Alfred M. Williams, Jeffrey J. Temple, Keith M. Print, and Mark S. Edelstein
Real Estate and Real Estate Finance
On Friday afternoon, June 14, 2019, New York Gov. Andrew Cuomo signed into law Senate Bill S6458, also known as the “Housing Stability and Tenant Protection Act of 2019” (the new “Rent Regulations”), after the bill passed the Democratic-controlled Assembly and State Senate by votes of 95-42 and 36-24, respectively, one day before the existing rent regulations were set to expire. Thought by many to be indicative of a state and nationwide legislative focus on rent reform aimed at addressing what activists have deemed an “affordable housing crisis,” the landmark bill introduces major reform to New York State’s affordable housing laws in the form of sweeping tenant protections. Some of the more notable provisions are briefly summarized as follows:
(1) Extending the Rent Regulations: The Rent Regulations, which have historically expired every four to eight years tracing back to the Rent Stabilization Act of 1969, are now permanent and any modification would require formal legislative reform;
(2) Repealing High-Rent Vacancy Deregulation and High-Income Deregulation: Apartment units that had previously qualified, under the former legislation, for permanent deregulation as a result of (a) rent escalations reaching the statutory threshold ($2,775 per month in 2019) and (b) either being (i) vacated or (ii) occupied by a tenant that no longer qualifies as “low-income” ($200,000 taxable income for the prior two years), will no longer be subject to deregulation. It is worth noting that 300,000 rent-stabilized apartments have been deregulated since 1994;
(3) Eliminating the “vacancy bonus” and “longevity bonus”: Under the previous legislation, when an affordable unit was vacated, landlords were able to increase rents by up to 20% for that unit, plus an additional bonus tied to the length of the expiring lease. Under the new Rent Regulations, these bonuses are eliminated, limiting annual rent increases to the escalations approved by the Rent Guidelines Board (RGB);
(4) Making “preferential rents” the baseline for lease renewals: Landlords who offer tenants “preferential rent” below the statutory maximum in many cases are no longer permitted, when the lease is subject to renewal, to increase that rent to the statutory maximum. Instead, the “preferential” amount will now be treated as the new maximum until that unit is vacated, and annual escalations will be limited to those set by the RGB. More than 251,000 rent-stabilized apartments had previously benefitted from preferred rents as of 2017 based on the most recent data available;
(5) Reducing rent increases allowable in connection with Major Capital Improvements (MCIs): Rent increases afforded to landlords for MCIs approved within the past seven years (as early as June 16, 2012) and going forward will be subject to a statewide cap of 2%, down from 6% in New York City under the prior legislation, and those increases, which were permanent under the prior legislation, now expire after 30 years. Additionally, the scope of what constitutes an allowable MCI has been limited to work for essential building functions and other improvements (excluding maintenance) and the State’s Division of Housing and Community Renewal is required to audit and inspect a minimum of 25% of approved MCIs each year;
(6) Reducing rent increases allowable in connection with Individual Apartment Improvements (IAIs): Under the previous legislation, owners that make improvements to individual apartment units were able to raise rent by an amount tied to the costs of those IAIs. The new Rent Regulations limit the amount that landlords may spend on IAIs that qualify for rent increases, at $15,000 for no more than three IAIs over a 15-year period. Additionally, as with MCIs, IAI increases will no longer be permanent under the new legislation, expiring after 30 years; and
(7) Increasing the Condo and Co-Op Conversion Requirements: The Rent Regulations eliminate a sponsor’s ability to file an “eviction plan” (which had allowed non-purchasing tenants to be evicted in connection with a conversion under the existing laws), and require 51% of favorable votes from existing tenants in occupancy at the time of conversion in order to obtain approval of “non-eviction plans.” The prior legislation had only required 15% of favorable votes and counted both existing tenants and prospective non-tenant bona fide purchasers.
The new Rent Regulations are expected to affect approximately one million apartments in New York City, accounting for approximately 40% of the City’s rental inventory. Although the new Rent Regulations did not go as far as many tenant advocates had initially hoped, major industry stakeholders, including owners, operators, developers, and trade associations, have voiced immediate concerns, explaining that operating cost escalations exceed RGB rent increases and by eliminating their ability to deregulate apartments, convert them to condominium units, and use the sales proceeds to offset operating losses, owning and operating multifamily buildings will no longer be profitable, and that by reducing the cap on MCI increases, capital improvements will no longer be made, buildings will fall into disrepair, jobs will be lost, property values will decline, and tax revenue will be reduced. Additionally, concerns have been raised that the new Rent Regulations, which apply retroactively, will unjustly impact buyers and lenders that purchased and financed these buildings on the assumption that the apartment units could be deregulated. Accordingly, these stakeholders have committed to file suit quickly against the governor’s office and the state legislature to challenge the validity of several components of the new legislation, including the permanency of the Rent Regulations and the retroactivity of their application.
Morrison & Foerster’s Real Estate Group will continue to monitor the situation. If you have any questions, please do not hesitate to reach out to any member of our team.
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