New Rental Legislation - How Rent-Reform Will Affect New York Property Owners

As seen in the Westchester County Business Journal and the Fairfield County Business Journal

On June 24, 2019, New York State passed the Housing Stability and Tenant Protection Act of 2019 (the “Act”) which made sweeping pro-tenant changes to rent laws. Predictably, the Act has been viewed favorably by tenant groups and unfavorably by landlord groups.

New York State’s Governor Andrew Cuomo issued the following statement on the legislation:

“At the beginning of this legislative session, I called for the most sweeping, aggressive tenant protections in state history. I’m confident the measure passed today is the strongest possible set of reforms that the Legislature was able to pass and are a major step forward for tenants across New York.”

Meanwhile John H. Banks, president of the Real Estate Board of New York, stated the following:

“The harmful impact of this legislation will be profound for New York City’s economic future. There are many losers, including small property owners, contractors, as well as tenants. This legislation will keep rent lower for some, but also significantly diminish housing quality and lead to less tax revenue to pay for vital government services. It will worsen the City's housing crisis. The construction of future affordable units will slow, if not end altogether, the housing vacancy rate will worsen and nothing will have been done to make it easier for those who struggle to pay their rent.”

In response, landlords are challenging this new legislation in court. Two landlord trade groups recently initiated a lawsuit in federal court against New York City; The Rent Guidelines Board and the state agency that has authority over rent-regulated apartments. The lawsuit alleges that the legislation violates the 14th Amendment due process clause and the takings clause of the Fifth Amendment. Their goal is to dismantle the entire rent stabilization system. The lawsuit may be heading to the Supreme Court, which could take years, assuming the Court agrees to hear the case.

Until that happens, landlords will have to abide by the new rules which are now in effect. These rules apply to both rent-controlled and rent stabilized apartments. Most of the current housing stock is rent stabilized, as the original rent-controlled units are older and have, over time, as the families pass away, been converted to market rate. Rent increases for rent-stabilized units are determined by the rent guidelines board.

Notably, the new regulations are permanent. Previously, the laws needed to be voted on to be extended every four-eight years. Also, the Act removes the geographical restrictions on the applicability of the rent stabilization laws, allowing any municipality that otherwise meets the statutory requirements (e.g., less than 5% vacancy in the housing stock to be regulated) to opt into rent stabilization. Therefore, these regulations apply statewide and are not limited to NYC.

Major tenant protection provisions include the following (not a comprehensive list):

• Previously, landlords were able to increase rents a certain percentage (capped) if they made major capital improvements. Now, the regulations lower the rent increase cap from 6% to 2% in New York City and from 15% to 2% in other counties. Other technicalities further limit the rent increase potential from improvements.
• Repeals the provision that allow the removal of units from rent stabilization rules when the rent crosses a statutory high-rent threshold (approximately $2,770) and the unit becomes vacant, or the tenant's income is $200,000 or higher in the preceding two years.
• Prohibits owners who have offered tenants a "preferential rent," below the legal regulated rent, from raising the rent to the full legal rent, upon renewal. Landlords will need to raise rents by normal increases from the guidelines imposed.
• Repeals the "vacancy bonus" provision that allows a property owner to raise rents as much as 20% each time a unit becomes vacant. Also, repeals the "longevity bonus" provision that allows rents to be raised by additional amounts, based on the duration of the previous tenancy.
• Limits security deposits to one month's rent and provides required procedures to ensure the landlord promptly returns the security deposit.
• Includes a wide variety of protections for tenants during the eviction process, including strengthening protections against retaliatory evictions.
• Strengthens and makes permanent the system that protects tenants in buildings that owners seek to convert into co-ops or condos.

The changes enacted by the new legislation are clearly designed to protect tenants and to reverse the benefits that landlords have benefitted from over the past few decades. The question is whether landlords will suffer decreased cash flow, which will lead to underinvestment in rental properties and negatively affect the housing stock. The limitation on rental income will cause building valuations to decrease and become less attractive investments. Additionally, now that landlords are limited in the amount they can raise rents to offset increased spending on building improvements, many fear that living conditions in such buildings will start to degrade. We will have to wait and see what actually happens to the real estate market as these new regulations are implemented, as well as the outcome of the pending lawsuits filed by the landlord groups.

Citrin Cooperman can assist landlords in navigating through these new regulations in determining possible effects on their real estate investments.