Sec. 2502.4. Adjustment of legal regulated rent

(a)

(1) An owner may file an application to increase the legal regulated rents of the building or building complex, on forms prescribed by the division, on one or more of the following grounds: substantial rehabilitation, major capital improvements and other adjustments.

(2) Upon application by the owner, the division may grant an appropriate adjustment of a legal regulated rent where it finds that:

(i) there has been since January 1, 1974 an increase in the rental value of the housing accommodations as a result of a substantial rehabilitation of the building or housing accommodations therein which materially adds to the value of the property or appreciably prolongs its life, excluding ordinary repairs, maintenance and replacements and that the legal regulated rent has not been adjusted prior to the application based in whole or part upon the grounds set forth in the application; or

(ii) 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; and

(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 division 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 the division's approval of a waiver, as set forth in clause (e) of this subparagraph:

USEFUL LIFE SCHEDULE FOR MAJOR CAPITAL IMPROVEMENTS
Replacement item or equipment	Years-estimated life
(1) Boilers and burners
(a) Cast iron boiler	35
(b) Package boiler	25
(c) Steel boiler	25
(d) Burners	20
(2) Windows
(a) Aluminum	20
(b) Wood	25
(c) Steel	25
(d) Storm	20
(e) Vinyl	15
(3) Roofs
(a) 2-ply (asphalt)	10
(b) 3-4 ply (asphalt)	15
(c) 5-ply (asphalt)	20
(d) Shingle	20
(e) Single-ply rubber	20
(f) Single-ply modified bitumen	10
(g) Quarry tile	20
(4) Pointing	15
(5) Rewiring	25
(6) Intercom system	15
(7) Mailboxes	25
(8) Plumbing/repiping
(a) Galvanized steel	25
(b) TP copper	30
(c) Brass cold water	15
(d) Fixtures	25
(9) Elevators
(a) Major upgrade	25
(b) Controllers and selector	25
(10) Doors
(a) Apartment entrance	25
(b) Lobby/vestibule	15
(11) Bathroom upgrading
(a) Toilets and valves	20
(b) Bathroom and sinks	20
(c) Vanity	20
(12) Kitchen upgrading
(a) Metal/wood cabinets	20
(b) Ranges	20
(c) Refrigerators	15
(d) Sinks	20
(13) Water tanks
(a) Metal	25
(b) Wood	20
(14) Waste compactors	10
(15) Air conditioners
(a) Individual units/sleeves	10
(b) Central system	15
(c) Branch circuitry fixtures	15
(16) Aluminum siding	25
Vinyl siding	15
(17) Catwalk	25
(18) Chimney
(a) Steel	25
(b) Brick	25
(19) Courtyards/walkways/driveways
(a) Cement	15
(b) Asphalt	10
(20) Fire escapes	25
(21) Fuel oil tanks
(a) In vaults	25
(b) Underground	20
(22) Water heating units
(a) Hot water/central heating	20
(b) Hot water heater (domestic)	10
(23) Parapets
(a) Brick	25
(24) Resurfacing exterior walls	25
(25) Solar heating system	25
(26) Structural steel	25
(27) Television security	10

for major capital improvements not listed above, the owner must submit with the application evidence that the useful life of the item or equipment being replaced has expired;

(e)

(1) an owner who wishes to request a waiver of the useful life requirement set forth in clause (d) of this subparagraph must apply to the division for such waiver prior to commencement of the work for which he or she will be seeking a major capital improvement rent increase. Notwithstanding this requirement, where the waiver is requested for an item being replaced because of an emergency, which causes the building or any part thereof to be dangerous to human life and safety or detrimental to health, an owner may apply to the division for such waiver at the time he or she submits the major capital improvement rent increase application;

(2) if waiver is denied, the owner will not be eligible for an MCI increase. If it is granted, the useful life requirement will not be a factor in the determination of eligibility for the major capital improvement rent increase. However, approval of the waiver does not assure that the application will be granted, as all other requirements set forth in this paragraph must be met;

(3) a owner may apply for, and the division may grant, a waiver of the useful life requirements set forth in the useful life schedule, if the owner satisfactorily demonstrates the existence of one or more of the following circumstances:

(i) the item or equipment cannot be repaired and must be replaced during its useful life because of a fire, vandalism or other emergency, or "act of God" resulting in an emergency;

(ii) the item or equipment needs to be replaced because such item or equipment is beyond repair, or spare parts are no longer available, or required repairs would cost more than 75 percent of the cost of the total replacement of the item or equipment. Certification by a duly licensed engineer or architect, where there is no common ownership or other financial interest with the owner, shall be considered substantial proof of such condition(s). The owner may also be required to submit proof that the item or equipment was properly maintained. Such proof may include receipts for repairs and parts or maintenance logs;

(iii)

(iii)(A) an appropriate New York State or local governmental agency has determined that the item or equipment needs to be replaced as part of a government housing program;

(B) for the owner to qualify for a New York State or local government long-term loan or insured loan, the governmental lender or insurer requires the remaining useful life of the building or building complex, as well as the component parts of such building or building complex, to be as great as or greater than the term of the loan agreement;

(iv) the replacement of an item or equipment which has proven inadequate, through no fault of the owner, is necessary, provided that there has been no major capital improvement increase for that item or equipment being replaced;

(4) in the event that the division determines that an installation qualifies for a waiver of the useful life requirements, the division may:

(i) where no previous increase was granted within the useful life of the item or equipment being replaced and the cost of repair would equal or exceed the cost of replacement, approve 100 percent of the substantiated cost of the item or equipment, including installation;

(ii) where no previous increase was granted within the useful life of the item or equipment being replaced and the cost of repair is more than 75 percent of the cost of replacement, grant a prorated increase based upon the remaining useful life;

(iii) where it is determined that an item is eligible to be replaced during its useful life, grant an increase based upon the difference between the substantiated cost of the item or equipment, including installation; and

(A) the amount reimbursed from other sources, such as insurance proceeds or any other form of commercial guarantee; and

(B) the amount of any increase previously granted for the same item or equipment either as a major capital improvement, or pursuant to other governmental programs, if such item or equipment has not exhausted at least 75 percent of its useful life at the time of the installation;

(iv) where it is determined that an item is eligible to be replaced even though it has not exhausted 75 percent of its useful life and that it was installed as part of a substantial rehabilitation or the new construction of a building for which the owner set initial building-wide rents, the division may reduce the increase granted for a major capital improvement by a proportion of the remaining useful life of such item or equipment;

(5) notwithstanding the provisions of subclause (4) of this clause, where a owner had substantially commenced work on the major capital improvement installation before the adoption of the useful life schedule, based on prior division's decisions and polices, and where adherence to useful life requirements or to the conditions of the waiver would create an undue hardship, the owner's application will be determined in accordance with those prior decisions and policies;

(iii) there has been other necessary work performed in connection with, and directly related to a major capital improvement, which may be included in the computation of an increase in the legal regulated rent only if such other necessary work was completed within a reasonable time after the completion of the major capital improvement to which it relates. Such necessary work must:

(a) improve, restore or preserve the quality of the structure and the grounds; and

(b) have been completed subsequent to, or contemporaneously with, the completion of the work for the major capital improvement;

(iv) there has been an increase in services or improvement, other than repairs, on a building-wide basis, which the owner can demonstrate are necessary in order to comply with a specific requirement of law;

(v) with approval by the division, there have been other improvements made or services provided to the building or building complex, other than those specified in subparagraphs (ii)-(iv) of this paragraph, with the express consent of the tenants in occupancy of at least 75 percent of the housing accommodations;

(vi) improvements or installations for which the division may grant applications for rent increases based upon major capital improvements pursuant to subparagraph (ii) of this paragraph are described on the following schedule. Other improvements or installations that are not included may also qualify, where all requirements of subparagraph (ii) of this paragraph have been met.

SCHEDULE OF MAJOR CAPITAL IMPROVEMENTS

l. AIR CONDITIONER:

– new central system; or individual units set in sleeves in the exterior wall of every housing accommodation; or, air conditioning circuits and outlets in each living room and/or bedroom (see REWIRING).

2. ALUMINUM SIDING:

– installed in a uniform manner on all exposed sides of the building (see RESURFACING).

3. BATHROOM MODERNIZATION:

– complete renovation including new sinks, toilets, bathtubs, and/or showers and all required trims in every housing accommodation; or any individual component or fixture if done building-wide.

4. BOILER AND/OR BURNER:

– new unit(s) including electrical work and additional components needed for the installation.

5. BOILER ROOM:

– new room where none existed before; or enlargement of existing one to accommodate new boiler.

6. CATWALK:

– complete replacement.

7. CHIMNEY:

– complete replacement, or new one where none existed before, including additional components needed for the installation.

8. COURTYARD, DRIVEWAYS AND WALKWAYS:

– resurfacing of entire original area within the property lines of the premises.

9. DOORS:

– new lobby front entrance and/or vestibule doors; or entrance to every housing accommodation, or fireproof doors for public hallways, basement, boiler room and roof bulkhead.

10. ELEVATOR UPGRADING:

– including new controllers and selectors; or new electronic dispatch overlay system; or new elevator where none existed before, including additional components needed for the installation.

11. FIRE ESCAPES:

– complete new replacement including new landings.

12. GAS HEATING UNITS:

– new individual units with connecting pipes to every housing accommodation.

13. HOT WATER HEATER:

– new unit for central heating system.

14. INCINERATOR UPGRADING:

– including a new scrubber.

15. INTERCOM SYSTEM:

– new replacement; or one where none existed before, with automatic door locks and pushbutton speakerbox and/or telephone communication, including security locks on all entrances to the building.

16. KITCHEN MODERNIZATION:

– complete renovation including new sinks, counter tops and cabinets in every housing accommodation or any individual component or fixture if done building-wide.

17. MAILBOXES:

– new replacements and relocated from outer vestibule to an area behind locked doors to increase security.

18. PARAPET:

– complete replacement.

19. POINTING AND WATERPROOFING:

– as necessary on exposed sides of the building.

20. REPIPING:

– new hot and/or cold water risers, returns, and branches to fixtures in every housing accommodation, including shower bodies, and/or new hot and/or new cold water overhead mains, with all necessary valves in basement.

21. RESURFACING OF EXTERIOR WALLS:

– consisting of brick or masonry facing on entire area of all exposed sides of the building.

22. REWIRING:

– new copper risers and feeders extending from property box in basement to every housing accommodation; must be of sufficient capacity (220 volts) to accommodate the installation of air conditioner circuits in living room and/or bedroom; but otherwise excluding work done to effectuate conversion from master to individual metering of electricity approved by DHCR pursuant to paragraph (d)(3) of this section.

23. ROOF:

– complete replacement or roof cap on existing roof installed after thorough scraping and leveling as necessary.

24. SOLAR HEATING SYSTEM:

– new central system, including additional components needed for the system.

25. STRUCTURAL STEEL:

– complete new replacement of all beams including footing and foundation.

26. TELEVISION SYSTEM:

– new security monitoring system including additional components needed for the system.

27. WASTE COMPACTOR:

– new installation(s) serving entire building.

28. WASTE COMPACTOR ROOM:

– new room where none existed before.

29. WATER SPRINKLER SYSTEM (FOR FIRE CONTROL PURPOSES):

– new installation(s).

30. WATER TANK:

– new installation(s) serving entire building.

31. WINDOWS:

– new framed windows; or

(3)

(i) An increase in the monthly legal regulated rent pursuant to subparagraph (2)(ii) of this subdivision shall be /₈₄th of the total cost of the approved items in the application.

(ii) Such increases shall not be collectible during the term of a lease then in effect, unless a specific provision in the tenant's lease authorizes an increase during its term pursuant to an order issued by the division, except that increases pursuant to paragraph (4) of this subdivision may be collected upon installation.

(iii) The determination of the appropriate adjustment of a legal regulated rent shall take into consideration all factors bearing on the equities involved, subject to the general limitation that the adjustment can be put into effect without dislocation and hardship inconsistent with the purposes of the act, and including as a factor a return of the actual cost to the owner, exclusive of interest or other carrying charges, and the increase in the rental value of the housing accommodations.

(iv) No increase pursuant to paragraph (2) of this subdivision shall be granted by the division, unless an application is filed no later than two years after the completion of the installation or improvement, unless the applicant can demonstrate that the application could not be made within two years due to delay, beyond the applicant's control, in obtaining required governmental approvals for which the applicant has applied within such two-year period. No increase pursuant to subparagraph (2)(ii) of this subdivision shall be granted within the useful life of an improvement or installation for which an increase was previously granted except with the division's approval for required improvements. Pursuant to section 2500.6 of this Title, the date for implementation of this subparagraph shall be delayed until January 1, 2005. The issuance of an advisory opinion to effectuate such postponement shall not be required.

(v) No increase pursuant to subparagraph (2)(ii) of this subdivision shall be collectible from a tenant to whom there has been issued a currently valid senior citizen rent increase exemption pursuant to local law or ordinance to the extent that such increase may cause the legal regulated rent of the housing accommodation to exceed a specified portion, if any, pursuant to such local law or ordinance, of the aggregate disposable income of all members of the household residing in the housing accommodation.

(vi) The collection of any increase in the legal regulated rent pursuant to subparagraphs (2)(i)-(v) of this subdivision shall not exceed 15 percent in any year from the effective date of the order granting the increase over the rent set forth in the schedule of gross rents with collectibility of any dollar excess above said sum to be spread forward in similar increments and added to the legal regulated rent as established or set in future years. In no event shall more than one 15 percent increase in the legal regulated rent be collected in the same year.

(4) An owner is entitled to a rent increase without the prior approval of the division where the owner and tenant by mutual voluntary agreement, agree to a substantial increase of dwelling space or an increase in the services, furniture, furnishings or equipment provided in or to a tenant's housing accommodation, on written tenant consent to the rent increase. In the case of a vacant housing accommodation, tenant consent shall not be required. In calculating the permanent increase in the legal regulated rent for the affected housing accommodation the total cost incurred by the owner in providing such increase in dwelling space, services, furniture, furnishings or equipment, including the cost of installation, but excluding finance charges shall be considered. Prior to September 24, 2011, the increase shall be /_40th of the cost. On or after September 24, 2011, the increase shall be /_40th of the cost for buildings or complexes with 35 or fewer housing accommodations and /_60th of the cost for buildings or complexes containing more than 35 housing accommodations. Provided further that an owner who is entitled to a rent increase pursuant to this paragraph shall not be entitled to a further rent increase based upon the installation of similar equipment, or new furniture or furnishings within the useful life of such new equipment, or new furniture or furnishings.

(5) An owner may apply for the division's advisory prior opinion, pursuant to section 2507.11 of this Title, as to whether the proposed work qualifies for an increase in the legal regulated rent.

(6) Rent adjustments pursuant to subparagraph (2)(ii) of this subdivision and subdivisions (c) and (d) of this section shall be allocated as follows:

The divisions shall determine the dollar amount of the monthly rent adjustment. Such dollar amount shall be divided by the total number of rooms in the building. The amount so derived shall then be added to the rent chargeable to each housing accommodation in accordance with the number of rooms contained in such housing accommodation. When determining the adjustment of legal regulated rents pursuant to subparagraph (2)(ii) of this subdivision, where the subject building contains commercial rental space in addition to residential rental space, and the division determines that the commercial space benefits from the improvement, the division shall allocate the approved costs between such commercial rental space and the residential rental space based upon the relative square feet of each rental area.

(7) The DHCR shall not grant an owner's application for a rental adjustment pursuant to this subdivision, in whole or in part, if it is determined by DHCR, based upon information received from any tenant or tenant representative or upon a review conducted on DHCR’s own initiative that, as of the date of such application for such adjustment that the owner is not maintaining all required services, or that there are current immediately hazardous violations of any municipal, county, State or Federal law which relate to the maintenance of such services. However, as determined by DHCR, such application may either be granted upon condition that such services will be restored within a reasonable time, or dismissed with leave to refile within 60 days which time period shall stay the two-year filing requirement provided in paragraph (8) of this subdivision. In addition, certain tenant-caused violations may be excepted.

(8) Where during the processing of a rent increase application filed pursuant to subparagraph (2)(ii) of this subdivision, tenants interpose answers complaining of defection operation of the major capital improvement, the complaint may be resolved in the following manner:

(i) Where "sign-offs" of a city, town or village (other than building permits) are required for the approval of the installation, and the tenants' complaints relate to the subject matter of the sign-off, the complaints may be resolved on the basis of the sign-off, and the tenants referred to the approving governmental agency for whatever action such agency may deem appropriate.

(ii) Where sign-offs of a city, town or village are not required, or where the alleged defective operation of the major capital improvement does not relate to the subject matter of the sign-off, the complaint may be resolved by the affidavit of an independent licensed architect or engineer that the condition complained of was investigated and found not to have existed, or if found to have existed, was corrected. Such affidavit, which shall be served by the division on the tenants, will raise a rebuttable presumption that the major capital improvement is properly operative. Tenants may rebut this presumption only on the basis of persuasive evidence, for example, a counter affidavit by an independent licensed architect or engineer, or an affirmation by 51 percent of the complaining tenants. Except for good cause shown, failure to rebut the presumption within 30 days will result in the issuance of an order without any further physical inspection of the premises by the division.

(iii) General requirements. There must be no common ownership, or other financial interest, between such architect or engineer and the owner or tenants. The affidavit shall state that there is no such relationship or other financial interest. The affidavit must also contain a statement that the architect or engineer did not engage in the performance of any work, other than the investigation, relating to the conditions that are the subject of the affidavit. The affidavit submitted must contain the original signature and professional stamp of the architect or engineer, not a copy. DHCR may conduct follow-up inspections randomly to ensure that the affidavits accurately indicate the condition of the premises. Any person or party who submits a false statement shall be subject to all penalties provided by law.

(b) An owner may file an application to decrease essential services for a reduction of the legal regulated rent, or to modify or substitute essential services at no change in the legal regulated rent, on forms prescribed by the division on the grounds that:

(1) the owner and tenant by mutual voluntary written agreement, consent to a decrease in dwelling space, or a decrease in the services, furniture, furnishings or equipment, or to a modification or substitution of the essential services provided in the housing accommodation; or

(2) such decrease, modification or substitution is required for the operation of the building in accordance with specific requirements of law; or

(3) such decrease, modification or substitution results from an approved conversion from master metering of electricity, with the cost of electricity included in the rent, to individual metering of electricity, with the tenant paying separately for electricity, and is in amounts set forth in a schedule of rent reductions for different-sized rent stabilized housing accommodations included in Operational Bulletin 2003-1 governing electrical conversions issued pursuant to this paragraph and section 2507.11 of this Title by DHCR, 92-31 Union Hall Street, Jamaica, Queens, NY, and available at DHCR's website at www.dhcr.state.ny.us, and determined as follows:

(i) Direct metering. Where the conversion is to direct metering of electricity, with the tenant purchasing electricity directly from a utility, such schedule of rent reductions is based on the median monthly cost of electricity to tenants derived from data from the United States Census Bureau's 2002 New York City Housing and Vacancy Survey, as tabulated by the New York City Rent Guidelines Board, 51 Chambers Street, Suite 202, New York, NY, and available on its website at www.housingnyc.com, and as further adjusted where appropriate to reflect differences in electric rates outside New York City. The charge for electricity is not part of the legal regulated rent and is not subject to this Subchapter. The resolution of any dispute arising from the billing or collection of such charge is not within the jurisdiction of the division. A conversion to direct metering is required to include rewiring the building unless the owner can establish that rewiring is unnecessary.

(ii) Submetering. Where the conversion is to submetering of electricity, with the tenant purchasing electricity from the owner or a contractor retained by the owner, who purchases electricity from a utility at the bulk rate, such schedule of rent reductions is based on the median monthly cost of electricity to tenants derived from data from the United States Census Bureau's 2002 New York City Housing and Vacancy Survey, as tabulated by the New York City Rent Guidelines Board, 51 Chambers Street, Suite 202, New York, NY, and available on its website at www.housingnyc.com, adjusted to reflect the bulk rate for electricity plus a reasonable service fee for the cost of meter reading and billing, based on the maximum estimated fee included in the Residential Electric Submetering Manual revised October 2001, published by the New York State Energy Research and Development Authority, 17 Columbia Circle, Albany, NY, and available on its website at www.nyserda.org, and further adjusted where appropriate to reflect differences in electric rates outside New York City, and reflected in Operational Bulletin 2003-1. The owner or contractor retained by the owner is not permitted to charge the tenant more than the bulk rate for electricity plus a reasonable service charge for the cost of meter reading and billing. The charge for electricity as well as any related service surcharge is not part of the legal regulated rent and is not subject to this Subchapter. The resolution of any dispute arising from the billing or collection of such charge or surcharge is not within the jurisdiction of the division. A conversion to submetering does not require rewiring the building provided the owner submits an affidavit sworn to by a licensed electrician that the existing wiring is safe and of sufficient capacity for the building.

(iii) Recipients of senior citizen rent increase exemptions (SCRIE) or disability rent increase exemptions (DRIE). For a tenant who on the date of the conversion is receiving a SCRIE or DRIE authorized by local law, the rent is not reduced and the cost of electricity remains included in the rent, although the owner is permitted to install any equipment in such tenant's housing accommodation as is required for effectuation of electrical conversion pursuant to this paragraph.

(a) After the conversion, upon the vacancy of the tenant, the owner, without making application to the division, is required to reduce the legal regulated rent for the housing accommodation in accordance with the schedule of rent reductions set forth in Operational Bulletin 2003-1, and thereafter any subsequent tenant is responsible for the cost of his or her consumption of electricity, and for the legal rent as reduced, including any applicable major capital improvement rent increase based upon the cost of work done to effectuate the electrical conversion.

(b) After the conversion, if a tenant ceases to receive a SCRIE or DRIE, the owner, without making application to the division, may reduce the rent in accordance with the schedule of rent reductions set forth in Operational Bulletin 2003-1, and thereafter the tenant is responsible for the cost of his or her electricity, and for the legal rent as reduced, including any applicable major capital improvement rent increase based upon the cost of work done to effectuate the electrical conversion, for as long as the tenant is not receiving a SCRIE or DRIE. Thereafter, in the event that the tenant resumes receiving a SCRIE or DRIE, the owner, without making application to the division, is required to eliminate the rent reduction and resume responsibility for the tenant's electric bills.

(iv) Every three years, upon the publication of a new housing vacancy survey, and tabulation of the survey data by the New York City Rent Guidelines Board, DHCR shall issue a new operational bulletin governing electrical conversions setting forth rent reductions based on the new survey data, and shall move to amend the regulations to incorporate by reference the new operational bulletin, housing vacancy survey, and rent guidelines board tabulation. At such time as New York State Energy Research and Development Authority issues a new residential electric submetering manual setting forth a new maximum estimated submetering service fee, DHCR shall move to amend the regulations to incorporate that document by reference.

(4) such decrease, modification or substitution is not inconsistent with the act or this Subchapter.

No such reduction in rent or decrease in services, or modification or substitution of essential services shall take place prior to the approval of the owner's application by the division, except that a service decrease, modification, or substitution pursuant to paragraphs (1) and (2) of this subdivision may take place prior to such approval.

(c) Comparative hardship.

The division may grant an appropriate adjustment of the legal regulated rent where the landlord, by application for increases in rents in excess of the rent adjustment authorized by the Rent Guidelines Board under the act and as provided for in section 2502.5 of this Part, establishes a hardship, and the division finds that the rate of such rent adjustment is not sufficient to enable the owner to maintain approximately the same ratio between operating expenses (including taxes and labor costs, but excluding debt service, financing costs and management fees) and gross rents which prevailed on the average over the immediate preceding five-year period, or for the entire life of the building if less than five years. No application may be made under this subdivision for an increase if a six-percent rent increase is still in effect based on an application pursuant to this subdivision or pursuant to subdivision (d) of this section.

(d) Alternative hardship.

As an alternative to the hardship application provided under subdivision (c) of this section, owners of buildings acquired by the same owner or a related entity owned by the same principals three years prior to the date of application may apply to the division, on forms prescribed by the division, for increases in excess of the level of applicable guideline increases established under the act, based on a finding by the division that such guideline increases are not sufficient to enable the owner to maintain an annual gross rent income collectible for such building which exceeds the annual operating expenses of such building by a sum equal to at least five percent of such annual gross rent income collectible, subject to the definitions and restrictions provided for herein.

(1) Definitions.

For this subdivision, the following terms shall mean:

(i) Annual gross rent income collectible shall be the actual income receivable per annum arising out of the operation and ownership of the property, including but not limited to rental from housing accommodations, stores, professional or business use, garages, parking spaces, and income from easements or air rights, washing machines, vending machines and signs, plus the rent calculated under subparagraph (2)(iii) of this subdivision. In ascertaining income receivable, the division shall determine what efforts, if any, the owner has followed in collecting unpaid rent.

(ii) Operating expenses shall consist of the actual, reasonable costs of fuel, labor, utilities, taxes (other than income or corporate franchise taxes), fees (including attorney's fees for services rendered during the test year not related to refinancing of mortgage), permits, necessary contracted services and repairs for which an owner is not eligible for an increase pursuant to this section, insurance, parts and supplies, reasonable management fees, mortgage interest, and other reasonable and necessary administrative costs applicable to the operation and maintenance of the property.

(iii) Mortgage interest shall be deemed to mean interest on a bona fide mortgage, including an allocable portion of the charges related thereto. Criteria to be considered in determining a bona fide mortgage other than an institutional mortgage shall include, but not be limited to, the following: the condition of the property, the location of the property, the existing mortgage market at the time the mortgage is placed, the principal amount of the mortgage, the term of the mortgage, the amortization rate, security and other terms and conditions of the mortgage.

(iv) Institutional mortgage shall include a mortgage given to any bank, trust company, bank and trust company, savings bank or savings and loan association (any of which may be licensed under the laws of any jurisdiction within the United States), pension funds, credit unions, insurance companies and governmental entities. The division may determine that any other mortgage is an institutional mortgage in its discretion.

(v) Owner's equity shall mean the sum of:

(a) the purchase price of the property, less the principal of any mortgage or loan used to finance the purchase of the property;

(b) the cost of any capital improvement for which the owner has not collected an increase in rent, less the principal of any mortgage or loan used to finance said improvement;

(c) any repayment of the principal of any mortgage or loan used to finance the purchase of the property, or any capital improvement for which the owner has not collected an increase in rent; and

(d) any increase in the equalized assessed value of the property which occurred subsequent to the first valuation of the property after purchase by the owner.

(vi) Threshold income shall mean that income for such building which exceeds the annual operating expense for such building by a sum equal to five percent of such threshold income.

(vii) Test year shall mean any one of the following:

(a) the most recent calendar year (January 1st to December 31st);

(b) the most recent fiscal year (one year ending on the last day of a month other than December 31st), provided that books of account are maintained and closed accordingly; or

(c) any 12 consecutive months ending within 90 days prior to the date of filing of the hardship application. Such period must end on the last day of a month. Nothing herein shall prevent the division from comparing and adjusting expenses and income during the test year with expenses and income occurring during the three years prior to the date of application, in order to determine the reasonableness of such expenses and income.

(2) Restrictions.

(i) No owner may file an application, nor may the division grant such owner an increase in excess of the level of applicable guideline increases, unless:

(a) the annual gross rent income collectible for the test year does not exceed the annual operating expenses of such building by a sum equal to at least five percent of such annual gross rental income collectible; and

(b) the owner or an entity related to the owner acquired the building at least 36 months prior to the date of application; and

(c) the owner's equity in the building exceeds five percent of the sum of:

(1) the arm's-length purchase price of the property; and

(2) the cost of any capital improvements for which the owner has not collected an increase in rent pursuant to subdivision (a) of this section; and

(3) any repayment of principal of any mortgage or loan used to finance the purchase of the property or any capital improvements for which the owner has not collected an increase in rent pursuant to subdivision (a) of this section; and

(4) any increase in the equalized assessed value of the property which occurred subsequent to the first valuation of the property after purchase by the owner; and

(d) the building was last granted a hardship increase more than 36 months prior to the date of application, provided that no application may be made for any hardship if a six-percent increase is still in effect based on a prior application; and

(e) the owner has resolved all legal objections to any real estate taxes and water and sewer charges for the test year.

(ii) The division may, in its discretion, deny an owner an increase as provided, in whole or in part, if the owner is not maintaining all essential services as required by law, or there are violations of record of any municipal, county, State or Federal law to his knowledge which relates to the maintenance of such services. Any increase granted herein may be conditioned or revoked upon the owner's failure to continue to maintain such services during the period for which the increase is granted, provided that where the division determines that insufficient income is the cause of such failure to maintain essential services, hardship increases may be granted conditionally, provided that such services will be restored within a reasonable time as determined by the division.

(iii) The maximum amount of hardship increase to which an owner shall be entitled shall be the difference between the threshold income and the annual gross rent income collectible for the test year. In buildings that also contain apartments subject to the Emergency Housing Rent Control Law, appropriate adjustments for both income and expenses will be made by the division in order to calculate the pro rata rate share for those apartments subject to this application. However, notwithstanding the above, the collection of any increase in the rent for any housing accommodation pursuant to this section shall not exceed six percent of the legal regulated rent in effect at the time immediately prior to the issuance of the order. The collectibility of any amount above said sum shall be spread forward in similar increments and added to the rent as established or set in future years. No application may be made for any hardship if a six-percent increase is still in effect based on a prior application.

(iv) The division shall set a rental value for any unit occupied by the owner or managing agent, or a person related to the owner or managing agent, or an employee of the owner or managing agent, or unoccupied at the owner's choice for more than one month at the last regulated rent plus the minimum number of guideline increases; or, if no such regulated rent existed or is known, the division shall impute a rent equal to the average of rents for similar or comparable apartments subject to these regulations in the building during the test year.

(v) Each owner who files an application for a hardship rent increase shall be required to maintain all records as submitted with the subject application, and further be required to retain same for a period of three years after the effective date of the order.

(vi) Each application under this section shall be certified by the owner or his duly authorized agent as to its accuracy and compliance with this section, under the penalty of perjury.