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Real Estate Companies Re-Think Their Business Models: The Housing Stability and Tenant Protections Act of 2019

Real Estate Companies Re-Think Their Business Models: The Housing Stability and Tenant Protections Act of 2019 Written by Susan Hinkson, Executive Vice President, Capalino+Company

Written by Susan Hinkson, Executive Vice President, Capalino+Company

June 2019 will go down in the annals of New York history as a month that saw sweeping change in regulations for rent stabilized and rent controlled apartments.

Some have characterized this as the natural result of a steady drumbeat of progressive initiatives that represent a groundswell of community and tenant activism. 

Others view the Housing Stability and Tenant Protections Act of 2019 as the opening salvo in what may turn out to be a pitched and prolonged battle over property rights in general and rent increases, in particular; increases used to fund capital improvements in rental buildings as well as to support necessary maintenance and investment. This new law may provide tenants a greater level of protection, but intentionally or not, it may also affect some of the traditional financial incentives used to support the financial feasibility of a multi-family building and modernize older housing stock.   

Highlights of the new legislation include:

  • The Vacancy Bonus: Rent-stabilized apartments, once vacant, formerly could seek a 20% increase in rent. Under the new rules, this is no longer permitted.
  • Vacancy decontrol:  Prior to the new law, when the rent stabilized legal rent on an apartment rose to $2,774, the unit became decontrolled and reverted to market rate rent. This is no longer the rule.
  • Preferential Rents: Previously, landlords of rent-stabilized apartments, could offer units to tenants at a lower rate than the legal regulated rent and raise the rent to the legal stabilized rent upon renewal of the lease. Under the new law, landlords can no longer raise the rent to the legally mandated limit when a lease was renewed; a practice that some contended was pushing tenants out.
  • Rent Increases Based on Building Improvements: A 6% per year increase in rent had been allowed based on improvements to the building that directly or indirectly benefit tenants. The permitted increase is now capped at 2 percent per year and a $15,000 per unit cap spread over 10 years.
  • High-Income Deregulation: A tenant in a rent-stabilized unit, whose income was over $200,000 for two consecutive years, was subject to deregulation.  Deregulating a unit under these conditions is no longer permitted.
  • Condo/Coop Conversion: Previously, a building could convert from a rental to a coop or condo upon the approval of 15% of the tenants. Now, 51% tenant approval is required.

One might argue that the intent of the new rent regulation law hearkens back to the 1920s and even 1940s – when many tenant protective laws were enacted to assist members of the armed forces returning home from WWII who were, because of high demand, unable to find reasonably priced rental housing. The 1970s and 80s saw another flurry of laws designed to protect and increase housing options for the working and middle class. 

The new law is broad in scope and effect, from vacancy decontrol to condo conversions, and has far-reaching applications for market rate units that do not fall under the controlled or stabilized rubric.  From revamped regulations on security deposits (security deposits will be limited to one month’s rent) to the elimination of “blacklists” that identified troublesome tenants and to greater safeguards from eviction, the legislation covers a lot of territory.

Landlords contend that their ability to renovate units as they become vacant, over time, is hampered by the new regulations, and will impair their ability to make major capital improvements or MCI’s because the revenue stream is flattened.  Tenant rights groups have praised the legislation as a reset or corrective measure for places like the Bronx, where rising rents have forced higher percentages of displacement in a market that has experienced waves of gentrification, changing populations and sparked tensions across the socio-economic landscape. 

Many in the real estate market community, who have characterized the changes in the rent regulations as draconian and overreaching, say that ultimately the regulations will stall the development and improvements to housing that are sorely needed, and may ultimately lead to abandonment and a return to the 1970s characterized by Howard Cosell’s famous declaration that the “Bronx is burning”.

A recently filed lawsuit by landlord advocates in federal court claims the new rent regulations violate the Fifth and Fourteenth Amendment rights of property owners; arguing a government taking without just compensation.  It will be interesting to see how this suit progresses up the judicial ladder.  However, this argument is not new to the courts.  In 2012 a similar suit was considered and ultimately proved unsuccessful at the U.S. Supreme Court, where the Court declined to hear the case and let stand the lower court’s ruling that there had been no unconstitutional taking.

Capalino+Company recently sat down with four industry leaders who spoke openly about the new regulations and the material impact on both tenants and landlords. Participants include: Charles Bendit, Co-CEO of Taconic Investment Partners; Jay Neveloff, Chair of the Real Estate Practice at Kramer Levin; Andrea Kretchmer, Founding Principal of Xenolith Partners LLC; and Blaine Z. Schwadel, Supervisor of the Regulatory Law Group at Rosenberg and Estis, PC. Listen to our podcast on the Housing Stability and Tenant Protections Act of 2019.

To learn more about how these regulations can affect your project, contact Susan Hinkson at susan@capalino.com or 212.616.5848.

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