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'Devastating, Irresponsible': CRE Industry Reacts To The NYC Rent Reform Deal

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Legislators called it historic, tenant advocates hailed it as a step toward ending the housing crisis and the governor promised to sign it. But many in real estate had a gloomy outlook Wednesday about the rent regulation reform now set to become law.

'Devastating, Irresponsible': CRE Industry Reacts To The NYC Rent Reform Deal

Tuesday evening, Albany lawmakers announced they had reached an agreement over a package of bills the Senate Majority Leader Andrea Stewart-Cousins and Assembly Speaker Carl Heastie described as “historic affordable housing legislation” that will “finally restore equity” between landlords and tenants.

Gov. Andrew Cuomo said Wednesday he would sign the bill, describing it as "the best tenant protections" lawmakers would pass.

The laws affect the way the 1 million rent-regulated apartments are run in the city. While tenant advocates cheered the changes as a win for housing affordability, they were met with dismay by many in the real estate industry. Real estate sources told Bisnow they see the changes will worsen, not improve, conditions for tenants. And for many it will mean major changes to how they operate their business.

“It’s very troubling. I made investments in good faith and I am being penalized for making those investments,” Taconic Investment Partners co-CEO Charles Bendit said. “I thought the legislature and government would come to a more balanced solution.”

Taconic, which is partnering on a major, mixed-income development called Essex Crossing on the Lower East Side, has a fund that was targeting workforce housing investments in the city, which he said he and his investors will need to re-evaluate in light of these new laws.

“There are some owners that are going to be screwed,” Camber Property Group principal Rick Gropper said. “[Those] who bought at the height of the market — a year or a year-and-a-half ago — and are relying on a business plan of deregulating units quickly and aggressively are going to be hurt the most.”

With the Assembly and the state Senate controlled by Democrats for the first time in decades, rent-regulation reform was an inevitability. Exactly what changes that reform would make was not made clear until last night.

Ultimately, legislators agreed on a package that incorporated some, but not all, of the proposals on the table.

The vacancy bonus, which allowed landlords to increase rents by as much as 20% when a unit became vacant, will be repealed. Landlords who provided a preferential rent — meaning a rent lower than they can legally charge — will not be allowed to hike the rents to the full price when leases are renewed.

One of the most contentious changes has to do with the Major Capital Improvement and Individual Apartment Improvements programs, which have allowed landlords to pass on the costs of building improvements in rent. Instead of removing these programs altogether — a move that both the governor and Mayor Bill de Blasio said last week they did not support — they will be reformed.

MCI increases will now be capped at 2%, down from 6%, and will be eliminated after 30 years. IAIs will be capped at $15K in a 15-year period, over which time landlords are allowed to make three improvements at a maximum.

The proposed legislation does not feature a provision that would require landlords to show “good cause” when a tenant is evicted, as had been discussed.

Andrew Cuomo
New York Gov. Andrew Cuomo

“The Senate and Assembly have listened to the needs of tenants across the state and put forth bold legislation to end the housing crisis,” co-Executive Director of Citizen Action of NY Rosemary Rivera said in a statement. “[It shows] how ordinary people, when organized, can beat back the billionaire real estate giants.”

The changes to MCIs and IAIs were particularly galling to members of the industry, who said while it was good the program was not axed completely, the reform is still problematic.

“We were hoping for more of a compromise than what was released last night,” Gropper said, adding the real estate industry had not reached a consensus on how to push its message.

He said his company does not rely on the aggressive “turning” of apartments, the common process of legally taking them out of regulation and making them market rate. However, he said, his company would want to rely on MCIs and IAIs to subsidize improvements to its buildings.

“This doesn’t eliminate MCIs and IAIs entirely, but it really waters them down," he said. "It’s not detrimental to our business, but it makes it more difficult to make economically sensible investments in building."

Some said the reforms could result in cheaper apartments, but some landlords could allow them to fall into disrepair without the incentive.

“It’s a bit of a head-scratcher how they came up with the $15K threshold for apartment renovations,” Hodges Ward Elliott broker Daniel Parker wrote in an email. “For New Yorkers, the choice will be either a less expensive apartment in poor condition or a well-maintained, market-rent apartment. This will only exacerbate the tale of two cities."

1314 Seneca
The building at 1314 Seneca in The Bronx

Nelson Management Group President Robert Nelson said he spoke to legislators in the lead-up to the June 15 deadline, though he declined to name names. He said many of them sympathized with the real estate industry’s position, but had been “drowned out” by a progressive Democratic agenda that wanted to “stick it to landlords."

“It costs me anywhere between $25K to $60K to renovate an apartment,” he said of the MCI and IAI caps. “[These laws are] irresponsible … I’m sure banks are going to get hit hard. Loans are going to fall into default. I think that it’s going to be devastating.”

The regulation discussion, which has played out in the form of hearings, commentary and protests, speaks to a wider affordable housing problem that plagues most urban centers. In New York City, though the administration says it is on target to create 300,000 affordable housing units by 2026, some 40% of households are rent-burdened and nearly 62,000 people are sleeping in the city’s shelter system.

The Real Estate Board of New York has long argued that the rent regulations, as proposed, would do nothing to fix the problem. 

“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,” said a spokesperson for Taxpayers for an Affordable New York, a coalition that includes the Real Estate Board of New York and the Rent Stabilization Association. “It is now up to the governor to reject this deal in favor of responsible rent reform that protects tenants, property owners, building contractors and our communities.”

Bendit said he and other landlords had tried to work with tenant advocates and had spoken with legislators about finding a compromise. Ultimately, he said, this outcome indicates that they were not receptive.

“Clearly we had some ideas we felt were balanced that we shared with elected officials,” he said. “I guess they were more heavily influenced by tenant advocates and by their commitment to change rent regulations.”

'Devastating, Irresponsible': CRE Industry Reacts To The NYC Rent Reform Deal
New York City Mayor Bill de Blasio in 2016

Brokers have attributed a recent slowdown in investment sales to the level of uncertainty around the laws, meaning buyers were taking a wait-and-see approach.

There were $3.7B worth of sales across all asset types last quarter in Manhattan, across some 79 transactions, according to Avison Young. That represents a 13% drop year over year in sales volume, and a 25% drop in the number of transactions, said to be caused by the shifting political environment.

“I think the volume of sales will be challenged for at least the next year,” JLL’s Bob Knakal said. “[And] what is likely to happen is that these changes will exert downward pressure on property values.”

Meridian Capital Group's David Schechtman said it is more evidence of an “anti-commerce” tenor in the state, but the changes aren’t as bad as they could have been.

“It’s a lot like getting into a minor car accident — when you get out and you look at the front bumper, [you think] 'Look, there’s damage but could have been worse,'" he said. “We are now on terra firma  … We have a new set of rules.

"This is an industrious and crafty industry," he added. "People will start working harder in the new set of rules and try and find value and increased profitability in other areas in their buildings.”