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Sweeping New Tenant Protections Raise Uncertainties about the Future of Affordable Housing

6.17.19 | Berdon Industry Insights

The New York State Assembly and Senate have agreed to, and Governor Cuomo has signed, comprehensive tenant protections in the rent regulation laws.1 The agreement effectively ends months of speculation on what would happen to the existing law, which was about to expire and affects close to a million units of housing and 2.4 million people in New York City.

Tenant advocacy groups, and the leaders in the Democrat-controlled state senate and assembly see the new law as a victory. However, real estate trade organizations are already sounding the alarm that this could hurt the dwindling stock and quality of affordable housing units.

Highlights and Changes

No More Sunsets

Previously, rent regulation laws had been temporary and required legislative renewal with terms as short as four years. The new rent regulations are now permanent with no sunset provisions so there will be no future uncertainty as rent regulation laws approach expiration.

End to Preferential Rents

Preferential rents are optional rent rates used by landlords to offer units at rates lower than the legal rent for a unit. Upon lease renewal, the expiring rent regulation law permitted a landlord to charge a new rent to the tenant up to the legal rent. Under the new law, landlords are no longer permitted to do so and must use the preferential rent as the base for increases.

Removal from Stabilization Prohibited

Under certain circumstances, units could be removed from stabilization when rent crossed a threshold ($2,775 as of January 1, 2019), upon vacancy, and/or when a tenant’s income exceeded a threshold. This is no longer permitted. These provisions led to the deregulation of nearly a half million units. The change, however, could sharply limit the landlord’s ability to increase revenues to offset unknown future increases in operating costs.

Vacancy Bonus and Longevity Bonus Both Ended

The new law ends the “vacancy bonus” and the “longevity bonus” provisions. With annual rent increases being limited while a unit is occupied, rents can be far below the market.  The vacancy bonus allowed a landlord to draw more evenly with the current market – allowing increases up to 20% if the last vacancy was four or more years ago. The longevity bonus allowed for rent increases by additional amounts related to how long the previous tenant occupied the unit.

Cap Placed on MCI Rent Increases

The Major Capital Improvements (MCI) provision allowed landlords to invest in improvements to building-wide systems as a whole – such as windows, HVAC, and roofs – and charge increases in rents to the tenants who would benefit from the MCI. Previously, a NYC landlord could pass along the costs by increasing tenants’ rents up to 6% annually, and permanently. The new law caps the increase at 2% across New York State, and the increases will only be effective for 30 years. Additionally, the scope of what will qualify as a MCI is greatly limited and subject to greater oversight.

Limits Placed on IAIs

The Individual Apartment Improvements (IAI) provision enabled landlords to improve units and equipment – such as new kitchen furnishings, appliances, and flooring, but excluding normal maintenance and repairs – and charge increases in rents to the tenants who would benefit from the IAI. The increases to the monthly legal rent were for 1/40 to 1/60 of the IAI costs, and were permanent. The new law limits IAIs to $15,000 over a 15-year period, while the associated IAI rent increases expire after 30 years.

Reaction to the New Law

Real estate trade organizations have harshly criticized both the MCI and IAI changes for creating regulatory red tape and expect the provision changes to disincentivize investment and improvement in regulated units. However, tenant advocacy groups have long contended that the permanence of the MCI and IAI rent increases pay for the cost of the improvements many times over at the ultimate expense of the tenant.

The new rent regulation laws also provide for greater oversight, tracking, and auditing by various agencies for MCI and IAI, as well as have requirements for reporting on the rent regulation programs overall and enforcing the various provisions.

If you own, operate, or invest in residential real estate, the new rent regulation laws are likely to affect you. If you have questions, please contact your Berdon advisor.

Berdon LLP New York Accountants and Advisors