PDD-45-11-00016-A Methodology to Determine the Allowable Costs of Continuing Lease Arrangements

1/25/12 N.Y. St. Reg. PDD-45-11-00016-A

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 4

January 25, 2012

RULE MAKING ACTIVITIES

OFFICE FOR PEOPLE WITH DEVELOPMENTAL DISABILITIES

NOTICE OF ADOPTION

 

I.D No. PDD-45-11-00016-A

Filing No. 8

Filing Date. Jan. 10, 2012

Effective Date. Jan. 25, 2012

Methodology to Determine the Allowable Costs of Continuing Lease Arrangements

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:

Action taken:

Amendment of section 635-6.3 and Subpart 635-99 of Title 14 NYCRR.

Statutory authority:

Mental Hygiene Law, sections 13.09(b) and 43.02

Subject:

Methodology to determine the allowable costs of continuing lease arrangements.

Purpose:

To modify the method of determining allowable costs of continuing lease arrangements.

Text of final rule:

• Section 635-6.3 is amended as follows:

Section 635-6.3. Leases for real property.

(a) This subdivision applies to allowability of costs for leases for real property except for continuing residential lease arrangements as specified in subdivision (b) of this section.

(1) In order for lease costs to be considered for allowability, the provider or [consumer] individual lessee must submit the lease to [OMRDD] OPWDD for approval. In deciding whether to approve a lease, [OMRDD] OPWDD shall consider whether the lease is in the best interests of the programs and the persons it serves and whether the lease in any way violates public policy. In deciding whether to approve an amount for rent, [OMRDD] OPWDD shall consider whether the provider's rate, fee or price, as a whole, including the amount of rent to be approved, would result in payment which is consistent with efficiency and economy.

[(b)] (2) If an approved lease (see glossary, Subpart 635-99 of this Part) or approved proprietary lease (see glossary, Subpart 635-99 of this Part) is between the provider or [consumer] individual lessee and a party which is not a related party, allowable lease costs shall be the lesser of contract rent or fair market [rental] rent.

[(c)] (3) If an approved lease or approved proprietary lease is between the provider or [consumer] individual lessee and a related party, allowable lease costs shall be the least of:

[(1)] (i) contract rent (see glossary, Subpart 635-99 of this Part);

[(2)] (ii) fair market [rental] rent (see glossary, Subpart 635-99 of this Part); or

[(3)] (iii) the landlord's net cost (see glossary, Subpart 635-99 of this Part).

[(d)] (4) The commissioner may waive the limitations on allowable costs as stated in [subdivision (c)] paragraph (3) of this section upon a showing that such limitations would jeopardize the opening or continued operation of the program or services and that the negotiations for the lease or proprietary lease were conducted as though the parties were not related.

[(e)] (5) The commissioner may, upon application from a provider, allow lease costs in an amount equal to contract rent and greater than fair market rent if the following conditions are met. The commissioner will allow such lease costs only for as long as it is necessary for the provider to relocate the program or services located on the lease property.

[(1)](i) The lease is a renewal which is not pursuant to an option to renew.

[(2)] (ii) The lease is a renewal of a lease for an existing program or services.

[(3)] (iii) The provider has shown that:

[(i)] (a) the provider has made diligent efforts to negotiate a lease renewal for fair market rent or less;

[(ii)] (b) the provider has been unable to negotiate a lease renewal for less than the current rent;

[(iii)] (c) the parties to the lease renewal are not related; and

[(iv)] (d) allowance of lease costs in the amount of contract rent is necessary to ensure the continued operation of the program of services.

[(f)] [From the effective date of this regulation until January 1, 2001, allowable costs under leases between related parties in effect on September 1, 1984 shall be determined in accordance with the regulation in effect immediately preceding the effective date of this Subpart. On and after January 1, 2001, allowable costs under leases between related parties in effect on September 1, 1984 shall be determined in accordance with subdivision (c) of this section.]

[(g)] (6) Contract rent incurred pursuant to an approved lease or approved proprietary lease which is renewed pursuant to an option to renew is allowable.

[(h)] (7) Costs incurred pursuant to an approved lease or approved proprietary lease which is renewed other than pursuant to an option to renew (see glossary, Subpart 635-99 of this Part) shall be allowable as follows:

[(1)] (i) If the lease is between parties who are not related, allowable costs are determined in accordance with [subdivision (b)] paragraph (2) of this [section] subdivision.

[(2)] (ii) If the lease is between parties who are related, allowable costs are determined in accordance with [subdivision (c)] paragraph (3) of this [section] subdivision.

[(3)] (iii) [OMRDD] OPWDD shall decide whether to approve any such renewal at least 30 days before the last day the lease may be renewed, if the provider or [consumer] individual lessee has notified [OMRDD] OPWDD in accordance with [paragraph (4)] subparagraph (iv) of this [subdivision] paragraph.

[(4)] (iv) Whenever possible, the provider or [consumer] individual lessee shall submit to [OMRDD] OPWDD a request for approval of lease renewals at least 120 days prior to the last date for renewing the lease.

(b) This subdivision governs the allowability of lease costs applicable to continuing residential lease arrangements for periods after December 31, 2011, for which periods OPWDD has not approved lease costs for an entire calendar year. This subdivision applies to residential lease renewals which are not renewals pursuant to an option to renew.

(1) There shall be an allowable lease cost, exclusive of any ancillary costs, for an entire calendar year. The allowable lease cost, exclusive of any ancillary costs, for a calendar year shall be the base lease amount for such calendar year increased by the annual increase percentage for such calendar year.

(2) Base lease amount. The base lease amount for a calendar year shall be the allowable lease cost calculated in accordance with this section in effect on December 31 of the prior calendar year, exclusive of any ancillary costs (see paragraph (4) of this subdivision).

(3) Annual increase percentage. The annual increase percentage for 2012 is 1.97%.

(4) Ancillary costs. Ancillary costs are those charges identified in a lease in addition to monthly rent. These include but are not limited to: special assessments, taxes, co-op or condominium maintenance fees, utility payments assessed to the lessee by the lessor pursuant to the terms of the lease, and lessor-financed renovations billed as additional rent.

(5) For ancillary costs under the terms of the lease to be allowable the lessee must submit an application to OPWDD specifying the nature and amounts of the ancillary costs. OPWDD may approve or disapprove the request or adjust the amount to be reimbursed based on whether the ancillary costs are reasonable and necessary.

• New subdivision 635-99.1(h) is added as follows and the rest of the section is renumbered accordingly:

(h) Ancillary costs. Ancillary costs are those charges identified in a lease in addition to monthly rent. These include but are not limited to: special assessments, taxes, co-op or condominium maintenance fees, utility payments assessed to the lessee by the lessor pursuant to the terms of the lease, and lessor-financed renovations billed as additional rent.

• New subdivision 635-99.1(as) is amended as follows:

(as) Fair market [rental] rent. The [rental] rent that the property would most probably command on the open market as indicated by [rentals] rents being paid and asked for comparable properties in the same geographic area as of the date of the appraisal.

Final rule as compared with last published rule:

Nonsubstantive changes were made in section 635-6.3(b).

Text of rule and any required statements and analyses may be obtained from:

Barbara Brundage, Director, Regulatory Affairs Unit, OPWDD, 44 Holland Avenue, Albany, NY 12229, [phone], email: [e-mail]

Additional matter required by statute:

Pursuant to the requirements of the State Environmental Quality Review Act, OPWDD, as lead agency, has determined that the action described herein will have no effect on the environment, and an E.I.S. is not needed.

Revised Regulatory Impact Statement, Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement

In response to comments received, OPWDD made a minor non-substantive change in the final regulations compared to the proposed regulations. The change in subdivision 635-6.3(b) clarifies that the new methodology is applied to lease periods after December 31, 2011.

This change does not necessitate revisions to the previously published Regulatory Impact Statement, Regulatory Flexibility Analysis for Small Business and Local Governments, Rural Area Flexibility Analysis or Job Impact Statement.

Assessment of Public Comment

OPWDD received comments concerning the proposed regulation from a provider association and two voluntary agencies which provide services to people with developmental disabilities.

COMMENT: The provider association and the voluntary agencies expressed concerns about the treatment of ancillary costs, which are those charges identified in a lease in addition to the monthly rent. The proposed regulation specified that OPWDD may approve or disapprove reimbursement of ancillary costs based on whether the costs are reasonable and necessary. The provider association and a voluntary agency were concerned that the decision-making process gives the appearance of being an arbitrary one. They recommended that language be added to provide some parameters regarding how these decisions will be made. The provider association and voluntary agencies stated that landlord imposed building-wide costs which are outside the control of the tenant (or costs associated with accommodations necessary due to the disability of the resident) should always be approved. The provider association and voluntary agencies also advocated that the ancillary costs be treated in the rate methodology in the same manner as they are currently treated. The provider association also suggested adding wording which states that the method of reimbursement for maintenance fees associated with cooperative apartments is not changed. One of the voluntary agencies stated that ancillary costs are beyond a provider's ability to negotiate, and it requested that the language be changed to establish that all ancillary costs would be reimbursed.

RESPONSE: OPWDD disagrees with the suggestions to eliminate its discretion in reviewing the ancillary costs. The review of ancillary costs is important in the interests of economy and efficiency in the expenditure of government funds. OPWDD also notes that the treatment of ancillary costs in this regulation, including cooperative apartment maintenance fees, reflects prior OPWDD practice, and that no changes in these practices are contemplated as a result of this regulatory change.

COMMENT: The provider association and the voluntary agencies were concerned that the language in the regulation could be interpreted as applying to lease periods that begin prior to Jan. 1, 2012. They advocated modifying the language to clarify that these situations are "grandfathered in" and that the new methodology would not apply in these situations.

RESPONSE: OPWDD has added additional language to clarify that the new methodology applies to continuing lease arrangements for periods after December 31, 2011, for which period OPWDD has not approved lease costs for an entire calendar year.

COMMENT: One of the voluntary agencies suggested that the proposed regulations include a differentiation factor for residential leased property in the downstate region that considers the higher cost of real property in this region.

RESPONSE: OPWDD convened a workgroup to develop the proposed regulations which consisted of representatives of providers and provider associations and OPWDD staff. The workgroup was unable to identify any independent, verifiable index that separated upstate and downstate rents. Accordingly, the most geographically relevant Rental of Primary Residence component of the Consumer Price Index (CPI) was adopted by the workgroup as the most viable solution. This was used to generate the annual increase percentage for 2012 which was incorporated into the regulation. OPWDD observes that the commenter did not suggest an alternative index.

OPWDD notes that the index used in the calculation of the annual increase percentage is actually weighted in favor of downstate over upstate. This is because the preponderance of rental housing in New York State is in the downstate metropolitan area. The use of this same index in the calculation of the annual increase percentage for future years will accommodate any higher increases in downstate rental costs over upstate rental costs. In addition, this same index has been used in the past to adjust OPWDD's rent approval guidelines, so its use in the context is consistent with prior practice.

COMMENT: The same voluntary agency suggested that the regulations grandfather in all rents associated with Prior Property Approval (PPA) requests that were submitted to OPWDD prior to 12/31/2011 for which approval from OPWDD is pending, so that the new methodology would not be applicable in these situations.

RESPONSE: OPWDD disagrees. OPWDD has not established a closing date for submission of PPAs for renewal leases that would be affected by this regulation, nor has OPWDD told any providers that they could exempt themselves from the new regulation by submitting a PPA request by December 31. It would be unfair to create a new exemption now.

COMMENT: The same voluntary agency noted that a large percentage of residential programs are housed in rent regulated/subsidized apartments for which all rent increases are established and determined by the NYC Rent Guidelines Board. The provider suggested that these residences be exempt from the application of the new methodology. The voluntary agency suggested that other independent indices be used in this situation.

RESPONSE: OPWDD disagrees. The workgroup which developed the regulation considered the use of the Rent Guidelines Board index for some or all leases, but determined that the index was not representative of lease cost changes across the region. It is also noteworthy that the Rent Guidelines Board index was lower than the relevant CPI sub-index over the ten years through 2010.

COMMENT: The same voluntary agency suggested that any Major Capital Improvement (MCI) increases be exempt from the new methodology.

RESPONSE: OPWDD notes that MCI costs are considered to be ancillary costs which are eligible for approval outside of the base rent calculation. This is the same regardless of whether the new or old methodology is applied. OPWDD notes that the annual increase percentage is not applied to MCI costs.

COMMENT: The same voluntary agency stated that many of the individuals it serves are medically fragile, multiply disabled and use wheelchairs for mobility, and that finding accessible housing in NYC for these individuals is difficult. The voluntary agency expressed concerns that the imposition of the new methodology could adversely impact these individuals by jeopardizing its ability to negotiate long term leases.

RESPONSE: OPWDD disagrees. Existing rules will apply to allowability of rent costs for initial lease terms, i.e., OPWDD will approve rent amounts for each lease based on the factors in subdivision 635-6.3(a). Rent amounts for initial terms of long-term leases will still be approved at inception for the entire term for which the rent amount is specified, as will subsequent renewals for sites involving significant renovations at the end of a long initial term. The only long-term leases that would be affected by the new regulations are renewals that do not involve renovations. OPWDD therefore does not expect that the new regulations will affect the ability of providers to negotiate long-term leases.

COMMENT: The same voluntary agency expressed concerns that the new methodology threatens continued occupancy in locations for which the rent increase would be within Fair Market Rental but the percentage increase would be insufficient to cover the rent increase. In the event that the actual rent exceeds the reimbursement the provider might not be able to afford to pay the difference.

RESPONSE: OPWDD intends to review the overall impact of this change with respect to market conditions and provider costs across their lease portfolios over time and will make necessary adjustments, down or up, if warranted.

COMMENT: The same voluntary provider questioned whether OPWDD would provide reimbursement for all costs in the event that relocation becomes necessary because of the new methodology.

RESPONSE: OPWDD does not intend to change its existing policy, which provides that OPWDD will provide funding associated with the reasonable costs of a relocation necessary to protect the health and safety of individuals being served.

COMMENT: The same voluntary agency suggested that the effective date be delayed for six months in order to give OPWDD additional time to conduct a comprehensive review of comments received and to make any necessary revisions.

RESPONSE: OPWDD notes that only three sets of comments were received, and that it has been able to comprehensively review the comments since their receipt. Since no substantive revisions were necessary in the regulations based on the comments received, OPWDD is able to promulgate the regulation without delaying the effective date.