How the NYC Rent Reform Law Can Impact Multifamily Development Going Forward

In June, the state legislature passed, and Governor Mario Cuomo signed, new legislation that changes the way rent can be increased, and other benefits for multifamily property owners, moving forward. Unfortunately, instead of these laws sunsetting after a number of years, the new legislation has made them permanent.

The largest percentage of rental units in New York City, 44 percent, are rent-stabilized while only 1 percent are rent-controlled. These are the homes that were the primary target of the regulation and which will be most affected by it.

 What Are The Major Rent Control Reforms?

While the new legislation didn’t go as far as many advocates were hoping for, there are some pretty strict hand-ties for landlords. The legislation did not do away with the major capital improvements loophole, but it does narrow the scope of definition for major capital improvements and limits how much landlords can raise rents to compensate for them to just two percent. This provision of the law will be in effect for the next 30 years.

In addition, the legislation puts an end to the 20 percent vacancy bonus landlords can raise rents by for new tenants when they move in. Landlords can also no longer raise rent from the preferential rent to market rate when tenants renew their leases. Landlords are further capped on how much they can spend on individual apartment improvements. Not only that, but the jurisdiction for the law has been expanded to include Westchester, Rockland, and Nassau counties.

How Might These Reforms Affect Multifamily Development in the Years to Come?

There are two major areas of multifamily development likely to be affected by these rent reforms. The first is the new construction sector. The second is capital improvements.

While many of the laws in the reform are targeted toward landlords who currently manage rental units, that doesn’t mean new construction won’t be affected. It costs money to build apartment complexes. Landlords rely on tenant rents and rent increases to pay for that development. While it could be a number of years before capital improvements are necessary on new developments, the cost of materials and labor will continue to climb. So developers will have to factor in the rising costs of construction and weigh it against flat rent increases. If the math doesn’t work out, in the long run, we will likely see new construction of multifamily developments decrease once market forces for labor and materials no longer make it profitable to build.

On the capital improvements side, landlords will be reluctant to improve apartment complexes if they can’t recoup the costs by raising tenant rents. On the other hand, certain maintenance costs cannot be avoided. This will become a major balancing act for landlords for the next three decades, particularly for landlords of older buildings.

For older complexes where rents are maximized, what could happen is landlords may decide to replace older buildings with new construction, which would allow them to effectively run older tenants out of the building and charge new tenants in new buildings higher rent. The “good cause” law was not included in the new legislation. This clause would prohibit evictions except for good cause. If it becomes too financially restrictive and costly to manage older apartment complexes, landlords may not have another way out other than to replace older buildings with newer constructions.

Rent reform advocates are disappointed the law didn’t go far enough. From a landlord perspective, it’s going to be difficult to manage the regulation financially and could hand strap many landlords in New York City and surrounding counties.