How New York's New Rent Regulations Will Impact Multifamily Investors
On June 14, 2019, Governor Andrew M. Cuomo signed into law the Housing Stability and Tenant Protection Act of 2019
New York has enacted perhaps the strongest rent control reforms ever, but questions remain about the impact of the legislation on multifamily investors and the real estate market in the five boroughs and beyond. While tenant groups are celebrating the new law, stakeholders of rent-regulated apartments say it could trigger a housing crisis, especially for lower income renters.
The Housing Stability and Tenant Protection Act of 2019, among other provisions, will prevent landlords from raising the rent to the legal maximum at lease renewals; eliminate the vacancy bonus that allowed landlords to raise rents by 20 percent when a tenant moved out; and repeal state provisions allowing landlords to deregulate apartments and charge market rates for units when rents exceed $2,700 a month.
This graphic from The Real Deal illustrates the rate of allowable rent increases for an apartment with a starting stabilized rent of $1,300 in New York City:
By eliminating vacancy bonuses, and reducing the rent increase cap on boilers, new roofs and other major capital improvements from 6 percent to 2 percent in New York City and from 15 percent to two percent in the rest of the state, hundreds of thousands of tenants could live in buildings that may fall into disrepair, industry observers said.
Brian Liske, Head of Eastern Regional Small Loan Origination at Greystone, says that the new regulations could potentially hinder appetite for investment in value-add assets in New York City with narrowed margins for potential investors. “Rent-regulated buildings may lose some of their appeal or potentially constrain the ability for capital improvements," he adds.
Some industry players assert that the new condo conversion requirements (“non-eviction" conversion plans now need 51% of renters buying in, up from 15%) present a tremendous hurdle and will discourage the development of new housing within reach for many of the city's 8.6 million residents.
Impact Felt Beyond New York City
The new regulations will also see rent stabilization reach counties well beyond New York City, allowing any city or town across the state of New York to regulate rents and evictions when there is a housing emergency, defined by a vacancy rate of five percent or less.
Cities such as Buffalo and Rochester both have vacancy rates of 7.3%, and Albany's vacancy rate sits at 8%, but this provision could make an impact down the road as these mid-sized cities see increased demand for rental housing.
What Multifamily Investors Need to Know
If rent stabilized assets are in your portfolio, or if you plan to invest in these properties, here are the basics on what's changed in the sweeping legislation:
Permanent rent regulations – they will no longer expire every four to eight years
Vacancy Decontrol – the ability to remove a unit from rent stabilization because the monthly price hits a certain threshold has been repealed, as well as in the instance when a tenant's income exceeds $200,000 or higher for two consecutive years
No More Vacancy Bonus – landlords can no longer raise rent as much as 20% when a unit becomes vacant
Preferential Rent – this below-market rent given by an owner now becomes the base rent at lease renewal, but the owner can charge the full legal rent if the tenant vacates for any reason other than failure of the owner to maintain the unit
Major Capital Improvements (MCIs) - the annual increase landlords can charge for renovations is lowered from six percent to two percent in NYC, and from 15% to two percent in other counties, with tighter rules on what qualifies for MCI increases
Individual Apartment Improvements (IAIs) - a spending limit of $15,000 over a 15-year period, with a limit of three IAIs during that period, and after 30 years, rent increases for IAIs are eliminated
Rent-Controlled Maximum Increases – these will be capped at the average of the last five Rent Guidelines Board annual rent increases for one-year rent-stabilized renewals, or at 7.5 percent, whichever is less.
Change in “Owner Use" Provision – if a tenant has lived in a unit for 15 or more years, they cannot be evicted for owner use
Overcharge Claims – in cases where tenants make complaints on overcharges, six or more years of rent history can be reviewed (extended from four)
More Data Reported – there will be more accountability with the Division of Housing and Community Renewal required to submit an annual report on rent regulation and the number of rent stabilized units in each county, as well as other data such as MCI applications and approvals
New Tenant Protections Statewide - “tenant blacklists" are banned, security deposits are limited to one month's rent, no unlawful evictions, notice required to raise the rent more than five percent, and allowing more time in eviction proceedings
Co-op / Condo Conversions – 51 percent of tenants in the building must agree to purchase apartments before the conversion can be effective