Analysis: Here’s what the new rent law will do to the average stabilized apartment

Landlords’ favorite rent-raising techniques are now far less effective
By Kevin Sun | June 18, 2019 07:00AM

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UPDATED, June 18, 11:41 a.m.: The new rent bill that was signed into law on Friday has already been described as “devastating” and “disastrous” for New York City’s real estate industry. But what specifically does it mean for certain multifamily landlords?

The new legislation touches on a wide range of rent-related issues, from vacancies and improvements to condo conversions and mobile homes. To illustrate the practical impact of these changes, The Real Deal took a look at one hypothetical rent-stabilized apartment – with a hypothetical, aggressively rent-maximizing landlord – to see how effective landlords’ favored rent-maximization tools will look under the new rules.

The result? “Gutted and neutered,” as one industry insider put it, sounds about right.

The Base Case

For our example, let’s consider a typical rent stabilized NYC apartment with a monthly rent of $1,300 – roughly the median contract rent being paid by rent stabilized tenants, according to the latest analysis from the Department of Housing Preservation Development. And because this will matter for some of the rules, let’s say this apartment is in a 100 percent residential building with 30 equally-sized units.

Now let’s say the landlord would like to raise rents as much and as quickly as legally possible — what are the options?

(To avoid another level of complexity, this analysis excludes annual rent increases permitted by the Rent Guidelines Board, which has ranged from 0 to about 3 percent over the past several years.)

Preferential Rent

To start, it turns out that the $1,300 per month the tenant is paying is not the unit’s “legal regulated rent.” The landlord could legally be charging $1,500, but chose to provide a “preferential” rent for any number of reasons.

Old Rules: The landlord can start charging the legal regulated rent the next time the lease is renewed – provided it was clearly stated in the original lease. If it was, our rent is now $1,500.

New Rules: Landlords can no longer do this for renewal leases. The rent stays put at $1,300.

Major Capital Improvements (MCIs)

MCIs are upgrades that “directly or indirectly benefit all tenants” in a building, and meet a few other criteria. Think new boilers, a new roof — that sort of thing. Based on a complex formula that considers the number of units in the building, the number of rooms per unit, as well as the percentage of residential space, landlords can pass the costs of an MCI on to tenants – but are subject to a cap on annual rent increases.

Old Rules: The annual cap is 6 percent, much more generous than that allowed by RGB guidelines. Let’s say the landlord spends just enough on an MCI to hit that cap in a year – with about $259,200 in building improvements, the landlord can raise the rent by 6 percent to $1,590.

New Rules: The annual cap is now just 2 percent. The landlord can hit that cap in a year with just $74,880 in MCI spending, raising our rent to $1,326. (Furthermore, this increase will expire in 30 years.)

Vacancy

This is where things get interesting. While rent hikes on existing tenants are relatively constrained, landlords have historically had much more room to maneuver when a new tenant moves in. So let’s say our apartment gets a new tenant.

Old Rules: The “vacancy bonus” can be as much as 20 percent for a new two-year lease, putting the new rent at $1,908 a month. (If the prior tenant was in place for eight or more years, an additional “longevity bonus” of 0.6 percent would also apply. There are also some caveats if the prior tenant was paying preferential rent – but our prior tenant had already started paying the full rent.)

New Rules: There is no vacancy bonus now. But! The previous tenant was still paying preferential rent before the vacancy, and the landlord is now entitled to charge the new tenant the full legal rent, which comes out to $1,530 with the MCI applied. So there’s that.

Individual Apartment Improvements (IAIs)

Here we have another rule landlords can take advantage of during a vacancy, which is probably one of the most powerful from a rent-hiking perspective. When a landlord makes upgrades to a vacant apartment, a fraction of the costs can be passed on to the incoming tenant.

Old Rules: There is no definite limit to how much can be spent on an IAI, but to use a real-world example, TRD in December reported several cases of landlords claiming more than $40,000 in expenses – albeit through somewhat suspect means. In any case, 1/40 of that cost – $1,000(!) – can be added directly to the next tenant’s monthly rent, which is now $2,908.

New Rules: IAI expenses are now capped at $15,000 over a 15-year period, and the rent change ratio has been reduced from 1/40 to a meager 1/168, so the maximum possible rent increase is now just $89.28. (Like MCIs, the rent hikes expire in 30 years.) Add that in, and the new tenant’s rent is now $1619.28.

Deregulation

Last but certainly not least, we have what used to be the holy grail of profit-maximizing landlords: the option to remove a vacated apartment from rent regulation altogether once its rent passed a certain threshold – most recently set at $2,774.76. City records show that 4,628 units became deregulated in this manner in 2018.

Old Rules: The landlord can now ask for as much rent as the market will bear. The median rental price in Brooklyn and Queens recently passed the $3,000 mark, while Manhattan’s median rent stands at around $3,500, according to the latest report from Douglas Elliman.

New Rules: “Vacancy deregulation” is no longer a thing, and “luxury deregulation” – where an apartment can be deregulated if the tenant made over $200,000 a year – is also canceled.

And in any case, the current monthly rent of $1619.28 is still well below the old deregulation threshold.

The removal of vacancy deregulation means that landlords no longer have a clear end goal when attempting to raise rents. At this point, under the new rules, our hypothetical landlord has basically used up all available tools to increase rents further, beyond the roughly 3-percent RGB-approved rent hikes.

Update: This story has been updated to reflect changes to the IAI multipliers.