Over the weekend, legislators passed the NY state budget and Governor Hochul will soon approve it. Despite the high praise politicians involved are heaping on one another, the budget passed nearly three weeks after the deadline. Hochul suggested that a good deal is better than a fast one. True, but New Yorkers got neither. Let’s examine good cause eviction (GCE) and, later in the week, Individual Apartment Improvements (IAIs) and 485-x, which replaces 421-a.
Good Cause Eviction
Lacking any creativity, NY legislators adopted a version of GCE very similar to California’s (perhaps a pre-emptive move to overcome any constitutional legal challenges). Specifically, free market rental increases are capped at the lesser of: (i) 10% and (ii) 5% plus inflation. NYC must apply GCE (with certain exemptions) while other localities can choose whether to opt in. Tenants who fail to pay rent or are a nuisance can be evicted (which shouldn’t need clarification but in this environment landlords can take nothing for granted).
Exemptions to GCE
GCE passed with certain exemptions and one in particular that seems misguided (discussed below). Any new project (built in 2009 or later) is exempt from GCE for 30 years from completion, and expensive units (those affordable to folks making 245% of the area median income) are also exempt from GCE. Owners of small portfolios comprising 10 apartments or fewer are exempt from GCE.
Takeaways and Open Issues
- Defining Ownership: What does it mean to own 10 units? Sounds simple, but most commercial properties are owned through an LLC (to minimize personal liability and contain issues with troubled assets from infecting an entire portfolio) and how will the state or city pierce the corporate veil and ascertain ownership? Furthermore, LLCs are very flexible structures often having multiple membership interests with different ownership stakes complicating matters. What if you own a 20% membership interest in a 40-unit property? Do you own 8 or 40 units? To me, the answer isn’t clear but one thing is: the future holds more paperwork/filings and, as a result, more costs for landlords.
- 10 Units or Fewer Exemption Defies Logic: In an attempt to lessen the bite GCE may have on smaller landlords, Albany enacted the 10-units or fewer exemption. Accordingly, a free market tenant “unlucky” enough to find herself living in a unit of a mom-and-pop owner will not have any protections afforded by GCE. To illustrate, her rent of $2,500 could be increased to $5,000 upon lease renewal. But isn’t this the exact “price gouging” the new rules are meant to protect against? Some may suggest this scenario is unlikely as the market wouldn’t support a doubling of rents. Ok, but then why have GCE at all? It’s clear that legislators want their cake and to eat it too by simultaneously protecting tenants and also smaller landlords. However, protecting the latter hurts certain members of the former.
- Price Ceilings Have Unintended Consequences: Rent stabilization and now GCE are forms of price ceilings—a concept that isn’t new. Cities such as Stockholm, Berlin, San Francisco and Mumbai, among others, have implemented some form of rent control. And it’s true that regulating rents provides short-term relief for certain tenants but it can lead to issues with housing supply, building maintenance and quality over the longer term. Time will reveal what unintended consequences come to pass from GCE in NYC.
So, the dirty little secret is that Albany has been tinkering with supply and demand economics with adverse consequences for some time now. Through rent stabilization, nearly one million apartments have been effectively removed from the supply side of the equation putting undue rental pressure on the remaining free market units. The supply issue was exacerbated when legislators allowed 421-a to sunset nearly two years ago. Few new rental projects were built and the price of free market apartments unsurprisingly increased dramatically as demand for NYC living remained robust.
To ameliorate their missteps, Albany is now asking landlords—through the adoption of GCE—to cap the foreseeable and inevitable rent spikes resulting from bad policy. Politicians have merely shifted the increase in housing costs and risk onto landlords: the perennial punching bag.
Sources:
Rebong, K. (2024, April 21). Housing deal finally passes; here are the details. The Real Deal. https://therealdeal.com/new-york/2024/04/20/housing-deal-finally-passes-here-are-the-key-details/
Smith, R. H. (2024, April 22). How ‘Good Cause’ Could Give Some Tenants New Leases and Lower Rent. THE CITY - NYC News. https://www.thecity.nyc/2024/04/22/tenant-eviction-good-cause-rent-limits/
Be First to Comment