover, the fact that the RSC permits the rents for rent stabilized units such as apartment 1B to be permanently augmented by MCI increases does not automatically entitle landlord to claim an MCI increase for apartment 1B simply because it performed building-wide renovation work. The Court of Appeals has long recognized that the DHCR has the authority to determine if renovation work does or does not "fall outside the statutory purposes" of the RSC, and therefore does or does not qualify as the basis for an MCI rent increase under the Code. See e.g. Matter of Versailles Realty Co. v New York State Div. of Hous. & Community Renewal, 76 NY2d 325, 329-330 (1 Dept 1990). Here, the DHCR found that the subject renovation work would not qualify as MCIs if the building was not rent stabilized, and it advised landlord to clarify the building's regulatory status. See return, exhibit A-10. Since the agency ultimately found that the building was exempt from rent regulation (as discussed above), the DHCR Commissioner adhered to the RA's original finding that the subject renovation work did not qualify as MCIs, because it "fell outside the statutory purposes" of the RSC. This was a reasonable determination that was well within the ambit of the DHCR's administrative authority to make. It also had a rational basis in the record.

The "substantial rehabilitation" exception to rent stabilization coverage is set forth in RSC § 2520.11, the pertinent provisions of which state as follows:

"(e) housing accommodations in buildings completed or buildings substantially rehabilitated as family units on or after January 1, 1974, except such buildings which are made subject to this Code by provision of the RSL or any other statute that meet the following criteria, which, at the DHCR's discretion, may be effectuated by operational bulletin:


"(1) a specified percentage, not to exceed 75 percent, of listed building-wide and individual housing accommodation systems, must have been replaced;

"(2) for good cause shown, exceptions to the criteria stated herein or effectuated by operational bulletin, regarding the extent of the rehabilitation work required to be effectuated building-wide or as to individual housing accommodations, may be granted where the owner demonstrates that a particular component of the building or system has recently been installed or upgraded, or is structurally sound and does not require replacement, or that the preservation of a particular component is desirable or required by law due to its aesthetic or historic merit;


* * *


"(6) where occupied rent regulated housing accommodations have not been rehabilitated, such housing accommodations shall remain rent regulated until vacated, notwithstanding a finding that the remainder of the building has been substantially rehabilitated, and therefore qualifies for exemption from regulation;


* * *


"(8) an owner may apply to the DHCR for an advisory prior opinion that the building will qualify for exemption from rent regulation on the basis of substantial rehabilitation, based upon the owner's rehabilitation plan;

"(9) specified documentation will be required from an owner in support of a claim of substantial rehabilitation;"

RSC § 2520.11 (emphasis added). Here, the DHCR asserts that the Commissioner was correct to uphold both of the findings in the second order; i.e., that the building was exempt from rent regulation because it had been "substantially rehabilitated," and that apartment 1B remained rent stabilized because Prioleau had not vacated it while the renovation work was ongoing. See respondent's mem of law, at 3-19. It would be difficult to disagree that this was a reasonable determination. The findings in the second order hew to the Code's provisions that: 1) the building was "substantially renovated" because "at least 75% of [its] building-wide and individual apartment systems, including common areas, were replaced" (RSC § 2520.11 [e] [1]); and 2) apartment 1B remained rent stabilized because Prioleau continued to occupy it during the renovation period and landlord performed no work in the unit "notwithstanding . . . that the remainder of the building has been substantially rehabilitated" (RSC § 2520.11 [e] [6]). See return, exhibit B-3. The court also notes that landlord's papers did not challenge either of the second order's findings, but were devoted solely to the issue of the MCI determination in the PAR order. In any case, the court finds that the portion of the PAR order that upheld the RA's findings in the second order was both rationally based and reasonable. Therefore, the court concludes that there are no grounds to disturb the DHCR's determination.

Accordingly, the court rejects landlord's argument that the PAR order was an arbitrary and capricious agency act, and finds that landlord's Article 78 petition should be denied as meritless.

DECISION

ACCORDINGLY, for the foregoing reasons it is hereby

ADJUDGED that the petition for relief pursuant to CPLR Article 78 of petitioner 475 West 145th Street, LLC (motion sequence number 001) is denied and the petition is dismissed, with costs and disbursements to co-respondent Romnel Prioleau; and it is further

ADJUDGED that co-respondent Romnel Prioleau, having an address at 475 West 145 Street, Apartment 1B, New York, NY 10031, do recover from petitioner 475 West 145th Street, LLC, having an address at 475 West 145th Street, New York, NY 10031, costs and disbursements in the amount of $__________, as taxed by the Clerk, and that co-respondent Romnel Prioleau have execution therefor; and it is further

ORDERED that counsel for Petitioner shall serve a copy of this Order with Notice of Entry within twenty (20) days of entry on Respondents. Dated: New York, New York


May 9, 2019

ENTER:

/s/_________


Hon. Carol R. Edmead, J.S.C.