Will Individual Apartment Improvements come back?

IAIs are now in play in budget negotiations, according to Speaker Heastie

The state budget is being held up and will now be at least a week late, as Governor Hochul has received an extension until April 8th to finalize the state budget. Disagreements over housing policies are a leading reason for the delay. What’s at stake has evolved from the 421-a revival and “Good Cause Eviction” (good cause) also to include the possibility of Individual Apartment Improvements (IAIs). While the budget will reveal the final details when it comes out, it’s essential to consider what an improvement to the IAI law could mean and how it would benefit owners.

Individual apartment improvements (IAIs) form the backbone of the incentive structure that propels the investment into and the management of rent-stabilized properties in NYC, which represent nearly half of all rental apartments in NYC. At a basic level, IAIs allow property owners to renovate apartments with documentation of the costs and then to increase rents to reflect a portion of the costs associated with the work to renovate the apartments. When considering how much capital to invest into upgrading apartments, owners ask themselves how long it will take them to get paid back on that capital. How long the payback period for money invested determines whether an investment is made or skipped over for other pursuits.

Publicly traded companies make the same tradeoffs when evaluating projects. When Apple decided to abort its pursuit of self-driving cars this year, its executives realized the profitability would be small and the payback period on any further investment too significant for it to warrant continued efforts. Conversely, Tesla, whose car models are now outdated compared to the typical 2-3 year lifecycle for car models, has decided the profit that new car models will deliver is worth pressing on and making the investment in R&D, sourcing, production and testing, and eventual sales and marketing required to make the new cars a reality. Drivers and consumers can no more demand that Tesla cease its production of a new Tesla model than they can force Apple to pick back up its designs for self-driving vehicles. But that very situation is happening now in the housing market in NYC.

Cars and housing are different goods, but the same incentive sets usually drive private investors. Providing housing is further down on Maslow’s hierarchy, and its absence is more deeply felt than the lack of a new apple vehicle. So, I’m not arguing the two domains should be treated the same way. However, investors across industries and verticals are the same in that they always search for higher yield and lower risk. If investors who own housing can get higher returns for equal risk by buying Apple stock, buying treasury bills, or putting money in high-yield-saving accounts, they will do so. If you take issue with how investors think, you can’t just hate the players; you have to hate the capitalist game and the institutions that support it, which are ubiquitous in the United States.

The profitability of performing IAIs was greatly reduced in the 2019’ HSTPA law, and so the prospect – confirmed by NY State Assembly Speaker Carl E. Heastie – of a change should excite the owners of the nearly 900,000 rent-stabilized units in NYC very much. Before 2019, the law said owners would get paid back for apartment investments in as soon as ~3.5 years. Invest $1,000 into the apartment, raise the rent by $25 per month, and obtain an extra $300 in rent per year. Today, the law says one could invest $1,000 into an apartment and raise the rent by $6 per month for $71 in extra rent per year. The owner who invests that $1,000 will not be made whole for another 14 years. So, because IAIs were initially quite profitable to perform, investors should be keen to see where this talk of IAIs goes and see if it doesn't make things look a little interesting for investors.