NYC's RGB approves 3.0% rent increases in final vote
NYC's RGB approves 3.0% rent increases in final vote
RGB's decision + Frankenstein apartment loophole inches closer to extinction
NYC’s Rent Guidelines Board (RGB) has come to a decision on what the allowable rent increases will be for ~900,000 rent stabilized apartments in NYC for the upcoming year. In a 5-4 vote, the board voted to raise rents for one-year leases by 3.0%. For two-year leases, the rents can increase by 2.75% in the first year, and by 3.20% in the second half of the two-year lease. The video of the hearing is available here. Much like I have written in past newsletters, this annual ritual leaves landlord advocates wanting more and tenants claiming the increases are too steep. All owner advocates voted against the proposal. Only this year, the rent debate is happening at the same time as Senate bill 2980-C, also known as Assembly Bill 6216-B, has passed both the Senate and State Assembly.
This new bill would ban one of the last two remaining loopholes to materially raise rents on rent stabilized buildings. DHCR announced its intention to remove and / or tighten these loopholes in August of last year. The announcement worried owners, many of whom had active projects involving apartment combinations.
What exactly does this bill propose to do?
Today owners can set ‘first rents’ when enlarging or combining two rent stabilized apartments, thus bringing rents up to the fair market value. There is no cap on what rents can be; only the market will decide what the apartments are worth. The bill would depart from this and limit how much owners could raise rents in three important ways:
When two units are combined: the new rent would become the sum of the legal rents of the two former apartments.
Text: “…where a landlord combines two or more vacant rent stabilized apartments, the legal regulated rent for the combined apartment shall be the sum of the rents of the formerly separate apartments.”When enlarging an apartment: the % increase in square footage of the apartment will be applied toward the rent such that: Prior rent * (1+ % of additional square feet) = new rent
Text: “…where a landlord substantially increases the outer dimensions of a unit, the initial legal regulated rent for that unit shall be its prior rent plus a percentage of rent that is equal to the percentage by which the unit has increased.”When shrinking an apartment: the % decrease in square footage of the apartment will be deducted from the rent such that: Prior rent * (1- % of square feet reduction) = new rent
Text: “…where a landlord substantially reduces the dimensions of a unit, the initial legal regulated rent for the reduced apartment shall be the prior rent reduced in proportion to the reduction in floor area.”The bill now rests on Governor Hochul’s desk, awaiting her signature before it becomes law. If signed into law, the bill would activate immediately.
Text: “This act shall take effect immediately and shall apply to all pending proceedings on and after such date.”What does this mean for owners?
If this bill passes, it lowers the values of rent regulated buildings. Vacancies will be worth less because they can’t be set to market rent. But the hit on value is obvious, what about the non– obvious consequences?
The bad: Projects that are currently underway to combine units or enlarge and alter apartments may be in jeopardy. Properties under contract may fall out of contract and litigation may ensue over whether deposits are refundable or not. This will also underscore the binary values of rent regulated buildings. Desired properties will be completely occupied and more easily financed by lenders and GSEs, or they will be totally vacant, which will allow buyers to file substantial rehabilitations, the last way to significantly raise rents on regulated buildings. Mini industries were created and sustained thanks to this loophole. Companies comprising General contractors, architects, and expeditors would offer A-Z solution for owners looking to raise their rents via apartments reconfigurations. Outside of owners, these are the industry players that will hurt from this policy via fewer jobs.
The good: This is not a retroactive law. That means investors at large in NYC who have completed projects like these since the advent of 2019’s HSTPA will not be punished for their forays into apartment combinations. This can’t be stressed enough.
This news comes on the heels of what is viewed as a positive decision by the RGB for landlords. As a reminder, last year’s decision to allow for 3.25% increases on 1-year leases represented the largest increase in 9 years since 2013. Now add the 3.0% increase for one-year leases. That’s 3.25% +3.0% so a 6.25% increase in two years. That’s a larger rent bump in two years than the sum of rent increases that took place from 2014 to 2021, which stood at 6.0% thanks to freezes on rent hikes under former Mayor De Blasio and due to Covid. Some owners want larger bumps, and some tenants want much less. According to the data, this is a healthy increase for owners.
The simultaneous nature of these events tells an interesting story about multifamily in NYC. The anecdote of the real estate syndicator who pays big numbers for property, turns units, then sells for 2x the original price shortly thereafter could become a rarer sight. This may give way to a generation of buyers oriented towards long-term holds. Everyone understands this shift has been coming, but if the RGB members can settle on annual increases of 3.0% the long-term hold could be worth it.
Would you buy rent stabilized buildings if you were guaranteed +3.0% rent increases for the next 5-7 years?
Sources: Senate Bill S-2980C, RGB final vote hearing, City Limits