New DHCR rules to be announced imminently

Okay, so you read my article last week about Governor Hochul’s pro-housing ambitions and you got excited. Hochul’s new goal of building 80,000 homes / year in NY for the next ten years grabbed a lot of headlines. That 80K number represents a >2x increase in statewide home construction! Investors are right to be excited. A news story like that lifts all boats. The only problem is that there is new legislation that promises to take much of that excitement away.

The Housing and Community Renewal (DHCR) has released a set of rule changes that would deter more housing from being produced.

The goal?

Mostly to clear up the confusing language in 2019’s HSTPA, which made critical changes to the rent stabilization law but had some conflicting language. Mostly.

The other intention was to make sure the HSTPA rules really represented the ‘spirit of the law’. For DHCR that spirit is to preserve a large amount of rent stabilized units for New Yorkers. The new language is aimed at eliminating pathways for owners to take units out of rent stabilization.

Owners were already warehousing apartments (read: not renting them) because it was not always economical to do the renovations required to improve old, dilapidated spaces and rent them for the same rent as before renovations. But some of those units were being converted into new, larger spaces and being legally rented for market rent. Or sometimes entire empty buildings were transformed into fresh properties. Both conversions and gut renovations increased the housing supply. The proposed changes would undo many of those incentives to produce housing. It’s widely expected that DHCR will release its changes ANY DAY NOW.

I wrote a full summary of these changes here, but as a recap, the proposed alterations to the HSTPA of 2019 are:

1. Close the Frankenstein loophole - NYCRR §2501.1 - full text

   Whereas the owner can today enlarge a unit or combine a unit with another to set a “first rent,” that is equal to what the market will bear, this rule would take away that opportunity completely. Instead, rents would increase only as a % of square feet added/subtracted to an apartment.

2. Tighten substantial rehabilitations - NYCRR §2520.11 subdivision (e) - full text

   The slight changes to the law here would constrain the range of motion for building owners performing substantial rehabs. Instead of being able to re-purpose buildings in the ways that are most economical, the rules promote adherence to prior building layouts.

Besides causing fear and slowdown in investment activity, these policies also go completely counter to Kathy Hochul’s goals. Hochul’s stated agenda is aggressive and allows for very little room for error.  Her 800K goal requires that a 421 a-esque tax abatement comes back, it calls for the legalization of basement units, and it would enable denser development in transit hubs. Disincentivizing owners from making profits while creating new apartments doesn’t seem like the move here.

But is this on Governor Hochul, or is this on DHCR?

Well, the governor appoints the DHCR Commissioner who oversees these decisions. The current chief executive of the housing authority is grandfathered in from former Governor Cuomo and played an important part in the 2019 HSTPA. Hochul can’t play the role of a housing champion yet overlook moves like this that directly contradict her aims of producing more housing. That’s a problem for investors, and it’s a problem for those who want to believe in the governor and her ability to turn things around for housing in New York.

Sources: Department of Housing and Community Renewal (HCR)