“I feel really bad for those agents”: How landlords and property managers are responding to broker fee rule

Some are raising rents, cutting staff

TRD NEW YORK /
Feb.February 10, 2020 12:00 PM
Here’s how landlords and property managers are dealing with the changes to broker fees (Credit: iStock)

Here’s how landlords and property managers are dealing with the changes to broker fees (Credit: iStock)

Within 36 hours of finding out about state regulators’ interpretation of the rent law, Lisa Management made the decision: It would no longer hire outside brokers.

That meant offering one of the two brokers exclusively responsible for leasing up 200 of the units Lisa manages a choice: hang up their brokers’ badge and join its in-house leasing team, or find a new place to work.

Lisa is the property management affiliate of affordable housing developer Hudson Companies, and manages a total of 2,200 units — the vast majority of which are rent-stabilized and owned by Hudson. In addition to its work on Hudson Companies buildings, it works with several other landlords across the city.

Lisa has a five-person in-house team that handles leasing for Hudson’s buildings, and, until last week, worked with two brokers exclusively for leasing 200 apartments owned by third-party landlords. Now, Lisa’s president Jorge Jorge said one employee will take over the role.

Jorge said he decided to make the cuts after Lisa Management’s landlord clients said they can’t afford to pay broker fees.

“I feel really bad for those agents,” he said, noting that if they decided to become Lisa employees they would be making less money.

Lisa is also getting crunched, according to Jorge. Before, Lisa received a split of the brokers’ commission, which was paid by tenants. Broker fees ranged from one month’s rent to the industry standard of 15 percent of the annual rent.

“We are definitely going to be taking a hit on revenue because of this,” he said. (He noted that at Hudson’s properties the developer has always paid its agents’ broker fees.)

The company is among many trying to cope with the sudden change in how rental brokers do business. In the short-term, landlords and property managers are doing what they can to mitigate risk. Property managers with in-house brokers — put in the awkward position of asking existing clients for more money — are in some cases marking up asking rents. Others are cutting staff, while some landlords are simply putting a freeze on allowing brokers into their buildings until the rule’s legal implications are sorted out.

Joseph Strasburg, president of the landlord group Rent Stabilization Association, said he expects a “shrinkage” in the brokerage industry if the law stands, but is not sure of its extent. Both brokers and landlords will become more reliant on tenants seeing the value in hiring agents themselves, because owners are still “going to want their units occupied,” he said.

AJ Clarke’s Michael Rothschild, whose company manages roughly 150 rental properties in Manhattan and is actively leasing out apartments in 10 to 20 buildings, said his firm has agreed with owners to increase asking rents by 5 percent to cover the cost of broker fees.

“We don’t really know if that will hold, but we didn’t know how else to handle it,” he said. “Most of our buildings are not full-service buildings. It’s all leg work by our brokers to show apartments.”

Stephen Kliegerman, president of Halstead Development Marketing, noted, however, that some landlords are already used to paying broker fees, which they have rolled into rents.

“[At] a lot of the buildings that are no-fee, the rents tend to be a little higher,” he said.

He said that at new developments and high-end rental buildings, landlords often pay broker fees to attract tenants and ensure units are rented. Larger multifamily owners and affordable housing developers also often have in-house leasing teams and won’t be as affected by the law change.

David Sigman, executive vice president and principal at development and investment firm LCOR, said the change will most acutely harm older, smaller landlords, especially those who already feel cash-strapped by changes to the rent-stabilization law. Meanwhile, larger, well-capitalized companies accustomed to paying broker fees — seen as a short-term cost to spike renting velocity — won’t be bothered by the new law.

“We’re set up that way,” he said of LCOR. “We have an institutional partner, a pension fund, so it’s just a different issue for us than a smaller landlord who doesn’t have the resources to do this.”

Nestio’s Caren Maio said that the state guidance will hit hardest for mom-and-pop landlords and multigenerational family-owned portfolios, which have relied on outsourcing marketing and leasing to brokers, who in turn were paid by tenants.

“That model has been flipped on its head as of this week,” she said.

Though high-end condominiums and cooperatives are somewhat insulated, residential management companies are following the issue closely as the June rent laws have had implications for operations.

Orsid Realty, which manages over 17,000 units predominantly in luxury condos and co-ops, such as the Dakota, is advising its clients to stop hiring brokers to avoid fees.

Though Dennis DePaola, the firm’s director of compliance, said he doesn’t believe its portfolio will greatly affected, he called regulators’ interpretation “frustrating.”

Orsid has two in-house brokers who receive a salary on top of commissions — previously paid by tenants or buyers — and work with the company’s clients on rentals and sales.

“We either have to start charging the landlords,” he explained, “or the broker would lose out of the commission.” DePaola said the firm is trying to give them deals where its clients are prepared to pay them a commission.

Max Freedman, CEO of Maxwell-Kates, noted that the high-end residential market is linked to rental properties through New York City’s property tax system, which assesses the value of condos and co-ops by calculating theoretical rents based on what actual rental properties are generating.

If rents do rise as landlords offload the cost of broker fees onto tenants, “it could have an unintended effect of higher taxes” for condo and co-ops, he said.

Chris Athineos, whose family owns 150 apartments in Brooklyn, said brokers typically contact him to see what units are available. He doesn’t hire brokers exclusively to lease out his units, but doesn’t want to risk being on the hook for fees. In light of the guidance, though, he will no longer allow agents to show his apartments.

Athineos said he would be open to allowing brokers who have a payment agreement with prospective tenants to show his buildings, but needs a guarantee before moving forward.

“Right now, until I get a clear and concise interpretation, I’m going to rent on my own,” he said. “I don’t want to put the broker at risk or put myself at risk.”


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