245% is your new lucky number

A look at something important in the Good Cause Eviction policy

Last week, I wrote about my uncertainty surrounding the upcoming housing deal because the NY Governor had inked nothing in writing, and some quotes from senators and other officials implied conflicting viewpoints. Based on news reports and comments from officials, the housing deal has all but been passed into law, and I recognize that my skepticism was exaggerated. All the housing policy changes that you may have heard about are real, and they will come to pass.

Now that it’s clear these new policies are real, it’s critically important to understand them and how they may impact your business. Some groups have nicely summarized the key points of these new rules. Today, I will quickly highlight Good Cause Eviction (GCE), the most significant change to multifamily owners and investors from all the 2024-2025 Budget Resolution housing items.

GCE limits rent increases to the lesser of 10%, or 5% + the inflation rate. It also prevents landlords from evicting tenants, even if they have expired or terminated leases, unless there is a listed good cause. The real estate law firm Rosenberg & Estis, P.C. lists the potential justifications for eviction here. Nonobvious points to highlight:

• Good Cause Eviction allows for a form of "high rent de-control." When rents reach 245% of the HUD Fair Market Rents (FMRs) for that year, they become exempt from rent stabilization good cause eviction.

  • More insight: Researchers raise the HUD FMRs based on the Bureau of Labor Statistics' Consumer Price Index (CPI) data and by looking at nearby rent data. Since GCE allows for CPI + 5% rent growth or 10%, the policy could lay the foundation for rents to grow faster than FMRs. Suppose rents can grow faster than FMRs, which is very plausible. In that case, investors can upgrade their properties or raise rents on existing tenants to eventually become exempt from the regulations.

  • Ironically, this newly established incentive structure may propel owners to raise their rents to the hilt. The desire to get out from under the rent restrictions may push owners to take rents as high as they can, limiting Good Cause's goal of preserving affordability.

  • GCE will further deter investors from operating or entering the NY market. Discussions with frustrated investment funds and owners support this. The empirical data strengthen this view as well. Transaction volume in Manhattan crashed by almost as much in 2019 (25% decline), the year the HSTPA rent laws passed, as in 2020 when COVID-19 happened (29% decline). GCE means the new housing supply remains flat as fewer operators enter the market. If demand stays steady, but supply is flat, the price increases. Price increases are capped on GCE units, so that won't happen. However, apartments with rents greater than 245% of HUD's FMRs will benefit from vertical rent growth as owners seek to re-coup the rents they cannot obtain on their rent-capped apartments, and supply stands still. That's a good outcome (though some owners may benefit more quickly from that because the journey to 245% of FMR is traversed more quickly from Brooklyn Heights than from Bensonhurst). It's not always easy to see the silver lining, but it's always there.

• The law will require owners to insert GCE disclosures into leases. If apartments fall under the umbrella of GCE, owners will have to say so in their leases. If the apartments are exempt, owners will need to explain why they are exempt in the leases.

  • The way leases are written will form the bedrock of any enforcement mechanism the state of NY will have against owners who fail to comply. Without such a measure, GCE would be toothless because tenants would never know their apartment status and would have no recourse for overcharge claims. This is parallel to the rent stabilization system. Tenants that don’t have rent stabilized leases often don’t know that their apartments are subject to rent stabilization. So, the administration of GCE leases will be an area to watch closely as those leases are likely to be the basis of tenant overcharge claims, should they ever arise.

Next week, I will discuss the new Individual Apartments Improvements policy.

I am bullish on NYC multifamily. Call me at 212 658 1471

Sources:

(1)    Rosenberg & Estis P.C. Summary of the 2024 Housing Laws

(2)    Real Deal Housing Deal Finally Passes; Here Are The Details

(3)    Holland & Knight Changes to New York’s Housing Laws: What You Need to Know