Major changes are coming to New York City real estate by way of the unprecedented rent reform deal reached by the state Senate and Assembly.
Before this new deal was reached, a landlord could convert their property from a rental to a condominium or co-op as long as they sold 15% of the total units to buyers who intended to occupy the apartment as their primary residence. That number is now 51%, and this will virtually end such conversions, which have been an important piece of the development puzzle in New York City. By requiring 51% of the tenants in the building to purchase their units in order to allow such a conversion, the landlord will be at the mercy of the tenants to agree to terms and pricing of their rental apartments, which gives the majority of the power to the tenants. This, in essence, will put tenants in control of the landlord’s property.
The intention here was to protect tenants from being harassed to vacate their apartments either overtly or constructively. Some lawmakers expressed concerns that aggressive landlords were not following the existing laws prohibiting harassment of tenants who lived in rent-regulated buildings and who chose not to purchase their apartments and remain rent-regulated tenants. Although there are very strict laws governing such harassment, arguments in favor of further legislation expressed the belief that the laws did not go far enough to protect tenants. Thus, lawmakers wanted to further protect tenants by putting them in control of the process.
There has been much explanation around the changes for rent-regulated tenants and their landlords. Less has been said about the sweeping changes to the laws governing rental to condominium/co-op conversions, and my decades of work with property developers in New York City make it very clear to me that there are serious negative implications for the future of condominium and cooperative conversions statewide.
Possible Loss Of Jobs
With rising real estate taxes and operating costs, many landlords have looked to conversion as a means to turn nonperforming or even negative-performing assets into profitable ones. Without the ability to convert such properties in the future, the economic hardships imposed on property owners could lead to deferred maintenance in many buildings. Deferred maintenance is when an owner chooses to hold off on repairing antiquated or broken systems or structures due to the high cost of such repairs, pushing them down the road for a later date. This affects the physical appearance and stability of the properties, not to mention the severe impact it could have on the contractors and laborers who would have performed such renovations and maintenance and may now be out of jobs.
I predict there will be a major economic trickle-down effect to numerous industries including legal, accounting, construction, brokerage and advertising, which could result in a loss of jobs and in some cases shutting down entire businesses that rely on such opportunities to operate. Additionally, it can mean serious economic hardship for many small property owners who have their life’s savings invested in a property — and often their friends’ and families’ money, too. Such investments were purchased with the future intent of converting them in order to make the investment worthwhile, often even being purchased with a negative or break-even cash flow and in great disrepair.
Deterioration Of Housing Stock
Furthermore, conversions of older, pre-war properties almost always lead to major capital improvements and upgrades that make the building more energy efficient, such as new windows, new heating and air conditioning systems, and electrical and plumbing upgrades. All of these improvements lead to a more energy-efficient property, reducing carbon footprint and demand on our energy supply.
Without such conversions, these upgrades will likely come to a screeching halt, causing our housing stock to further deteriorate. This deterioration will not only have an impact on the owners of such properties, but also on the inhabitants of the neighborhood, who will find that such properties are no longer being maintained in an attractive manner, causing blight and reducing values around them.
It could have environmental repercussions as well, if landlords and owners cannot fund capital improvements that are necessary to bring buildings up to current and future environmental standards that benefit tenants’ quality of life and the environment. Upgrades like new windows, more efficient heating systems, new roofs and new electrical systems all enhance the efficiency of a property. But without the ability to recapture the costs of those improvements over time, landlords may very well stop making such upgrades, resulting in a negative impact on both our environment and on city residents’ quality of life.
This provision to the new rent laws provides that the state attorney general’s office may make exceptions to this new rule at its discretion. I believe that such exceptions without guidelines will be difficult for the AG to offer, as there will be too many political consequences if exceptions are made. My greatest hope is that the legislature will review the intention and consequences of this new law and create a more thoughtful and businesslike process to approve rental conversions. Perhaps this could include requiring a reasonable discount to proven market rate sales prices for tenants who wish to purchase their apartments. In addition, there should be a financial litmus test whereby if a landlord can prove a hardship where the property is not financially viable as a rental, the landlord may be allowed to convert it.
There are so many reasons why conversions have helped to enhance the overall New York City real estate landscape — from neighborhood beautification to job creation and homeownership opportunities, all of which bring a further sense of pride and investment to our city — that it seems to me have been overlooked in this new legislation. Only time will tell the true impact, but it is undeniable that there will be a huge economic and aesthetic effect on our city.