Major capital improvements in rent-regulated buildings: still landlord-friendly

Feb. 25, 2026 — Much recent discussion of rent-regulated apartments in New York City has focused on whether Mayor Zohran Mamdani will be able to get the Rent Guidelines Board (RGB) to fulfill his pledge to freeze rents on such apartments, let alone for four years. Mamdani has recently appointed or reappointed six of the nine members of the RGB. (The data say it is dubious that a freeze would comport with the factors that the RGB is legally required to take into account; while the politics may be very different, litigation focused on whether a freeze was predetermined as opposed to arrived at as a result of statutorily mandated factors would be sure to ensue.)

The other main feature of discussion has been those landlords of “distressed” properties — those properties with negative net operating income (where operating costs — excluding debt service — exceed rent collected. According to the 2025 RGB Income and Expense Study, 9.3 percent of properties were distressed citywide, with the percentage in “Core Manhattan” estimated at 7.1 percent, and the rest of the the city estimated at 10.1 percent.

The element of the system that has not been getting much attention is how landlords of rent-regulated apartments recoup costs for major capital improvements (MCIs) — things like new roofs, boilers, windows, plumbing, and electrical wiring. The answer is that, even under the landlord-pilloried reformed system, landlords fare very well indeed.

Imagine the scenario of a landlord with a 50-unit rent-stabilized building where the average rent is $1,500/month. The landlord makes $2 million in MCIs that are approved by the oversight agency, the New York State Department of Homes and Community Renewal. Now also assume that, over the course of the 30 years that the landlord gets to collect an MCI increase from tenants, the RGB allows, independent of the MCI charge, a 1.5 percent rent increase per year.

Since the building has more than 35 units, the initial calculation is to spread the cost out over 12.5 years (150 months). That would mean an increase of $266.67 per tenant per month. But, as a function of the 2019 rent reforms, landlords are not permitted to start charging the full amount right away. They have to phase it in so that the MCI increase each year is no more than 2 percent of the tenant’s base rent at the time the MCI was approved (in our case, 2 percent of $1,500 means $30 tacked on in Year 1, $60 tacked on in Year two, and so on, until the full $266.67 has been added in Year 9).

This leaves out an additional benefit that landlords get, but let’s begin here. If you look at the rightmost two columns in the table on page 2, you see the rental amount attributable to the MCI that is charged to a tenant on a monthly and annual basis. It turns out that we already see the landlord collecting more than $4.1 million in additional rent for an MCI that cost $2 million. 

But there is another benefit that landlords get. During the 30-year period, the MCI charge is added to the base rent and RGB annual rent increases (1.5 percent in our example) include the MCI charge. As such, the monthly and annualized amounts in the (true) scenario where MCI is included in base rent (columns 4 and 5) start to exceed the amounts in the counterfactual example where the MCI charge is not included in the base rent. The difference is small at first, but, by the final year, the difference amounts to more than $1,400 per apartment per year.

That difference means that, rather than collecting more than $4.1 million over time for the $2 million MCI, the landlord collects slightly more than $5 million for that $2 million MCI.

Does the MCI still work out for the landlord where average rent is even lower? Yes. We ran the numbers for the same sized-building (make the same rent-increase assumptions) where the average rent started out at $1,000. It takes longer for the full MCI charge to phase in (14 years versus nine in our other example), but ultimately the landlord collects more than $4.5 million for the $2 million improvement (see table on page 3).

It is entirely fair to point out both that, in almost all circumstances, the landlord will borrow money to pay for the MCI, and that, in all circumstances, the expenditure is not fully recouped until well into the 30-year recoupment period. But this just highlights the leverage that the landlord gets to wield by largely playing with other people’s money. Interest on the loan is tax deductible, so part of the cost is subsidized by the taxpayers. 

The landlord begins to depreciate the MCI on its taxes (a paper loss), another taxpayer subsidy. 

To the extent that the property is sold before the MCI is fully depreciated, the property’s basis is boosted by the cost of the MCI (that is, the property’s basis increased by the full cost of the MCI minus that which has been depreciated). So, the reduction in what is treated as profit and, consequently, the reduction in taxes owed, is a third subsidy.

Just as the landlord doesn’t get paid in 2026 dollars (the 1.5 percent per year RGB increase that is applicable to the MCI charge will almost certainly lag the rate of inflation to the landlords’ disadvantage), the payment of the money borrowed (at least a substantial portion, if not all, of the $2 million) is not paid in 2026 dollars), to the landlord’s advantage.

Finally, the amount borrowed is cash that the landlord is not spending on the property. To the extent that cash exists, the landlord is able to deploy it elsewhere.