Multifamily Headwinds Explained
Last week, I wrote about the current status of the multifamily sector in New York City and one sentence, toward the end of that column, produced more emails and calls than any other I have written in quite some time. That sentence was, “Notwithstanding the strong policy headwinds rent-regulated assets have faced, and will continue to face, the sector continues to progress in a positive way, at least for now.” Most of the questions were regarding the headwinds yet to come. But the tumult the market has already faced is substantive and should be reviewed as well. Let’s take a look.
Most casual observers of the multifamily sector in the city would say that the biggest problem faced by the market has been the rent freeze approved by the Rent Guidelines Board last year. This policy created a zero percent increase in rents on one-year leases in rent-stabilized apartments. But this was really only a minor headache relative to the policy storms that began many years ago. There have been three major court decisions that have created tremendous uncertainty in this sector, have added operating hurdles for owners and property managers and have left attorneys who advise property owners at a loss. Many of these attorneys, who spend all of their time practicing within this specialty, can only give advice based on their client’s level of risk tolerance.
In the Stuyvesant Town-Peter Cooper Village case, commonly referred to as “The Roberts Decision,” the court determined that apartments in buildings receiving J-51 benefits cannot be removed from rent regulation. This decision threw a curveball to property owners since for many, many years it was generally accepted that units could be removed from regulation in these properties. This was the opinion given to owners by the Department of Housing and Community Renewal, which interprets the rules of the game.
As the sheriff of rent regulation in New York, DHCR opinion letters were relied upon by owner and attorneys alike as they figured out what the correct operating procedures were. For many years, DHCR instructed owners that they could deregulate units pursuant to high-rent or high-income guidelines in buildings receiving J-51 benefits.
Further, the department of Housing Preservation and Development, another of the agencies that interpret the rules of the game, had for those same many years ratified the decisions made by DHCR. HPD did this by reducing the J-51 benefit by the percentage of units removed from regulation. Therefore, we had a long history of two of the most respected and influential agencies in the city’s housing market saying that deregulation in J-51 properties was okay, only to be reversed by one court decision.
Unfortunately, while the court concluded that deregulation in J-51 buildings was illegal, they did not decide what owners should do with units that become vacant in these buildings. To this day, there is no clarity.
More recently, Altman vs. 285 West Fourth LLC threw another curveball to owners by changing another long-held operating procedure. Since high-rent deregulation was introduced, owners would take the last legal rent being paid by a regulated tenant and would add to that rent level the vacancy bonus and Individual Apartment Improvement supplement (1/40th of qualifying improvement costs incurred in the renovation of the unit). If this new legal rent exceeded the high-rent threshold, the unit was removed from regulation and could be rented on a free-market basis. The judge in the Altman case concluded that the unit only becomes deregulated if the last occupant of the unit was paying a regulated rent above the high-rent threshold. This decision reversed years of standard operation.
And most recently, The Altschuler Decision, (Altschuler vs. Jobman) determined that even if a deregulate apartment has been occupied by a series of free-market tenants, the unit may, under certain circumstances, be reregulated at a reduced rent level.
Each of these landmark decisions has created uncertainty for property owners trying to create—or even determine—value in their properties.
Future headwinds are likely to be generated by the desire of the present administration to “preserve” affordable units. The mayor has pledged to create or preserve 200,000 units of affordable housing. The expiration of the 421a program will create a huge air-bubble in the supply pipeline of new units. Therefore, preservation will have to be the focus of elected officials for the foreseeable future. Skewing rent laws even further in favor of tenants is likely to occur to achieve this objective. It would not be surprising to see, among many other things, the rent freeze extended for a period of years.
The strength of the multifamily market is remarkable given the policy headwinds. Many people want to come live and work in New York City. This demand exerts upward pressure on rents and leaves apartment vacancy rates at historically low levels. Will there be a straw that eventually breaks the market’s back? Only time will tell.