[REN #753] Landlord Crisis: Radical New Rent Control in New York

Picture of NYC for Real Estate News for Investors Podcast Episode #753

New York landlords are gearing up for a court battle over new statewide rent control rules. These rules will have a dramatic impact on rent-regulated apartments in New York City, as well as non-rent regulated rentals across the state. Landlords say the legislation is a clear defeat for the real estate industry, but they are planning to fight back with a lawsuit.

The high cost of housing is making rentals more expensive across the nation. We need more housing to bring prices down but that’s not happening fast enough as the cries for rent control grow louder. In New York, housing advocates cite figures for the state’s 3 million renters that show more than half of them are rent-burdened. That means they are paying more than a third of their income on rent.
 

Rental Affordability Crisis

To address the rental affordability crisis, New York has become the third state to adopt state-wide rent control rules. Oregon was the first, followed by California earlier this year. In mid-June, the New York Senate and Assembly approved The Housing Stability and Tenant Protections Act of 2019. The bill was also quickly signed by Governor Andrew Cuomo, just a day before the previous rules were set to expire. (1)

This legislation will have a direct impact on almost one million rent-regulated apartments in the city, and new rules for all New York rentals. They also give local governments the authority to enact their own regulations. And, the new rules won’t expire. They were approved as “permanent” by lawmakers.

Cuomo said in a statement, “At the beginning of this legislative session, I called for the most sweeping, aggressive tenant protections in state history.” He said, “I’m confident the measure passed today is the strongest possible set of reforms that the Legislature was able to pass.” The bill includes most of the changes called for by tenant advocates supporting “universal rent control.” (2)
 

New York Rent Regulations

New York has some complicated rules to begin with, including specific differences between rent controlled and rent regulated units. Units that are rent controlled protect tenants who’ve been living in the same place since at least July 1971. The building also has to have been built before 1947. Those tenants can pass the apartment on to another family member, but once everyone moves out, the unit falls out of rent control and landlords can charge market rates for the rent. It sounds vaguely similar to California’s Proposition 13 for controls on property tax increases.

Rent regulated units usually apply to newer buildings with six or more units that were built between 1947 and 1974. A Rent Guidelines Board determines how much the rent can be raised each year. These rentals are now subject to many new rules, including ones that will make it harder for rentals to become deregulated.
 

Big Changes to NY Rent Control

Many of the changes involve the elimination of rules that benefit property owners. Vacancy decontrol is one of them. The previous rules allowed landlords to raise the rent a certain amount each year until the rent hit a maximum amount of $2,774 per month. At that point, the unit became deregulated and landlords could charge market rate for a new tenant. That’s gone. (3)

Something called a vacancy bonus has also been eliminated. That allowed landlords to raise the rent for rent-regulated apartments by as much as 20% when tenants moved out.

The new rules also lower the amount that landlords can raise the rent after making improvements. The new rules only allow a 2% increase.

A rule that allowed for the deregulation of an apartment if a tenant earned more than $200,000 a year for two years in a row has also been eliminated. Preferential rents are gone. That allowed landlords to provide a move-in discount, and then raise it to the legal limit when the lease is renewed. The owner-occupied provision has also been trimmed to allow just one unit for landlord use. Lawmakers say the previous rule was abused by landlords who claimed multiple units as their homes.

There are also new rules that pertain to non-regulated apartments throughout the state, including the limiting of security deposits to one-month’s rent, a ban on the blacklisting of troublesome tenants, tenant protections during the eviction process, and a 30-day notice warning tenants of a rent increase or the non-renewal of a lease.
 

Critics Warn of Long-Term Impacts

Among those opposed to the legislation is the group Taxpayers for an Affordable New York which includes the Real Estate Board of New York and the Rent Stabilization Association. The group said in a statement, “This legislation failed to address the City’s housing crisis and will lead to disinvestment in the City’s private sector rental stock consigning hundreds of thousands of rent-regulated tenants to living in buildings that are likely to fall into disrepair.” It says, “This legislation will not create a single new affordable housing unit, improve the vacancy rate or improve enforcement against the few dishonest landlords who tend to dominate the headlines.”

President of the Real Estate Board of New York, John H. Banks, echoed that sentiment. He says, “We are deeply concerned about exacerbating the affordability crisis in the future if developers have no financial incentive to produce more affordable units for our growing population.”

Property owners are particularly concerned about the lower 2% cap on rent increases to cover major capital improvements. It was 6% previously. There’s now concern that landlords won’t be able to afford needed upgrades and that buildings will fall into disrepair. That will also affect the workers and contractors who maintain those buildings, as well as the residents who have to live there.

The New York Times offered an example, saying that one landlord spent $25,000 to renovate a one-bedroom apartment recently. That included improvements to the kitchen along with a new sink and tub. With the new 2% cap on rent increases to cover those improvements, she says she may have a hard time paying her mortgage.

As the amount of deferred maintenance grows, the resale value of the buildings will decline, along with their future potential for rental income. Developers will also have a tougher time deregulating apartments, which will reduce the supply of the non-regulated apartments, and push rents higher for those that remain.

Scott Rechler, of RXR Realty, told the Commercial Observer that the legislation is a “bugle call” for landlords and property owners. He says, “Historically, members of the real estate industry were the leaders that helped our city navigate these challenges. Now, rather than being seen as leaders, we’re being seen as villains.”

There’s a housing crisis out there to address, for sure. But this isn’t the way to do it.

Links:

(1) New Rent Control Bill: Curbed

(2) NYT Article

(3) NY Changes in Rent Control: NYT

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