What the death of the vacancy bonus means for landlords

Industry figures predict run-down buildings and capital flight

Jun.June 17, 2019 04:30 PM
Landlords can no longer add 20 percent to the rent when there is a change in tenant (Credit: iStock)

Landlords can no longer add 20 percent to the rent when there is a change in tenant (Credit: iStock)

Landlords who count on the vacancy bonus as part of their business model are going to have to recalibrate. The state killed the tool as part of the sweeping rent regulation package signed into law on Friday. That means landlords can no longer add 20 percent to the rent when there is a change in tenant, although owners can still charge the maximum legal rent when there is a vacancy.

Legal experts are poring over the bills to understand the new framework. They say that the impact will be immediate and disastrous: and the effects will not be limited to landlords.

Some multifamily landlords say they may not be able to make loan payments and their buildings would pass into foreclosure. As a result of mechanisms by which landlords increase rents being changed, some landlords may be overleveraged, and won’t be able to make debt service payments, according to attorney Blaine Schwadel, who supervises the regulatory law group at Rosenberg & Estis, P.C.

“That’s not the owner’s fault. The rules changed overnight,” Schwadel said. “The projected increases aren’t happening.”

The vacancy bonus was scrapped alongside vacancy decontrol, which allowed landlords to remove units from regulation once they hit $2,775 in rent. That combined system — along with increased rents through apartment and building renovations — allowed landlords to remove nearly 300,000 units from regulation since 1993, according to the 2018 annual report from the city’s Rent Guidelines Board. High-rent vacancy deregulation accounted for 4,628 of the units removed in 2018 (62 percent), according to the RGB.

Landlords warn that the radical expansion of tenant protections and the regulatory squeeze will lead to capital flight, and disincentivize investment in New York City. According to Treetop Development’s Adam Mermelstein, whose firm is heavily invested in New York City multifamily housing, the changes to the rent regulation framework amount to socialized housing— so Treetop and others in the industry may be looking for greener pastures outside of the city and outside of rent regulations.

“This is, for all intents and purposes, socialism,” Mermelstein said. “And in a capitalist economic system it’s too difficult to operate under a socialized housing system.”

According to Mermelstein, landlords are likely to provide the bare minimum in improvements to apartments — which is not enough to maintain New York City’s aging housing stock, he said.

Ken Fisher, an attorney at Cozen O’Connor who represents real estate clients, said that the increases will mostly affect those who made investments thinking they would be able to raise rents over time. (The Real Deal explored speculative multifamily trading in the Bronx in a 2017 feature. )

And the tenants that most benefit from the new framework may not be those the law was premised on benefitting, according to Fisher.

“Ironically, the repeal will mostly benefit more affluent tenants in below-market apartments, said Fisher. “The burden will fall hardest on small owners in working class neighborhoods that struggle anyway.”

As for the players the repeal will affect the most, Fisher contends that the vacancy bonus repeal will punish those who were banking on being able to increase rents over time. But the effects of the changes may not be immediate, Fisher said.

“I don’t think the Bronx is going to suddenly start burning. This is like a lava flow: slow moving and destructive but unpredictable in its course.”

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