The Housing Stability & Tenant Protection Act Part 1: What actually happened

9 Jul 2019

 

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by James Nelson

New York, New York – Last month the Housing Stability & Tenant Protection Act of 2019 and a correctional bill were signed into law, rocking the New York commercial real estate industry. In the 20 years that I’ve been a commercial real estate broker, I’ve never seen anything remotely like this and I think the implications will reach beyond New York City. This month for The Nelson Report I’m going to take you through what happened and the outlook for the industry through podcast interviews with four experienced real estate attorneys. For the first podcast, I interviewed two very accomplished landlord/tenant attorneys: Nick Kamillatos, partner at Rosenberg & Estis, and Christina Smyth, founder of Smyth Law.

I asked Kamillatos to set the stage:

He explained that close to one million apartments in buildings completed in New York City before January 1, 1974 are subject to rent-stabilization laws. Twenty-five years ago, a major deregulation provision was enacted that allowed these rent-stabilized units to become de-regulated when their rents reached a “luxury threshold” (most recently $2,774) and then became vacant, or if they reached the luxury threshold and the tenants earned a certain amount of income ($200,000) for two consecutive years. Because of that initiative, it’s estimated that approximately 300,000 apartments left the rent-stabilization system in as a result of luxury deregulation. With the passing of the new law, deregulation based on high rent ended. Unlike other housing programs such as 421-a or Section 8, there is no means test for rent-stabilized apartments, so that the law protects wealthy tenants living in rent stabilized units as well as low-income tenants.

Kamillatos said under the new law, apartments in pre-1974 buildings are now forever frozen in the rent stabilization system; while buildings that are receiving certain tax benefits that make them rent stabilized can’t leave the rent stabilization system until the tax benefits expire.

“The effect of this bill is going to… freeze the number of available housing units,” Kamillatos said. “It’ll freeze people in place…because there'll be fewer vacancies and fewer opportunities to move. The bill is very muddled. But one thing is comprehensive and clear. They want everybody who has a stabilized apartment to stay in that stabilized apartment forever.”

I pointed out that all of us want affordable housing and understand that new housing is needed because of the tremendous population growth in the city in recent years. Yet this law isn’t creating more affordable housing, just freezing the current housing stock.

“Everyone is for affordable housing,” Smyth agreed. “But I think this (law) creates more disparity between the luxury market and the regulated market and I think the intent may have been affordability but it put that burden on private owners.”

Under the new law, there will not be an incentive to improve apartments because owners won’t be able to increase the rent on vacant apartments and pass the cost of the improvements on to new tenants, Smyth said.

Kamillatos estimates under the new law, for buildings with less than 35 units, the maximum increase you can charge on a vacancy is $89. If it's above 35 units, it's $83. “So, if something's broken beyond repair, yes, an owner will replace some appliances so the next tenant will rent the apartment,” he said. “But, nothing to improve it, to upgrade it, to make it a better apartment.” which is what the trend of the last 25 years has been.”

“Clients are talking about spending a tenth of what they spent on construction since this bill was passed, basic paint jobs, no new appliances,” Smyth said. “The legislative intent was affordability but the by-product of the bill is far reaching on an economic level.”

Kamillatos added, a combination of the vacancy allowance, Individual Apartment Improvements (IAIs), Major Capital Increases (MCIs) to the buildings such as improving lobbies, hallways and HVAC systems and luxury deregulation, resulted in better buildings for long-term tenants. As the apartments were deregulated, newer tenants came in willing to pay more rent, which offset the cost of the improvements.

I had to ask: Is there any shot of getting this overturned?

“This bill really is different, fundamentally different,” Kamillatos said, “This is new ground and I think the court challenges will be different this time. We received a decision from the United States Supreme Court …that rules that taking these cases against the states can begin immediately in federal court…and clearly that's going to happen here.”

Smyth added, “I've spoken to many, many owners, large owners, not just concerned about their own profitability and their own value. They're concerned about the city that they've invested in for decades and are absolutely taking this to a federal lawsuit, sooner rather than later.”

 

Update: As of Monday night, several days after our interview, the Rent Stabilization Association and the Community Housing Improvement Program, along with seven individual landlords, filed a federal lawsuit alleging that the HSTPA violates the U.S. Constitution’s Fifth Amendment, according to The Real Deal. This includes a clause that bars taking of private property without “just compensation,” and the Fourteenth Amendment’s due process clause. The complaint argues that changes to the rent law deprive “property owners of their core rights to exclude others from their property and to possess, use, and dispose of their property.”