Real Estate Community Should Prepare Now for Just Cause Eviction

March 4, 2020Real Estate Weekly

As Just Cause eviction legislation gains popularity in New York State, the real estate community needs to proactively strategize around the possibility that it will be enacted.

By requiring the renewal of most fair market leases upon expiration and limiting rent increases for existing tenants, Just Cause eviction would deal a significant blow to fair marketing housing.

While we don’t know if or when Just Cause eviction will be enacted, and whether or not it will be exactly the same as the 2019 proposal, the real estate industry should be cognizant of this issue and take any steps it can now to prepare.

Education is an important first step. Owners must educate themselves about what Just Cause legislation would entail and the impact it could have.

Most significantly, the legislation would create a very challenging environment for owners, effectively destroying the free market that exists for currently unregulated rental properties. Owners should think through the recourse that’s available to them and plan for the future.

Though there are no certainties, one strong option for consideration is the development of condominiums, which are exempt from rent regulation in New York.

Unfortunately, the 2019 legislation made conversions of rental housing into condominiums or cooperatives virtually impossible, eliminating a major safeguard for landlords under previous rent regulation schemes.

This in reality turned into a boon for many tenant-purchasers in the long run.

However, if an owner can afford the loss of rents, it could consider allowing all the leases in the building to expire, then turning the vacant building into a condominium.

It could then sell some units and rent the others on a free market basis indefinitely.

Moving forward, developers building rentals also could consider making these units condominiums, so they are not subject to Just Cause eviction.

It’s worth noting that this could present near-term challenges as the luxury condo market in New York City in particular is currently experiencing a glut.

However, if land doesn’t have to be purchased and any renovation or construction costs are reasonable, it may not be necessary for the condos to be luxury.

Additionally, this could create a valuable opportunity for affordable condo development.

Still, it’s impossible to predict what exactly the New York state legislature will finally pass in terms of Just Cause eviction. Owners and developers need to be prepared for all possibilities.

For instance, California recently passed its own version of Just Cause Eviction state-wide, which contained a higher rent increase allowance than that anticipated in New York.

California previously made condominium units owned by certain legal entities other than individuals subject to rent regulation, which unfortunately might leave little recourse for owners and developers if adopted in New York.

The real estate community must stay on top of all developments, and begin to strategize around this new reality – even if there’s no immediately actionable step to take to safeguard against it.

New York owners and developers should not make any assumptions around the contents of the legislation, keeping itself closely apprised of the bill’s passage through legislature and its contents, and not taking for granted the efficacy of industry lobbying efforts.

When New York State passed overarching rent reform last year, much of the real estate community was taken aback by both the passage of the bill and the nuances of the reforms put into place.

With Just Cause eviction likely to pass through state legislature this year, owners and developers cannot let themselves be similarly caught unawares.

While it currently seems like the best recourse for some may be to change existing properties to condominiums where possible, and to focus new development on condos, the real estate community would be wise to be prepared for all possibilities regarding Just Cause eviction legislation and its impacts.

Douglas P. Heller is a counsel in the real estate practice of Herrick, Feinstein LLP. He is based in Manhattan.

This article originally appeared in the March 4, 2020 edition of Real Estate Weekly.