Article by Max Rosenthal
On June 14, 2019, many property owners took a significant financial loss on their real estate investments, with many of their buildings dropping as much as 25% in value overnight. This came on the heels of changes to the 2019 Housing Stability and Tenant Protection Act. Let’s dive a little deeper on just why the Act may have had such a dramatic impact on real estate values.
The commercial building resale value, which is tied to potential rental income, decreased because most regulated apartments will now remain regulated. This affects a landlord’s ability to charge market-value rents. Furthermore, major capital improvements will now be capped at what could be passed on to the tenant. Some investors see this as a major blow to the local real estate market and might consider developing outside of New York State. Landlords are concerned about affording much-needed building improvements, while tenants are rejoicing that they don’t have to worry as much about their rent being drastically increased. Will this lead to fewer real estate transactions? And what of the impact on mortgage brokers, title companies, construction workers and others? Real estate professions should keep a close eye on the fallout from this legislation.
The following is a summary of changes to the 2019 Housing Stability and Tenant Protection Act:
- The new rent regulations are permanent and can only be changed via legislation.
- Changes now eliminate the high-income and high-rent deregulation provisions. Previously, when rent exceeded $2,774.76, the unit became vacant and the tenant’s income was over $200,000 in the prior two years, then the unit became deregulated. These provisions are eliminated.
- When a unit became vacant a landlord could raise the rent by as much as 20%; the vacancy bonus is now eliminated.
- You can no longer raise the rent based on the amount of time the previous tenant rented the apartment (longevity bonus).
- The landlord may only raise the rent to the maximum legal rent when the tenant vacates.
- Landlords making major capital improvements could pass on to tenants in the form of rent up to 6% in NYC and 15% in other counties. This has now dropped to 2% everywhere. Additionally, MCI rent increases are now eliminated after 30 years, and 25% of these costs will be inspected and audited.
- Rent increases due to individual apartment improvements sunset after 30 years and are capped at $15,000 over a 15-year period.
- Owner occupancy rules limits owners (immediate family) to a single unit.
- Now—for co-op/condo conversions—you need 51% of the apartments purchased from current residents, and there is no eviction plan option.
- Maximum rent increases for rent-controlled tenants are now the average of the five most recent rent guideline board annual rent increases for one-year renewals.
- The lookback period to determine a base rent has been increased from four to six or more years, and owners can no longer avoid treble damages by returning rent overcharge voluntarily before the court’s or the HCR’s decision.
- A landlord can no longer refuse to rent to a tenant based on any prior court records or any tenant screening tests; security deposits are limited to one month’s rent; and landlords must give notice to tenants for rent increases above 5% or if they do not intend to renew the tenant’s lease.
- Fuel pass-along charges are now prohibited.
- The court can grant the tenant an additional year to stay in his/her current apartment if he/she cannot find a similar suitable dwelling in the same neighborhood or if eviction would cause extreme hardship.
This Act certainly provides some new challenges for the real estate sector, and the impacts on valuations and tax revenues are unclear at best. Many observers say this is a natural progression toward tenant parity, while real estate investors are asking “what’s next on the legislative horizon?”
While affordable housing initiatives are welcome, even applauded, the hope is that this does not cause the unintended consequence of investors drifting away from real estate, further decreasing capital improvements and property values. This would be a lose-lose scenario.