Presented By: Marks Paneth LLP
Ripple Effect of New Rent Regulations in NYC Real Estate Industry
Since June, when the New York State legislature passed historic rent regulations in the Housing Stability and Tenant Protection Act of 2019, landlords and developers have been weighing its potential effects on their operations and profitability. Clearly favoring the interests of tenants, the new regulations will have far-reaching implications on the real estate industry.
What remains to be seen is whether some of these changes could actually hurt the very tenants the bill was meant to protect.
Two of the more significant changes were made to Major Capital Improvements (MCIs) and Individual Apartment Improvements (IAIs).
Landlords could previously pass 6 percent of costs associated with MCIs (building-wide improvements) on to their tenants. Not only are these “MCI increases” now capped at 2 percent, but 25 percent of them must now be inspected and audited. MCI increases will be eliminated entirely in 30 years.
The ability to pass on the costs of IAIs (physical improvements made to vacant apartments) has also been dramatically limited. The new law allows only $15,000 of the renovations to be passed on to tenants over 15 years, even though permits alone cost around $6,000 before the renovation can even begin!
The tenants themselves could lose out in this new equation, with landlords having far less motivation and financial incentive to invest in property improvements. Businesses who depend on this work, such as carpenters, plumbers, contractors and suppliers, could also feel the effects.
Decontrol and Vacancy Bonus
The new law bids farewell not only to the decontrol of apartments, but the vacancy bonus as well. In the past, when the maximum legal rent for a rent-stabilized apartment was reached, the apartment would destabilize and become available at market rate when the tenant vacated. The new legislation has permanently repealed this practice. The vacancy bonus, which allowed tenants to raise rents by 20 percent when tenants changed, is also coming to an end.
With the loss of these incentives, will there still be a market for purchasing rent-regulated units?
Preferential Rent and High-Income Deregulation
Landlord revenues may further be affected by the end of both preferential rent (the discounted rent a tenant would pay when the maximum legal rent of a unit exceeded the market value) and high-income deregulation, which allowed landlords to deregulate a rent-stabilized unit when a tenant earned over $200,000 a year for two consecutive years. Rents will now remain at the lower preferential value in both cases.
These changes are just a portion of the sweeping reform that was passed this year. With the potential impact of the new law so great, members of the real estate industry have wasted no time reacting. Landlords and property owners are claiming that these changes will make the continuous renovation of apartments and buildings in New York City unachievable. Many of the city’s buildings are 80 to 100 years old and growing costlier to repair and maintain. Their concern is that the returns and incentives to invest in their buildings are now too low.
The Real Estate Board of New York, the Rent Stabilization Association (RSA) and the Community Housing Improvement Program (CHIP) are just a few of the organizations that have been challenging these new regulations. The organizations have expressed worry that with impacted revenue streams, obtaining capital is going to become more difficult for property owners, driving capital out of the city and encouraging landlords not to improve their buildings. Ultimately, this would slow growth in affordable housing and the real estate industry as a whole.
On July 15, just one month after the law was passed, RSA, CHIP and seven individual landlords filed a federal lawsuit stating that the new law violates the Fifth and Fourteenth Amendments of the U.S. Constitution. The lawsuit intends to end the state’s rent stabilization regulation, alleging that the new law restricts the landlord’s property and claiming that it does not meet the city’s goal of making housing affordable for low-income tenants.
I know many members of our industry are hoping to find a better way to communicate with New York’s state capital, and vice versa. Only with a stronger partnership between industry and community can all expect to move forward and grow.
Abe Schlisselfeld, CPA, EA, is co-partner-in-charge of the Real Estate Group at Marks Paneth LLP, a premier accounting, tax and advisory firm headquartered in New York City. He can be reached at firstname.lastname@example.org or 212.201.3159.