Costs And Uncertainty On The Rise For Owners Of Multifamily Properties

By Nicholas C. Mastrosimone, Esq., Associate  |  Harris Beach PLLC

Residential leasing is changing and becoming more expensive, costly, and uncertain. Earlier this year, Governor Cuomo enacted the Housing Stability and Tenant Protection Act of 2019 (the “Act”) – a sweeping legislative package that expands the rights of residential tenants and opens up the entirety of the State of New York, not just downstate, to rent regulation.

 

Tenant Rights

The Act, among other things, strengthens protections for residential tenants through:

  • Limiting the amount of security deposit and advance a landlord can request from a tenant to no more than one month’s rent;
  • Prohibiting application fees charged before or at the beginning of a tenancy;
  • Requiring landlords to deliver notice ranging from 30 to 90 days if the landlord intends to (i) increase rent by 5% or more or (ii) not renew the tenancy; and
  • Increasing costs for owners and the length of time associated with eviction proceedings.

Additional information is available on the New York State Association of REALTORS®, Inc.’s website.

 

Rent Regulation Expanded

Perhaps more frightening from the perspective of the property owner is the expansion of rent regulation statewide, a regulatory and bureaucratic regime that controls the rental rates owners may charge residential tenants and prohibits the owner from charging rental rates in excess of the “initial regulated rent” until an increase is allowed by government. Steep penalties can be imposed against an owner who charges a rental rate in excess of the legal rental rate.

In short, rent regulation is government’s response to what it perceives as the market’s failure to set price. According to the Emergency Tenant Protection Act of 1974 (the “ETPA”), which was amended and expanded by the Act, there is “an acute shortage of housing accommodations” and a substantial number of persons are being charged “excessive and unwarranted rents and rent increases.” The stated rationale of the ETPA makes clear that although the “ultimate objective of state policy” is a “normal market of free bargaining between landlord and tenant,” rent regulation is necessary in the interim.

In order for rent regulation to be enacted, the local legislative body must declare a public emergency “requiring the regulation of residential rents” as to all or any class of housing where the vacancy rate is less than 5 percent.

 

If a municipality adopts a rent regulation regime, the owners of multifamily housing subject to its grasp must register each individual unit with the rent guidelines board, establish an “initial regulated rent,” and adhere to the rent increase schedule established by the board, amongst other responsibilities. Furthermore, an owner’s ability to increase rental rates for rehabilitating or improving individual apartments and more broadly, capital improvements to the entire building, are substantially limited.

 

Possible Consequences

These changes to residential landlord-tenant law impose greater regulatory burdens on owners of multifamily properties, in addition to the uncertainty that certain properties could be subject to rent regulation if the local municipality declares an emergency. This could affect demand for certain classes of commercial real estate and thereby influence property values, particularly those properties that could be subject to rent regulation. Also, questions remain over whether banks will be less willing to finance acquisitions of such properties. Whether these laws will cause a shift in the demand for real estate in particular regions of the State, from downstate to upstate New York where the vacancy rate is generally higher, is also yet to be seen.

 

The information provided in this publication does not, and is not intended to, constitute legal advice. All content is for general informational purposes only.

 

About the Author

As an Associate at Harris Beach, PLLC, Nick focuses his practice primarily on commercial real estate development. He counsels commercial developers, lenders, and investors in the development, financing, acquisition, selling, and leasing of commercial real estate. He also advises business clients in matters including the structuring of private equity transactions, raising debt and equity capital, and negotiating mortgage loans. Learn more about Nick.