End of tenant-pays broker fees is “death knell” that will cost jobs and up rents, industry says

New guidance will save renters thousands, but real estate experts say the tradeoff is agent jobs

TRD NEW YORK /
Feb.February 06, 2020 08:00 AM
James Whelan and Julia Salazar (Credit: Getty Images, Facebook, iStock)

James Whelan and Julia Salazar (Credit: Getty Images, Facebook, iStock)

State regulators have turned New York City’s rental market on its head.

New guidance unexpectedly issued by the Department of State reversed the tenant-pays broker-fee system that has long been the norm in New York City.

While many of the city’s 5.6 million renters — 8.9 million statewide — are lauding the change, some in the real estate industry claim it’s a death knell that will cost thousands of agent jobs and lead to rent increases.

The guidance is based on the DOS’ interpretation of the rent law passed last June, and notes that agents working for landlords will be penalized if tenants pay their broker fees.

One of the lawmakers who sponsored the rent law, State Sen. Julia Salazar, said in statement that “our intent is to eliminate barriers that currently prevent low-income and vulnerable people from obtaining housing.”

Broker fees are typically 15 percent of an apartment’s annual rent. For a Manhattan apartment with the median rental price for the borough — $3,499, according to Douglas Elliman’s December report — that means paying broker fees of $6,298 upfront.

For the industry the ruling means new costs for landlords and potentially a shakeup for the entire business model of apartment rentals in the state. There are close to 79,500 licensed real estate agents and more than 54,000 brokers in New York, according to the Department of State. In New York City in 2018, the Real Estate Board of New York counted more than 12,000 residential brokers as members.

Reggie Thomas, REBNY’s senior vice president of government affairs, called it “a body blow to thousands of hard-working New Yorkers.” The organization also said it was “exploring legal action” to reverse the interpretation.

Agent for change

Landlords who are now on the hook to pay the extra fees were swift to react.

“That’s insane,” said real estate attorney Bruce Cohen. “The reason it’s insane is ultimately it’s going to do one of two things: It’s either going to raise rents… or it’s going to have [landlords] not use brokers on rentals.”

Multiple landlords, who spoke on the condition on anonymity, supported Cohen’s assessment, saying they would raise rents to pass the new costs onto tenants, or handle listing and showing apartments themselves without the help of real estate agents.

The situation is more complicated for owners of rent-stabilized buildings, however. Unlike landlords who are free to charge market rents and can bake in the extra cost of a broker fee, landlords with rent-restricted units cannot recover that expense from tenants.

“On stabilized apartments where the legal rent is fixed and can not be increased due to the same laws, how would an owner recoup the cost?” asked Raphael Lipschitz of SCL Management.

His firm operates a portfolio of multifamily properties in Brooklyn consisting mainly of rent-stabilized units.

“It’s certainly more of a squeeze on the brokerage model but it has ripple effects on rent-stabilized building owners,” Lipschitz said.

One owner of a large portfolio of rent-stabilized units said the guidance makes warehousing look more attractive. “This will just make it harder to rent the apartments that were borderline worth renting,” they said. “It’s essentially an additional expense that I can’t recover, making it less likely that I’ll rent the apartment.”

Jay Martin, who leads the Community Housing Improvement Program, an organization representing smaller landlords, said his members “will have to make really tough choices” about whether to use a leasing agent.

“I can see this as a death knell for a huge portion of the brokerage industry,” he said.

Defining a “landlord’s agent”

This is not the first time the Department of State has been called on to clarify the rent laws, which were passed and enacted last June.

In September, the DOS issued initial guidance making clear that agents and landlords could not charge renters more than $20 for applications. That had an immediate impact on brokerages’ balance sheets.

CHIP’s Martin said there were differing legal opinions on whether the $20 cap on what tenants can pay for rental applications could also include broker fees for landlords’ agents.

“We had always had this fear that this would be the interpretation,” he said.

A spokesperson for the DOS said in a statement that its most recent guidance was issued after it continued to receive “many” questions from real estate professionals about the law. It’s still unclear, though, what will happen when a landlord’s agent and tenant’s agent co-broker a rental transaction.

Another nagging question for landlords and brokers is what qualifies a real estate agent as “a landlord’s agent,” particularly given that non-exclusive listings are common in the rental market.

Lisa Faham-Selzer, a partner at Kucker Marino Winiarsky & Bittens, said it appeared to her that a landlord’s agent could be any agent who has no agreement with a tenant, but she acknowledged it was still unclear.

“A landlord’s agent, I think, is now anyone who provides a service for the landlord,” the attorney said, noting that could include any agent involved in a rental transaction who didn’t have a signed agreement with a tenant.

Holding out hope

Some brokerages were taken aback by the guidance and were at a loss for an immediate response.

“I have zero comment,” said Hal Gavzie, who leads Douglas Elliman’s rental division.

Two of the city’s biggest rental agencies — Elliman and Citi Habitats, which is now part of the Corcoran Group — and other industry organizations, including the Rent Stabilization Association and New York Residential Agent Continuum, were mum on the new change. Some said there was too little information out there to comment; others said more time was needed to digest the implications.

David Schlamm, who heads brokerage City Connections, called it “wrong on so many levels.”

“I am shocked not only with the new law, but also that there was no warning or grace period,” he said. “I am hoping that this will be reversed as fast as it was implemented.”

Such a reversal is not unheard of: Late last year, regulators interpreting a state law walked back guidance that would have upended the city’s high-end sales market — but only after sponsoring lawmakers intervened to say that was not their intention.

Though initial reactions from the brokerage community have been limited, it’s expected that residential leaders and agents will fight tooth and nail. Last February, City Council member Keith Powers proposed a bill that would cap a rental broker’s commission at one month’s rent, which for some would have meant collecting roughly 8.3 percent of the annual rent versus 15 percent. The real estate industry rallied, and ultimately the bill lost several sponsors and was amended to clarify that it would only affect landlords’ agents. A year later, the bill remains in committee.

The latest guidance has also found some support in the brokerage community.

“I think it’s a great thing,” said Moiz Malik, president and chairman of Brooklyn firm Nooklyn, which deals mainly in rentals. “It introduces more transparency for the renter.”

Malik said 90 percent of the firm’s business involved agents working for landlords, but he said the fact that they had long-standing relationships with owners and dealt primarily in no-fee transactions separated Nooklyn from its Manhattan counterparts.

The firm was one of the hardest hit by the cap on application fees implemented under the new rent law: After the state clarified the law for the first time last year, Nooklyn slashed broker commissions to compensate for the loss of revenue, causing outrage among its agents. One of the firm’s founders, Harley Courts, then stepped down as CEO.

Robert Desir, a staff attorney at the Legal Aid Society’s Civil Law Reform Unit, said the guidance “reaffirms what we have been saying for a very long time: landlords should shoulder the costs associated with hiring brokers to represent their interests, not tenants.”

Write to Erin Hudson at [email protected] and Sylvia Varnham O’Regan at [email protected]


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