New Rent Law Hurts the Tenants It Was Supposed to Help

June 2019Crain's New York Business

New rent law hurts the tenants it was supposed to help - Lenders exploring whether they can cancel loan commitments to rental projects.

The state Legislature has passed new rent legislation which in theory enhance protections for low- and middle-income tenants. In practice, it has dealt a devastating blow to the effort to maintain and increase affordable housing.

Most low- and moderate-income tenants live in very old buildings. They have the direst need for building upgrades, such as revamping ancient bathrooms, kitchens, electrical wiring and HVAC systems. Now they are less likely to receive them.

For example, owners can now charge a tenant only 1/168th per month of the cost of an individual apartment improvement until the work is fully paid for. Previously, this figure was a permanent rent increase of 1/40th. As a result, instead of just over three years for landlords to recoup the cost of investment, it will now take 14 years. The state had encouraged needed upgrades that directly benefit tenants, but now it disincentivizes them.

Are these concerns merely theoretical? Past foreclosures and abandonments of buildings in the Bronx, Brooklyn and other parts of the city indicate otherwise. Indeed, owners have historically walked away from buildings when expenses exceeded income. That could happen again: Generally, owners do not personally guarantee mortgages on multi-family buildings.

Consider that when the government curtailed the ability of owners of government-subsidized Mitchell Lama housing to raise rents to market-rate—by forcing owners to wait 35 years instead of 20 to buy out of the program—developers immediately stopped building these middle-class buildings.

It calls to mind the opposition that Amazon faced from some local lawmakers when it planned its Long Island City headquarters—opposition that ultimately caused the company to pull out. Polls had indicated that most New Yorkers supported the Amazon deal. The fiasco cost New York opportunities for new, well-paying jobs and tax revenue that could have supported many important public needs.

Now, legislators have erred yet again. This is “Amazon 2.0.” It is another message to the business community that New York, notwithstanding its advertising to encourage business investment here (“New York is the state of opportunity”), is not welcoming to the business community. This is unfortunate because New York has so many great resources that should encourage local investment.

We live in an age in which technology facilitates investors’ ability to find opportunities in other states and countries, and to make informed decisions as to which areas offer the most favorable returns. There are now fewer reasons to invest in New York residential rental buildings. New York real estate owners already have to contend with high land costs, property taxes, utility charges and permit fees, as well as complicated zoning laws.

When the supply of rental housing shrinks, market rents increase. Thus, to tenants in New York City already struggling with rents that are about 50% above the national average, these new regulations represent a significant setback.

Many in the business community are reasonably concluding that the state government does not care about or understand the challenges New York’s housing industry must contend with. In fact, some lenders are already considering whether they may exercise their right to cancel loan commitments if there is a “material adverse event” or “material adverse change” that could affect the security of the loan.

When people choose to not invest in maintaining and expanding rental housing in New York, the entire city loses.

Scott Mollen is a Partner at Herrick, Feinstein LLP and a former Chairman of the New York City Rent Guidelines Board.

This article originally appeared in the June 21, 2019 edition of Crain's New York Business.