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It’s Time to Close the Scandalous Individual Apartment Rent Increase System

May 31, 2019

The NY State Attorney General’s Lawsuit Shows How Widespread This Rent Increase Loophole Abuse Is By Landlords

New York State Attorney General Tish James filed a lawsuit yesterday that sheds a remarkably clear light on how landlords abuse a key rent increase loophole called the Individual Apartment Improvement Rent Increase (IAI) system. The section headings of the lawsuit say it all:

  • “[The Landlord] Participated in Persistent Fraud and Illegality in Carrying Out Individual Apartment Improvements”
  • “[The Landlord] Counted Kickbacks as Funds Spent on Individual Apartment Improvements, Illegally Inflating Rents and Bringing Apartments Out of Rent Regulation”

According to the lawsuit, the landlord “routinely worked…in a scheme to illegally increase the rent of rent stabilized apartments and illegally deregulate apartments through the use of price fixing, cost splitting, false job proposals, false change orders, and kickback schemes”. The lawsuit goes on to say that the landlord’s “business model was ‘uncover[ing] value’ in rent-stabilized apartments by, among other things, undertaking IAIs in order to deregulate vacant units using high-rent deregulation.”

ANHD believes it is time for legislators in Albany to close the scandalous IAI rent increase loophole once and for all.

Evidence is mounting that the IAI rent increase loophole is a particularly damaging mechanism routinely used by landlords to de-regulate units and displace tenants. As a recent report by ANHD and the Housing Rights Initiative showed, the IAI loophole is not only open to rampant fraud because of lax oversight, but it is also fundamentally designed and legally used to drive speculation and displacement. 

The Individual Apartment Rent Increase system allows landlords to increase rents on vacant apartments by passing on large expenses for apartment renovations. As the lawsuit and ANHD’s report shows, these increases are most often used to raise the rent over the de-regulation threshold and take the unit out of rent-stabilization. 

The AG’s lawsuit sheds light on the dramatic details of one bad actor, including:

  • collusion with contractors to set the renovation prices at exactly the amount needed to just put the unit over the de-regulation threshold (ranging from $2,000 to $2,700 over the course of the investigation);
  • falsified proposals and receipts to spread renovation costs across units and buildings in such a way that maximizes the number of units de-regulated; and
  • kickbacks of over $1.2 million that were paid in cash, Porsche payments, and country club memberships!

But, more importantly, the lawsuit makes clear how widespread the practice is and that it is not just one bad actor.

Our legislators in Albany have a once-in-a-lifetime opportunity to fix New York City’s rent regulation system. Rent-stabilization is one of the most important sources of private affordable housing for lower-income New Yorkers and people of color. But tens of thousands of affordable units have been lost because of an IAI system that incentivizes and enables landlords to displace lower rent paying tenants. 

The Individual Apartment Improvement rent increase loophole can’t be “fixed,” and it should be eliminated.

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