New York Gov. Mario Cuomo calls New York’s new rent control law “the most sweeping, aggressive tenant protections in state history.”
Opponents of the law, which Cuomo enacted June 14, feel that it represents a troubling move against apartment owners and developers in New York, particularly in New York City. It also promises to have far-reaching effects on the multifamily lending industry.
New York Post real estate reporter Steve Cuozzo put it bluntly when he wrote that the law “makes it likely that no new apartment buildings will rise. It guarantees that existing ones will decay. It will make repairs and upgrades prohibitively expensive for landlords who must eke out puny profits from properties that require major reinvestment, but where they can’t charge enough rent to pay for it.”
According to American Banker, the law could harm multifamily lenders because some apartment owners might struggle to make loan payments and some investors might shy away from the city’s multifamily market.
Based on CrediFi data, New York City’s two biggest multifamily lenders since 2007 are New York Community Bancorp and Signature Bank. They are followed, in descending order, by Wells Fargo, Capital One, JPMorgan Chase, Investors Bancorp, Sterling Bancorp, National Consumer Cooperative Bank, Dime Community Bank and Deutsche Bank. Based on their lending track records, all of these banks could lose lending business — and potentially millions of dollars — under the new law.
Collyn Gilbert, financial analyst at investment banking firm KBW, says that even ahead of Cuomo signing the rent control bill into law, property owners and developers were taking a wait-and-see approach to apartment projects in New York City, leading to a first-quarter decline in multifamily lending. CrediFi data shows that in the first quarter of 2019, multifamily loan originations in New York City fell 11% compared with the first quarter of 2018 and 52% compared with the fourth quarter of 2018.
The rent control law “encourages landlords to turn apartments into condos, reducing the supply of rental housing that’s available,” says Emily Hamilton, a research fellow at George Mason University’s Mercatus Center. “It will also reduce the construction of new apartments, since buildings may not be profitable under the new rules that would have made sense to construct under the previous policy.”
Furthermore, Mark Fitzgibbon, director of research at investment banking firm Sandler O’Neill + Partners LP, anticipates property values and maintenance spending will decrease for buildings with rent-controlled apartments.
In New York City alone, the law affects more than 1.2 million rent-regulated apartments.
Proponents say the new law will help clamp down on the housing affordability crisis in New York City and other parts of the state.
“These reforms give New Yorkers the strongest tenant protections in history,” state Senate Majority Leader Andrea Stewart-Cousins and Assembly Speaker Carl Heastie said in a statement. “For too long, power has been tilted in favor of landlords and these measures finally restore equity and extends protections to tenants across the state.”
The new law replaces rent control provisions that were scheduled to expire June 15. In the past, legislators had to regularly extend the provisions. Now, the provisions are permanent.
So, under the new law, what’s behind the expected drop-off in apartment construction and renovation — and, in tandem, the expected drop-off in multifamily lending?
Here are a few provisions of the law that worry apartment owners, developers and lenders:
- It repeals the “vacancy bonus,” which enabled property owners to raise rents as much as 20 percent each time an apartment becomes vacant.
- It repeals the “longevity bonus,” which permitted landlords to raise rents based on the duration of the previous tenancy.
- It lowers the annual increase that landlords can charge tenants for major capital improvements, such as a new roof or new boiler, from 6 percent to 2 percent in New York City and from 15 percent to 2 percent in other counties. Also, these increases are eliminated after 30 years rather than being permanent.
- It puts a $15,000 cap on individual apartment improvements, such as kitchen and bathroom upgrades, over a 15-year period and allows only three such improvements during that time. Also, rent increases for these improvements are eliminated after 30 years, rather than being permanent.
Because of these and other changes in the law, some real estate professionals predict dire consequences — even foreclosures — for multifamily owners, developers and lenders. For instance, Adam Mermelstein, managing member of New York City-based TreeTop Development LLC, which is active in multifamily housing, predicts landlords “will start giving buildings back to the bank because they simply won’t be able to meet debt service requirements and expenses.”
John Banks, president of the Real Estate Board of New York, perhaps best summarized the concerns of multifamily owners, developers and renters when he complained that the rent control law does nothing to ease vacancy rates or improve apartment affordability.
“Instead,” Banks added, “[the reforms] threaten to put small landlords who own the majority of the city’s rent-regulated units in financial crisis and stifle the construction of affordable housing in the future.”