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Commercial Real Estate: New rent control law disrupts New York City housing

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Commercial Real Estate: New rent control law disrupts New York City housing

November 03
12:50 2019

Landlords, investors and CRE professionals in New York City predict that the state’s new rent control law will have a disastrous impact on valuations for assets that have a high concentration of rent-sta­bilized units – and especially those with revenues very close to their operating expense levels. The new regulations dictate the rents of about 1 mil­lion apartments, amounting to about half of the apartments in New York City.

Older assets are subject to substantial rent regulations. According to valuation experts from RERC, a SitusAMC company, properties with below-market rents will be affected the most; valuers expect 1% to 2% income increases into perpetuity. Cap rates for some New York City apartments, which have been as low as the 3% to 4% range, are expected to rise into the 4% to 5% range; this could cause a decline in values of up to 40%.

Gov. Andrew Cuomo signed the rent control bill, known as the Housing Stability and Protection Act of 2019, on June 14. The law makes it harder for apartment owners to increase rents and eliminates rules that allowed units to become free of any rent control.

Here are some of the provisions of the 2019 law:

  • Landlords can no longer increase rents by more than 20% when tenants move out.
  • Landlords can no longer deregulate an apart­ment from price controls if its rent exceeds $2,774 a month or if the occupant’s yearly income exceeds $200,000.
  • Rents below the legally permitted rate are now frozen as long as existing tenants occupy the unit, and rent increases due to capital improvements are capped at 2% annually.
  • Newly constructed buildings are classified as stabilized and therefore subject to the new laws; they can’t be classified as exempt “afford­able housing.” (“Affordable housing” is defined as dwellings that cost their residents less than 30% of their income.)
  • With new building taxes of as much as 30% of gross income, tax abatements are much less attractive because these programs regulate rents.
  • Condo/co-op conversions now require that 51% of existing tenants buy their apartments before they can be converted, further complicat­ing and limiting a traditional exit strategy.
  • Less-noticed provisions of the new state law extend beyond the borders of the five boroughs of New York City. The provisions make it more difficult for landlords to evict tenants, providing more time for tenants to fight their evictions and preventing landlords from blacklisting tenants or using their past eviction history in deciding whether to rent to them.

During protracted negotiations, CRE inves­tors did not expect that such sweeping changes would make it into the final law. These are some of expected effects of the new law, according to RERC’s valuation experts:

  • The laws have made investors skittish and many transactions have been canceled.
  • The recovery for capital improvements has been limited and many landlords will decide to make no capital improvements at all.
  • It will be almost impossible for landlords to make a profit on stabilized units; in some cases, it may force them to sell their buildings.
  • Investment demand will likely dry up, further reducing the prospects for capital investment.
  • Values could decrease 20% to 30% for middle-class apartments due to increased cap rates, a function of diminished income growth potential.
  • Revaluations of assets with a high concentra­tion of below-market rent-stabilized units could make material refinancing more difficult.

Appraisers and investors will have to look at prop­erties on a case-by-case basis, and sometimes a unit-by-unit basis. The fear is that regulated stock will deteriorate and tenants will move to market-rate projects that continue to maintain their properties.

In July 2019, landlord groups challenged the latest New York rent regulations in federal district court in Brooklyn, alleging that the new restrictions vio­late their constitutional protections against the taking of private property without just compensa­tion. The lawsuit was filed in part against New York City; the Rent Guidelines Board, the nine-member board that decides rent ceilings; and the state agency that administers and oversees rent-regu­lated apartments.

Tenant groups and state officials vowed to fight the lawsuit and said they expect to prevail. They said landlords were exaggerating about their lost prof­its. In the past, apartment owners have challenged rent control laws, but courts have generally sup­ported the government’s right to regulate rents. The plaintiffs, however, pointed to a federal appeals court ruling in 2015 that found that rent regulation was a “public assistance benefit” for tenants.

The state was already grappling with changes to the state and local tax (SALT) deduction that was part of the 2017 Tax Cut and Jobs Act. Investors say the new $10,000 annual limit on the federal deduction for state and local taxes has hit the mar­ket hard and widened the gap in the cost of living between so-called high-tax states such as New York, New Jersey and Illinois, and low-tax states like Florida and Texas.

Amid all these changes, perhaps the most impor­tant question is whether rent control accomplishes its goal of helping make housing more afford­able. Many critics believe that not only does it not accomplish that goal, but that in many cases it does more harm than good – or, at best, provides a neg­ligible benefit.

A recent study of all San Francisco residents between 1980 and 2016 by economists Rebecca Diamond, Timothy McQuade and Franklin Qia supports this view. They studied the effects of a change in San Francisco rent control policy enacted in 1995. Previously, all small multifamily buildings were exempt from rent control, but since 1995, only buildings built after 1980 are exempt.

Among their findings:

  • The new policy created a powerful incen­tive for landlords to either convert rental units into condos or demolish their old buildings and replace them with new ones.
  • The conversions reduced the supply of rental housing and raised rents.
  • On the other hand, many people subject to the changes became less likely to move because their rents didn’t increase as much as they might have without controls.
  • The benefit to those who get to stay in their homes almost exactly balanced against the harm caused by the policy.


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