Scandal and renewal

Real estate issues took center stage in the corruption scandals that toppled the leadership of the State Assembly and Senate at a time when vital legislation is on the agenda.

Last month, Senate Majority Leader Dean Skelos was forced to give up his powerful post after his arrest on federal corruption charges related to his dealings with real estate interests, including Glenwood Management and Tishman Speyer. That came just months after Assembly Speaker Sheldon Silver suffered a similar fate.

Meanwhile, Mayor Bill de Blasio unveiled a series of proposals to reform the 421a tax abatement program and rent regulations, both of which face an imminent deadline for renewal or expiration.

The Real Deal talked to leaders from various sides of the industry, including the development, law, academia and public policy sectors, to gauge the industry’s views on how the scandals will impact negotiations on those laws and others.

Our panelists largely believe the turmoil in Albany will pass, like other corruption scandals before this one, without leaving a major mark on the industry.

“I don’t think the recent events in Albany will impact the real estate industry or negotiations on important matters such as rent regulation,” said Frank Ricci, director of government affairs for the Rent Stabilization Association, which represents landlords. “These are big issues with major implications for owners, residents and the budgets of the city and state. I believe the elected officials understand the impact of these laws and the role they play.”

Several said the alleged corruption will likely result in more attention to the issues, though. “It’s clear that bright lights are shining on Albany, and many eyes will be scrutinizing and searching for sweeteners in upcoming real estate-related legislation,” said Michael McMahon of Herrick, Feinstein.

On de Blasio’s proposals, opinions varied more widely. While Ricci was mostly critical, David Kramer, principal at Hudson Companies, expressed broad support for the mayor’s ideas. “ I think the mayor’s 421a plan is incredibly smart,” he said. “I feel like they shut out the noise from the 421a haters and the building trades and came up with a proposal that will increase the production of affordable housing and not screw developers along the way.”

Some of our experts expressed sympathy for de Blasio’s ends, if not for his specific proposals, with some preferring less radical or more market-friendly approaches.

Where everyone agreed was their disdain for a pied-à-terre tax. “It is a terrible idea,” said Stuart Saft, partner and chairman of Holland & Knight’s New York real estate practice group. “Why are we punishing people who are bringing money and jobs to our city?”

For more on what’s right and what’s wrong with real estate policy and politics in our city and state, we turn to the experts.

David Kramer
Principal,
Hudson Companies

As we all now know, several real estate firms, including Glenwood Management and Tishman Speyer, played roles in the charges pending against the Sheldon Silver and Dean Skelos. Are there concerns in the industry that other real estate players are going to get swept into the investigations?

I haven’t lost any sleep. Aren’t the primary charges related to asbestos litigation, title insurance and storm water management?

Will the real estate industry need to recalibrate its lobbying efforts and rethink the way it does business? How hamstrung do you think Albany is in connection with passing real estate-related issues given the latest corruption scandals?

It’s not as though Albany was particularly competent prior to the recent scandals in connection with real estate-related issues. I thought their overzealous extension of the General Exclusion Area all the way to East New York was pretty irresponsible in 2007. But there’s definitely an anti-real estate vernacular developing that’s a concern. If you paid attention to the recent special election for the 43rd Assembly district [in Brooklyn], there were lots of references to greedy real estate developers.

Mayor de Blasio has called for significant changes to the soon-to-expire 421a program, including eliminating subsidies for condos, reducing the subsidies per unit and requiring a higher portion of affordable units in qualifying projects. What do you think of those proposals?

I think the mayor’s 421a plan is incredibly smart. I probably couldn’t have come up with such a thoughtful plan myself if I were in charge, something I rarely cop to. I feel like they shut out the noise from the 421a haters and the building trades and came up with a proposal that will increase the production of affordable housing and not screw developers along the way. My only concern is that given that it’s a very sensible proposal and it’s coming from the mayor, that might mean two strikes against it already.

Like de Blasio, tenant advocates argue that the city is becoming unaffordable for even middle-income families. What role, if any, do you think the government should play in assuring that developers don’t exclusively build housing for multi-millionaires?

Plenty of developers, such as Hudson, aren’t in the business of building housing for multi-millionaires. That just means your break-even costs are astronomically high … But the factors that dictate a high break-even basis — land costs and hard costs — are largely out of government’s sphere of influence.

The idea of a pied-à-terre tax for New York City has been touted as a way to ensure that foreign investors, who buy real estate to park their cash, would also provide some support for city services. Do you think that’s a good idea?

It’s an absurd idea. Just wait for there to be a real estate slow-down, and we’ll start debating how we can attract foreign investment.

As part of his goal for building and preserving 200,000 units of affordable housing, the mayor has proposed zoning changes that would allow for taller buildings in certain areas. This proposal has upset preservationists. What are your thoughts?

Here’s a perfect example of how the vilification of real estate development is making it hard for the mayor to achieve his affordable housing goals. This particular proposal is a thoughtful, modest corrective to a problem that has plagued contextual zoning for a while now, which is that the existing height limits sometimes conflict with irregularly shaped sites and inclusionary zoning bonuses. It’s not going to make dramatically taller buildings. But it’s a tough environment out there; folks don’t like height, they don’t like change, they challenge the affordability of the affordable units and this can be intimidating to elected officials.

The mayor also caused some concern with his move to mandate affordable housing whenever a zoning change is required for a new development. Do you think this plan will work, or are you concerned it will hamper new development?

I think it’s another good idea. The best time to create more affordability is when you’re undertaking a rezoning and handing a windfall to the existing owners. So instead of it being a home run for them, it’ll be a triple.

What’s the best or worst thing that government has done for real estate recently?

I’m optimistic that City Hall’s announcement of investing $120 million in the Department of Buildings will improve the department. We’ve endured a lot of pain for many, many years.

Stuart Saft
Partner and chairman of New York Real
Estate Practice Group, Holland & Knight

Frank Ricci

The industry had a fairly positive view of Gov. Andrew Cuomo when he was first elected, and donated over $2 million to his reelection campaign. What’s your take on his performance on real estate-related issues now?

I think the governor has done an excellent job of building the state’s infrastructure while supporting businesses that produce jobs and [benefit] the working poor, which necessitates balancing the needs of a state that has been losing businesses and middle income taxpayers to lower-cost states for several decades.

What impact will de Blasio’s tenant
protection and rent regulation proposals have on the industry?

The mayor’s plans are thoughtful, but in a city of almost 9 million people, with 3.1 million units of housing, much of it in disrepair, adding or saving 200,000 units of housing over 10 years is not enough.

What legislative changes do you think should be made to rent regulation, if any?

Part of the problem with the rental laws is that it bases the subsidy on longevity rather than on a tenants’ need for the subsidy. It seems to me that rent for stabilized and controlled housing should be pegged to an individual’s ability to pay, rather than how long they have lived in the apartment.

What role, if any, do you think the government should play in assuring that developers don’t exclusively build housing for multi-millionaires?

The city has become unaffordable for many reasons and it is unfair to just blame the real estate industry and to expect that the real estate industry can make the city affordable or that it can develop affordable housing on its own. There is so little affordable housing because city policies make it so expensive to build and operate housing, including but not limited to the real property tax.

Do you think a pied-à-terre tax is a good idea and do you see it regaining traction?

It is a terrible idea, because it would create a disincentive for part-time residents to invest in New York. Why are we punishing people who are bringing money and jobs to our city? Every time someone buys an apartment that they do not plan on using for their permanent home, they are bringing large sums of money into the city economy, they are paying real estate taxes, which fund the city, and the building has to be fully staffed and supplied as if the owners were living there full time, so it is adding to the employment and income of the city. … Moreover, if anyone thinks that, with high land costs and construction costs, affordable housing could be built in those locations, they are wrong.

Frank Ricci
Director of Government Affairs,
Rent Stabilization Association

What impact, if any, do you think the leadership shake-up in Albany will have on the real estate industry, and on rent regulation renewal?

I don’t think the recent events in Albany will impact the real estate industry or negotiations on important matters such as rent regulation. These are big issues with major implications for owners, residents, and the budget of the city and state. I believe the elected officials understand the impact of these laws and the role they play.

Mayor de Blasio recently called for a major expansion of tenant protections as part of the renewal of rent regulations, including ending vacancy decontrol. What impact would his proposals have?

All of Mayor de Blasio’s proposals would have a devastating impact on housing, owners and tenants. Capital investment would come to a halt and New York City’s aging housing stock would suffer. Rent stabilized housing in New York City produced $19 billion dollars in economic activity in 2014, including 153,000 jobs in locally based businesses. Half of this housing is owned by small business owners utilizing other small neighborhood businesses. This housing also generated nearly $3 billion in city taxes to fund municipal services … Why would anyone want to strangle this industry by cutting off the rental income it needs to meet ever-increasing operating costs and the constant improvements required by a housing stock that is generally more than 70 years old?

What changes do you think should be made to rent regulation, if any?

The laws should be amended to return the decontrol levels to the pre-2011 level of $2,000 per month for a vacant apartment. The current vacancy rate for apartments renting at $2,000 per month is over 5 percent. There is no housing
emergency at that level.

Beyond rent regulation, which real estate related issues are, or should be, on the agenda in Albany right now?

The legislature should be taking up the entire real property tax system in New York City. There’s a lot of discussion on tax caps outside of New York City but no discussion about the city’s system.

What are the most pressing real estate issues for the federal government?

Funding of section certificates and allowing localities more flexibility in administering Section 8.

Barry Hersh
Associate professor,
New York University Schack Institute of Real Estate

What impact do you think the leadership shake-up will have on the industry?

The leadership turmoil in Albany results in unchartered territory for all, especially for the real estate lobby. Its hope and perhaps the most likely outcome for the most contentious issues, such as rent regulation as well as 421a, may well be a simple extension. The governor’s hand is very strong, as both laws will expire and no change will become law without his support, [which has been] made even stronger as he is now the most experienced leader.

What’s your take on Gov. Cuomo’s performance on real estate-related issues?

In 2014, both houses of the legislature voted for a short-term extension of the sun-setting Brownfield Tax Credit program … Gov. Cuomo vetoed the extension, and instead negotiated a long term, and I and many others would say, improved Brownfield program. It is possible that the governor could seek comparable programmatic reforms in expiring housing programs. Housing is a much higher profile issue, for numerous elected officials improving housing affordability is their top priority, yet there are areas where changes might be obtainable. For example, stringent restrictions on subleasing, such as Airbnb, would be favorable to apartment and hotel owners yet also gain support from strong tenant advocates.

Sherwin Belkin
Founding Partner,
Belkin Burden Wenig & Goldman

Michael McMahon

What impact, if any, do you think the leadership shake-up in Albany will have on the real estate industry?

A legislative session about major real estate issues such as the expiration of rent regulation and the 421a tax abatement program is always a time of great uncertainty. Certainly, these recent events have only served to create an even higher sense of uncertainty as the leadership of the parties — and therefore of each house — now rests with members that are new to the leadership role in this process.

Will the real estate industry need to recalibrate its lobbying efforts?

Ultimately, the real estate industry is central to the well being and fiscal strength of New York City and the state. Despite these unfortunate events, these are major issues that will need to be addressed.

What’s your take on Gov. Cuomo’s performance on real estate-related issues now?

Many of my clients that own rent-regulated properties are disappointed. The tenant protection unit that the governor created has run roughshod on many owners by threatening penalties in proceedings that seem to be tainted by significant lapses in due process. In addition, the governor’s Division of Housing promulgated more than two dozen changes to the rent stabilization code — now being challenged by a lawsuit on which my firm is co-counsel.

What legislative changes do you think should be made to rent regulation, if any?

The amendments to the rent stabilization code make it incredibly difficult to simply say what the legal rent of any apartment is. This was addressed in 1997 by the creation of a ‘four-year rule’ that was intended to eliminate the need to retain ancient documents and make the calculation of legal rents easily understandable for both owners and tenants. Unfortunately, the code amendments and certain court rulings have created endless exceptions to the rule. If there was a clear restatement of the four-year rule, so it was not subject to endless exceptions, this would create the certainty that both owners and tenants need in being able to determine legal rents.

Michael McMahon
Government relations partner,
Herrick, Feinstein; Staten Island district attorney candidate

Will the real estate industry need to recalibrate its lobbying efforts?

I don’t think the industry needs to rethink the way it does business, and I don’t think Albany will be hamstrung when it comes to issues that can’t be avoided or sidestepped, such as the expiration of 421a. But it’s clear that bright lights are shining on Albany, and many eyes will be scrutinizing and searching for sweeteners in upcoming real estate-related legislation.

What do you think of the mayor’s proposals for changes to the 421a program? And what changes do you think the program needs before it is renewed?

I don’t think it makes sense to eliminate the abatement for condo ownership completely. The better approach would be to have price caps or income caps on condo developments that would allow the middle class to still enjoy the benefits of ownership.  

Do you think the mayor’s move to mandate affordable housing whenever a zoning change is required will work?

The difficulty in the mayor’s proposal can be seen in buildings built under the current 421a program, which have ‘poor doors’ or unequal access for the residents of the building. Sometimes, imposing affordability in certain neighborhoods doesn’t make sense. In other neighborhoods, it’s the right thing to do.

What are some of the issues that have fallen off the radar that you would like to see de Blasio and the city take up?

The city has an excess of land zoned for manufacturing uses, including places like Long Island City, the Garment District, Staten Island and around Madison Square Park. The city should stop calling these manufacturing zones and start calling them ‘maker zones.’ This would recognize the city’s shift from heavy manufacturing to what we have today —
a growing economy of small and mid-sized companies that create everything from software to independent films. We need to encourage these businesses, which are suitable in a neighborhood zoned for both living and working.