A state agency is looking to crack down on a loophole in New York state law that has allowed landlords of rent-regulated apartments to combine units and dramatically increase the rent — a legal workaround that regulators have been aware of for more than two years.

The Division of Housing and Community Renewal, the state agency that oversees roughly one million rent-regulated units in New York, issued a proposed rule change last week that would curb a landlord’s ability to merge regulated units, a move the real estate industry is already decrying.

Landlord groups say the proposed changes would hurt them financially and questioned whether the state agency has the authority to make such a change to state law.

“They're basically legislating by regulation,” said Jay Martin, executive director of the Community Housing Improvement Program, which represents about 4,000 owners of mostly rent-regulated apartments.

Martin predicts that the proposed rules, if implemented, would lead to potential lawsuits.

“It's just a catastrophe,” said Martin.

The agency’s proposed rule change, which is subject to public input, comes just days after Gothamist reported on the agency’s lack of movement on the loophole. DHCR was first made aware of the issue as early as February 2020 and said it would address it then.

The Real Estate Board of New York, the powerful trade group representing developers and landlords, is also voicing its objections.

“It is disappointing that at a time when New York City is experiencing a worsening housing crisis, the Governor and her team are putting forward ideas that further discourage investment in rental housing,” James Whelan, president of the Real Estate Board of New York or REBNY, said in a statement.

The 2019 overhaul of New York’s rent laws strictly limited the ways landlords can raise rents on regulated apartments.

However, the law did not say how much rent landlords can charge after they combine two or more rent-regulated units or merge a rent-regulated unit with a market-rate apartment.

In the years since the rent laws passed, the real estate industry waited for clarity from DHCR. In the meantime, landlords went ahead and combined units, setting the initial rent to what they wanted.

The proposed changes would require that the rent of a new combined apartment be no more than the sum of two previous rents.

As Gothamist previously reported, an East Village landlord combined two rent-stabilized apartments that residents dubbed a “Frankenstein” unit, and listed the new four-bedroom two-bath unit on StreetEasy for $9,000 a month, nearly three times higher than what it would have cost to rent the regulated units separately.

Before they were combined, the 2020 rents for the one-bedroom apartments were about $1,300 and $1,800 a month, according to the rent roll obtained by Gothamist.

The rent for the East Village apartment would be roughly $3,100 under the rule changes being floated by DHCR.

I'm very pleased that they finally came out with their rules, even though it took them several years to get them done

State Sen. Liz Krueger (D-Manhattan)

“I'm very pleased that they finally came out with their rules, even though it took them several years to get them done,” said state Sen. Liz Krueger (D-Manhattan).

Krueger said the proposed changes would increase the supply of affordable housing because landlords who have been leaving regulated apartments vacant with the hope of combining them would put them back on the market.

“So that should be good for affordability,” she said.

Among the other changes being sought by DHCR:

  • If an owner takes space from a regulated apartment to increase the size of an unregulated apartment, the new enlarged apartment becomes rent regulated.
  • If an owner increases or decreases the size of a regulated apartment, the rent is adjusted by a percentage equal to the percent change in the size of the apartment.

The state housing agency is holding a public hearing in Lower Manhattan on Nov. 15 to get input from the public — one of many steps required before a rule can go into effect. Members of the public can also weigh in virtually, by submitting via email to 2022RentRegulationComments@hcr.ny.gov.