Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
In 2019 NYC Rent Law went through significant modifications. We drafted a synthesis of the 145-page bill that passed. Several new laws on rents just took effect in New York City following the “Housing Stability and Tenant Protection Act of 2019″. On June 14, 2019, Albany lawmakers approved, and Governor Cuomo signed. This legislation changes New York State’s rent laws. The main focus of many has been on the changes to the State’s rent stabilization law. However, landlords and tenants should understand that the legislation’s effects go beyond rent stabilization. The new bill implemented significant changes to rent stabilization laws and real property law. Most of the changes affect rent-stabilized units. Some of the new regulation affects “normal” (i.e., non-rent-stabilized) apartments, including standard condo and co-op apartments in New York.
The 2019 law eliminated the majority of the deregulation protection for rent-stabilized units. Deregulation virtually remains a thing of the past, except for rent-stabilized apartments in buildings with 421a tax benefits. Stabilized units in 421a buildings can still deregulate gradually under the new legislation. There are approximately one million rent-stabilized rentals in New York City affected by the 2019 legislation. Rent stabilized units in New York consist of all apartments built between 1947 and 1974 (except for those deregulated before the new law). There are also rent-stabilized apartments (constructed after 1974) that received tax benefits under the 421a and J-51 tax abatement programs. The 2019 law does not “re-regulate” any units previously removed from the rent-stabilization program. Before the 2019 law, it was legal to “deregulate” a stabilized apartment over time through 2 processes:
The authorities mentioned an affordability crisis to justify their decision. They claim over 300,000 rent-stabilized apartments have been removed from the rent regulation program and converted to regular units in NYC over the last 25 years ago. Under High-Rent Vacancy Deregulation, a landlord could deregulate a vacant apartment if a potential tenant moved into an empty unit, and the legal rent rose above $2,774.76. Deregulation would apply if the new tenant’s rent were below the threshold, as long as the legal rent was above. In the past, owners could deregulate an occupied unit if the rent was above (i) the Deregulation Rent Threshold (DRT) and (ii) the total household annual federal gross incomes were over the Deregulation Income Threshold (DRT) of $200k for each of the two preceding years. This condition was called the “High-Rent High Income-Deregulation.”
The new 2019 law has significantly limited options for rent increases on rent-stabilized apartments. Previously there were four ways to legally adjust rents on rent-stabilized units, including the possibility for landlords to raise rents to 20% upon a vacancy using the “statutory vacancy bonus.” Under the 2019 law, the only way to adjust rents results from capital improvement work done to stabilized units and buildings.
The new 2019 law has reduced the landlord’s ability to increase the rent based on an Individual Apartment Improvement (“IAI”). Before, apartment improvements used to permit a rent increase of (i) 2.5% in buildings with less than 35 apartments and (ii) 1.67% in buildings with more than 35 apartments. The new law reduced these percentages to respectively, 0.6% and 0.55%. The legislation also capped the work which qualifies under an IAI (total $15k for three improvements in any 15 years).
The law also limited a landlords’ ability to increase rents through a building Major Capital Improvement (MCI). Before that, building improvements used to permit a rent increase of 1.04% for buildings with less than 35 apartments and a 0.92% increase for buildings with more than 35 apartments. The law decreased these percentages to 0.69% and 0.66%. Also, the new law limits eligibility for MCI work to building improvements such as windows, roofing, plumbing, and heating, whose cost will also be regulated. Finally, buildings with fewer than 35% regulated tenants are also ineligible for MCI rent increases under the 2019 law.
Furthermore, all rent increases (from Individual Apartment Improvements and Major Capital Improvements) expire in 30 years under the 2019 law. Previously, those increases were permanent. The 2019 law now limits a landlord’s ability to charge a rent upon a lease renewal if its tenant was receiving a preferential rent. A preferential rent means a rent lower than the legal rent on a rent-stabilized unit. Prior, upon lease renewal, the preferential rent could be fully or partially eliminated. Preferential rents are the base rent for each tenant’s occupancy; any rent increases remains limited by the Rent Guidelines Board, the agency that sets rent increases for rent-stabilized units. Under the 2019 law, all renewals get calculated on preferential rent, plus whatever rent increases the NYC Rent Guidelines Board permits.
The new law modified rent overcharge rules in tenants’ favor as a result of the 2019 law. This legislation expanded the statute of limitations for recovery of a rent overcharge to six years (from four). Before the law, there was a 4-year limit for filing a complaint. As a consequence, it was previously permitted for landlords to dispose of rent records older than four years. The law carved out some limited exceptions to these limitations. In the 2019 law, there is currently no limitation on the look-back period. The 2019 law also increased a landlord’s exposure to treble damages for a rent overcharge to six years from two before. Additionally, the legislation removed the ability for owners to avoid treble damages if they voluntarily return the amount of the rent overcharge before a court makes a decision.
The 2019 law limits the “owner use” provision to the use of a single rent-regulated unit by the owner or their family as their primary residence. The landlord must prove an “immediate and compelling” necessity instead of just “good faith” standard employed before the 2019 law. The new law also restricts eligibility of the owner use except if its tenant is over 62 years old, is disabled, or has occupied the apartment for at least 15 years. Besides, the 2019 law provides tenants with a cause of action if they get evicted because the landlord makes a fraudulent claim. In the 2019 law, combining or splitting apartments to obtain a “first rent” is still possible. Also, a “substantial building rehabilitation” will always take it out of stabilization.
The law made several modifications to the real property for regulated and standard apartments. They include notice requirements for non-renewal, rent increases above 5%, apartment re-letting, security deposits, and application fees.
The law strengthened the retaliatory eviction provision for all apartments in NYC. The new law prohibits retaliatory eviction by a landlord against a tenant who makes a good faith complaint to them.
The landlord now has a year to prove that eviction is not retaliation was (vs. six months before). The new law also broadens the scope to include complaints made by tenants directly to landlords, whereas under previous legislation, only authorities could make the allegations.
The 2019 law increases the notice requirements for a non-renewal of a lease or a rent increase over 5% to 30 days notice for rentals under a year), 60 days (between one and two years), and 90 days (2 years or more). Before the legislation, landlords of unregulated units did not have to send out any notice of non-renewal.
The 2019 law requires landlords of both regulated and standard units to make a reasonable, good-faith attempt at re-renting an apartment if a tenant vacates before the end of the lease. Landlords must re-lease at the lesser of previous rent or market rent. The tenant is off the hook for damages when the apartment rents again. If market rent falls after signing a lease, the current tenant remains only responsible for the lower market rent.
Under the 2019 law, a landlord may not consult housing court records for tenant screening. Accessing court records would create a presumption that the landlord has violated this statute. A bad FICO represents a good reason for rejecting a tenant under the new legislation.
The 2019 law mandates a maximum security deposit for both regulated and standard units of no more than one month of rent. The maximum amount an owner can collect remains a month’s rent and one-month deposit. Receiving more than one month of prepaid rent would subject a landlord to treble damages. Furthermore, the landlord must return deposits to the tenant within 14 days of moving out. The landlord must provide a tenant with an itemized statement of deductions and any remaining portion of the deposit within 14 days.
Additionally, a landlord must offer to accompany the tenant to a walkthrough inspection of the apartment upon initial lease signing. The landlord must provide a written agreement that specifies any defects or damages. Lastly, tenants have the right to request an inspection before move-out and receive an itemized statement from the landlord specifying any repairs or cleaning, which may warrant any reduction in a tenant’s security deposit. Tenants have the option to repair defects discovered during the inspection before the expiration of the lease.
Under the new 2019 law, a landlord cannot charge an application fee higher than $20. A broker who represents a landlord may not collect an application fee over $20. However, the limitation does not apply to real estate agents who represent tenants.
Furthermore, a tenant can only pay the minimum of (i) $20 or (ii)the cost of a credit report. Landlords must also provide a copy of that credit report to the tenant. In case a tenant provides a copy of a background check or credit check conducted within the past 30 days, the landlord waives the application fee. The new law also caps late fees for both regulated and unregulated units to $50. Landlords must offer a minimum of 5 days as a grace period.
The 2019 law significantly expands the process for handling non-payment of rent. If the tenant fails to pay the rent within five days, the landlord must send a written notice to the tenant. The landlord must retain the receipt. Furthermore, the tenant must also receive a fourteen-day demand for rent in addition to the aforementioned 5-day notice. Any claims for rent and subsequent non-payment summary judgment may only be in the amount of the lease and cannot include any other charges, such as late fees. Also, the amount of time a tenant has to answer a non-payment petition has increased to ten days from five.
Furthermore, the landlord’s counsel needs to submit a written motion to request continued rent payment during the proceeding. Before the 2019 legislation, an oral action for continued rent payment was allowed. The 2019 law also allows tenants to bring forth orders to show cause and seek further stays of court determination after trial. Previously, a lawsuit was the final determination in a non-payment proceeding.
Also, the new legislation created a new criminal offense. The landlord who illegally evicts a tenant risks prosecution for a Class A Misdemeanor.
The most significant unknown effect of the law remains the impact it has on the valuations of older rental buildings that have rent-stabilized apartments. Before the legislative changes, there were several options an owner could raise rents to remove units from rent-stabilization. Valuations of buildings trading in New York City include that ability. Indeed, the new legislation severely limits the ability to remove apartments from the stabilization program. As a result, we think the income for buildings with rent-stabilized units declines over time.
Furthermore, the valuation’ multiples’ may decrease over time to reflect the increased risk associated with owning a building in NYC with rent-stabilized units. Consequently, we expect the 2019 legislation to severely depress the valuations of multifamily buildings in New York City and real estate in general by contagion.