‘Up in Smoke’: Despairing Landlords Still Sorting Through Rent Reform Impact

Landlord groups have vowed to take the fight against the state’s new rent regulation laws to federal court. But that act of defiance has done little to lift the mood across the industry.

It has been a little over two weeks since New York state legislators introduced, then passed, a sweeping set of new laws drastically curtailing how landlords can raise rents on stabilized units or move them out of regulation.

Although welcomed by tenant advocates as a worthy attempt to fight the city’s crippling housing crisis, the real estate industry has decried the laws as ineffective, irresponsible and draconian. And as landlords and property owners piece through the details, their sense of gloom has only deepened.

Sources said property owners, lenders and investors are still figuring out what the full impact of the legislation will be on businesses' bottom line. Though powerful landlord groups are planning to mount a legal challenge to the laws, some owners are said to be considering redirecting their capital to other asset classes in other states.

Other real estate players told Bisnow that landlords are looking for opportunities to work around the laws — but are reluctant to talk about them publicly for fear it will encourage further legislation from the state.

“General despair is the word … I’m not seeing anyone coming up with any brilliant ideas,” said Alvin Schein, a partner at law firm Seiden & Schein. “[The rent reform package] shut all the doors around it. There are no back doors.”

Under the new laws, landlords are no longer able to use the vacancy bonus, a provision that had allowed them to increase rents by as much as 20% when a unit became vacant. Property owners who provided a preferential rent — a rent beneath that they can legally charge — will not be allowed to increase the rent to the full price when leases are renewed.

The Major Capital Improvement and Individual Apartment Improvements programs, which had permitted landlords to pass on the costs of building improvements in rent, have been significantly reduced.

As part of the reforms, it has also become significantly more challenging for owners to turn rental buildings into co-ops or condominiums.

“I don’t see anything in this law that I could see that makes sense for me … the whole business model has just evaporated up in smoke,” said Nelson Management Group President Robert Nelson, who said the past few weeks have been “hell.”

“We need to talk to our partners about this, but the only thing that is certain is that I will not run the buildings in the same way as in the past,” he added.

Durst Organization Vice President for Public Affairs Jordan Barowitz said the company’s main concern is buildings that have recently opened and that were built with the 421a tax abatement.

Though legislators updated the laws to ensure they didn't limit developers’ ability to increase rents on market-rate units built under Affordable New York, Barowitz said buildings that used the old 421a program would still be affected.

“In a macro sense, this presents a challenge for newer 421a buildings,” he said. "It is an existential threat to older, traditional rent-regulated buildings, especially in the Bronx."

Durst’s apartment building in Queens, 10 Hallets Point, which started leasing earlier this year, is the one building in the Durst portfolio that will be affected, Barowitz said.

“Those buildings are in a tight spot,” he said.

The Rent Stabilization Association and the Community Housing Improvement Program, both powerful landlord groups, later this month plan to try and overturn the laws in federal court. Their argument is that the laws are unconstitutional because they infringe on owners' right against the “unlawful taking of property."

Plus, some landlords are reaching out to lawyers to launch their own suits, The Real Deal reported last week, in groups and as individuals.

“It’s a mistake for individual landlords to go and do it. I think the industry should do things cohesively,” Nelson said, adding he believes the industry did not present enough of a united front to lobby against the laws as they were being developed, which legislators “exploited."

Sources said a lawsuit could be a drawn-out process, with no guarantee of success.

“Certainly, that will take a long time to make its way through the courts — [and] these are challenging lawsuits,” said Rosenberg & Estis lawyer Jeffrey Turkel, who has successfully challenged legal rulings over rent regulations in state court. “There are judges out there that are happy with the state of legislation.”

He said his clients are now looking to invest in other asset classes in other parts of the country. With the Democratic hold on both on the Senate and Assembly, he added, there is little chance of any amendments.

And those who have multifamily properties in the city will be keeping their ideas of how to handle the assets close to their chest, out of concern that the government will further legislate.

“I don’t know [that] owners are interested [in] advertising what their strategies are … They will just do the best they can and wait for better days.”

Schein, the attorney from Seiden & Schein, agreed the attempts to overturn the laws would not be an “easy road," although he thinks it is possible.

"I think that there's hope for parts of the rent law being declared unconstitutional. I think the co-ops and condo restrictions that were voted in are unconstitutional," he said.

And while Schein doesn't anticipate more amendments like the Affordable New York tweak, he said he has heard concern about more legislation further restricting rent regulation that could be coming.

The city’s investment sales market has been sluggish for most of this year, with many brokers and developers saying uncertainty around the rent regulations had put a chill on the market.

There were $3.7B worth of sales across all asset types last quarter in the borough, across some 79 transactions, a 13% dip from 2018, according to Avison Young — a fall that was attributed at least in part to the new reforms.

Ariel Property Advisors broker Victor Sozio said, in some cases, owners are taking their properties off the market, electing instead to wait for a few years to see if the sales environment is better in the next five to 10 years.

“A lot of those cases it will lead to a refinance and just a much longer hold period than was initially anticipated,” he said. “In some cases, [buyers] are still actively pursuing and willing to purchase, but you will require a much higher yield … [Some] are still willing to be fairly aggressive and actually look at this as an opportunity to go out there and secure our assets that are perfect for them at better pricing, given the lack of competition.”