- Jason Gordon
In the view of many of New York's residential landlords, the fix is in.
In late June, New York City’s largest rental landlord, The Blackstone Group, announced it was halting all non-mandatory apartment renovations and other planned work at their adjacent Manhattan properties, Stuyvesant Town and Peter Cooper Village, which together comprise over 11,200 apartments. “In light of the recent legislation, we are in the process of evaluating capital investments at Stuyvesant Town,” a spokesperson for Blackstone said in a statement to Crain's New York.
The firm’s stunning announcement came in response to the passage of The Housing Stability and Tenant Protection Act (HSTPA) by Albany lawmakers on June 14 and signed into law the same day by Governor Cuomo. The law dramatically changes the guidelines concerning rent increases landlords can charge in rent-stabilized properties to offset their renovation expenses. But this aspect of the law is just one of the provisions landlords find untenable, even suffocating, in terms of maintaining their business models.
Here’s a list of some of the more salient provisions of the HSTPA which will impact landlords and the city’s nearly one million rent-stabilized apartments which house approximately 2.4 million people:
- In the past, landlords could renovate apartments and add a fraction of that expense to the monthly rent bill of the tenant. That increase to the rent would be permanent. The new law stipulates that landlords can only pass on a total of $15,000 worth of renovation expenses over 15 years (about $89 per month), after which it disappears from the monthly rent bill.
- The HSTPA, for the first time, has made the rent regulation laws, themselves, permanent. Since the inception of rent stabilization in the city, some 40 years ago, the laws were always temporary, needing extension every several years.
- The law eliminates vacancy bonuses which permitted landlords to boost rents by 20 percent when a tenant moved out. It also terminated preferential rents, a method which allowed landlords to charge less than an apartment’s legal rent but permitted a rent increase to the legal maximum when the tenant renewed his lease.
- Before the HSTPA went into effect, an apartment which reached a rent of a $2,774 threshold through the normal yearly/biyearly rent increases (and the vacancy boost) became deregulated; the landlord could then seek to rent the unit at the market rate. The new law prohibits landlords of rent stabilized apartments from ever seeking market rate. In essence, they remain stabilized forever.
- Landlords can now only pass on two percent (previously 6 percent), to tenants for major capital improvements (MCIs). These are building-wide renovations such as plumbing, electrical system upgrades, roof replacements, etc. Additionally, rather than becoming permanent rent increases, MCIs will be removed from the rent after 30 years
The Landlord’s Perspective
Blackstone is hardly isolated in their plans; many other New York residential landlords, large and small, issued similar statements. In an ominously titled article, “Game Over,” The Real Deal offers an informal survey of landlords impacted by the new rent stabilization guidelines.
Edward Kalikow of the Kalikow Group which owns about 6,000 rental units in New York (90 percent of which are rent-stabilized) said his firm too plans to cut back on renovations. Kalikow added that landlords whose business plan called for flipping apartments to market rate will be most negatively impacted by the HSTPA. “Anyone that bought a property at a 3 or 4 percent cap rate, planned to turn over units legally, that business model is going to be completely destroyed.”
John Tashjian, a principal of Centurion Real Estate Partners which currently owns and operates 24 mixed use properties in NYC said that while the industry was aware adjustments were needed on reimbursement costs for renovations, the new law “pushed past reason.”
Marla Siegal, executive director of mid-sized Sugar Hill Real Estate which owns about 1,300 rent-stabilized units in the city and specializes in acquiring buildings in need of upgrading, expressed concern about the new law’s impact on basic necessities: painting common areas, improved lighting, the installation of security systems, etc. “This is a total about face in the way we operate … [and therefore] our ability to make improvements in buildings that are really old. Often, when we acquire them, they’ve been undermanaged and not maintained for many years.”
“I think there will come a time when the New York City housing stock will be in terrible shape, like it was in the ’70s,” developer Myles Horn told The New York Times recalling an era when the city had to seize apartment buildings from landlords who fell behind on property taxes and mortgage payments.
Taken together, the law’s elimination of the landlord’s ability to deregulate when a rent threshold is reached, the elimination of the vacancy bonus, and the new regulations concerning both individual apartment and building wide renovations have left landlords despairing. From their point of view, the lure of ownership of multi-family buildings has always been a profit driven enterprise. They now feel that the HSTPA will serve to make it very difficult to realize that profit. As a result, landlords of buildings with rent stabilized units fear the value of their properties will decrease, perhaps sharply.
The Tenant’s Perspective
Proponents of the new law argue that occupants of rent stabilized units represent many of the most vulnerable of the city’s residents. A survey conducted by a NYC agency determined that the median household income for tenants in rent stabilized apartments is about $44,000 compared to bout $67,000 in non-regulated units. Also, tenants in these units are disproportionately racial minorities – about 75%.
Additionally, compared with non-regulated units, rent stabilized households are more likely to contain at least one adult who is 62 years of age or older and more likely to be headed by a single adult.
Tenant advocates also cite statistics which show NYC has lost 152,000 rent regulated apartments since 1993, as landlords have steadily pushed the rents higher. Another 130,000 units have been lost to co-op and condo conversions.
While an April study by the NYC Rent Guidelines Board acknowledges that operating costs for landlords have increased 5.5% in the year ending in March 2019, net operating income for landlords of rent stabilized buildings have increased for the 13th consecutive year.
Finally, Tenant advocates allege that landlords have abused the rent stabilization laws for decades. They argue, for example, that individual apartment improvements (IAIs) were usually done while an apartment was vacant and that landlords often reported inflated costs to the Department of Housing and Community Renewal, the state body which oversees the rent guidelines. If a tenant didn’t challenge the renovation costs, the landlord’s reported outlay was accepted as accurate.
The Landlords Go to Court
Late last month, two of the city’s largest landlord organizations challenged the HSTPA on constitutional grounds. In interviews with several owners, The Real Deal reports that landlords will argue that their 5th amendment rights have been violated. Scott Mollen, a partner at Herrick, Feinstein LLP said, “Generally, government cannot take private property without due process and just compensation.” Mollen elaborates that the new rent laws erect barriers and create “substantial limitations” on a landlord’s ability to realize a profit, which represents “an unconstitutional taking of property.”
In the same article, Charles Moerdler, a partner at Strook said that he believes the new law “raises serious questions of [a] constitutional dimension.”
A second but related argument landlords will make according to The Wall Street Journal is that “The complaint [will] demonstrate the rent laws are arbitrary and irrational and violate constitutional protections against government actions. It argues, for example, that the law doesn’t promote more housing, and provides strong protections to affluent renters.”
While courts have dismissed similar challenges, landlords contend that their chances of prevailing have improved due to the severity of the restrictions on rental properties.
But legal opinion is divided; many real estate and constitutional attorneys contend the strategy is a long shot. In any case, litigation could take months, if not years to wend its way through the courts.
A Way Forward?
With each side unwilling to recognize the reasonable arguments on the opposing side, there appears to be little hope for compromise.
But the facts for the foreseeable future is that the rules have changed for residential landlords. Perhaps a way forward for owners is through creative approaches. There may yet be ways landlords can maintain their profit margin, while economically challenged residents are not squeezed beyond their means.
In this regard, on July 30th The Wall Street Journal reported that L+M Development Partners “has agreed to pay $1.2 billion for a portfolio of 2,800 New York rental apartments with an investment strategy … that appears to run counter to conventional real estate wisdom.” Although all the apartments L+M is purchasing are renting at market rate, the firm plans is to convert about two-thirds of the units into units that are affordable to financially challenged tenants.
L+Ms business plan calls for subjecting the apartments to rent stabilization laws in exchange for property tax breaks. The city and L+M will utilize a tax incentive known as Article XI, a provision which allows the city to negotiate tax arrangements with individual landlords who, in turn, will set rents at no more than 30% of median income for households. The lost income resulting from bringing the units under the rent stabilization guidelines, will be compensated for by the tax break.
Louise Carrol, commissioner of NYCs Department of Housing Preservation said in a statement, “This landmark transaction will reclaim a large portfolio of once-affordable housing and provide thousands of New Yorkers the security of knowing that they can afford to stay in their communities for years to come.”
Camber Property Group and Belveron Properties employed the same strategy when they paid $77 million for a 400-unit building in the Bronx. The investors plan to rent all the units to tenants with limited incomes, in exchange for the same Article XI tax breaks.
These, and other kinds of creative strategies should be explored by landlords who must now navigate the new residential real estate landscape.