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Home > Real Estate > Tenants score win with NY rent regulations; laws could signal broader U.S. trend

Tenants score win with NY rent regulations; laws could signal broader U.S. trend

Jun. 17, 2019 by Laura Dietzel and Troy Merkel

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On June 11, New York State lawmakers passed landmark new rent laws designed to protect the rights of tenants.

Unlike existing tenant regulations, which expire on June 15, the new package of laws will be permanent. The biggest impact will be on rent-regulated apartments, which include both rent-controlled and rent-stabilized units in New York City, where they account for roughly one million units, or 40 percent of rental housing. Advocates of the new legislation point to the fact that these rental units have suffered a steady decline of protections and have been dwindling in supply.

Landlords argue the new legislation may have unintended consequences, including a decline in building valuations due to implications that will restrict net operating income.They also contend the changes will cause buildings to fall into disrepair, due to owners’ inability to fund capital improvements through rent increases.

Landlords argue the new legislation may have unintended consequences, including a decline in building valuations due to implications that will restrict net operating income.They also contend the changes will cause buildings to fall into disrepair, due to owners’ inability to fund capital improvements through rent increases.

The legislation repeals key provisions of existing law that allowed for the deregulation of units, given certain criteria. Following passage by both the State Senate and Assembly, the legislation was immediately signed into law by Gov. Andrew Cuomo.

Key changes to current under the new legislation:

  • Landlords achieve rent increase for capital improvements.
    1. Current law allows for rent increases up to 6% annually when improvements are made to directly or indirectly benefit tenants.
    2. Proposed legislation caps rent increase at 2% per year.
      1. Capped improvement spending at $15,000 over 15-year period.
      2. Allows up to three rent increases over that time.
        1. Increases are temporary for 30 years vs. permanent.
        2. Any violations must be addressed before landlords can collect increases.
  • Vacancy decontrol eliminated – current law allows for the removal of units from rent stabilization when rent crosses a threshold (currently $2,774 per month) and the unit becomes vacant.
  • High-income deregulation eliminated – current law allows for deregulation of unit when tenant’s income is $200,000 or higher in the preceding two years.
  • Vacancy bonus eliminated – current law allows for a “vacancy bonus” permitting landlords to raise rents up to 20% each time a unit becomes vacant.
  • Preferential rents – no reset at renewal – Landlords of rent-stabilized apartments can offer units to tenants for a price lower than the legal-regulated rent, but can no longer raise the rent to the legally mandated limit when a lease is renewed.

costar rent graph

Interestingly, in terms of 1- and 2-star properties, median household income growth has generally stayed above the effective rent growth for units since 2011. This indicates that median income growth is eclipsing the effective rent growth for workforce housing and that, based on this, New Yorkers are not currently worse off in terms of the ability to rent at this level. For its part, New York has taken proactive measures to address the affordable housing crisis. Mayor Bill de Blasio has set a goal of producing 300,000 additional total affordable housing units by 2026, which the city is on pace to reach.

Interestingly, in terms of 1- and 2-star properties, median household income growth has generally stayed above the effective rent growth for units since 2011. This indicates that median income growth is eclipsing the effective rent growth for workforce housing and that, based on this, New Yorkers are not currently worse off in terms of the ability to rent at this level.

Tenant advocates for the legislation say the change is needed to result in cheaper apartments for New Yorkers and that market forces make it nearly impossible to build new housing that middle-class families can afford. Increasing land and labor costs, coupled with few tax incentives and a lending environment that does not support workforce housing development, have been compressing margins for developers and steepening the gap between the low income/affordable apartments and luxury units being constructed. Owners are quick to point to the decline in transactions as evidence that the market is challenged already; Manhattan apartment transactions fell 34% in the first quarter, compared to the prior year, according to CoStar.

Many U.S. cities have instituted rent control to varying degrees, prohibiting landlords from raising rents in certain units or limiting the amount that rent can be raised. It remains to be seen whether passage of New York’s robust new legislation will spur other cities to take more aggressive measures. Urban centers throughout the country have experienced rising rents that are generally unmatched by wage increases, exacerbating the housing crisis as housing costs as a percentage of income continue to grow and fueling the rent control discussion. Since the Great Recession, there has been growth in the supply of luxury multifamily units, while growth in workforce and affordable housing units has stagnated. Proponents of rent control argue that rent control in cities like New York hasn’t thwarted new construction.

 

 

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Filed Under: Real Estate Tagged With: housing, landlord, New York, rent, tenant

About Laura Dietzel

@lauradietzel1

Laura is a partner who specializes in providing real estate audit and consulting matters for privately held companies and private equity funds specializing in real estate. Since joining RSM, she has worked with commercial, residential, retail, hotels and real estate opportunity funds, as well as performed due diligence services for real estate funds and various lenders in the real estate conduit markets.

Laura has thirteen years of experience in real estate and public accounting, and has developed and presented multiple continuing education courses in the real estate industry. In 2018, she was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves.

About Troy Merkel

@troymerkel

Troy Merkel is a Partner and Real Estate Senior Analyst at RSM. He has 15 years of experience in audit and consulting, with a particular emphasis in real estate and financial services reporting, in accordance with US GAAP, IFRS, NCREIF PREA Reporting Standards and income tax basis. He is also an expert in accounting for asset acquisitions and complex leases and specializes in various tax-advantageous, in particular Opportunity Zones and government subsidized deal structures.

In 2018, Troy was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Troy’s focus is on the real estate industry.

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