Everything you need to know about the sudden upheaval of rental commissions

TRD NEW YORK /
Feb.February 13, 2020 04:00 PM
rental armageddon

No more rental fees! Wait, no fees only if the landlord hires the agent. Scratch that, fees are back. For now.

It’s been a whirlwind week for New York City renters, agents and landlords since the Department of State blindsided brokers with guidance that attempted to change the way rental agents have been paid for decades. In its interpretation of June’s rent law, the agency said tenants no longer had to pay an agent retained by the landlord.

However, what sounded like a good idea to many renters sent the industry into a tailspin. Brokers feared lost income and jobs, and landlords grappled with the prospect of having to pay them. (In the midst of the fracas, Mayor Bill de Blasio floated the idea of giving renters an alternative to security deposits in city-financed housing. He said he would “pursue local and state legislation to expand these alternative options citywide to all of New York’s 2.2 million rental households.”)

After the industry mobilized on the broker fee issue, a judge put the guidance on ice as suddenly as it had arrived. But the restraining order is temporary, and both sides will meet in court next month to duke it out.

Here’s your guide to what went down and what’s at stake.

MEET THE STAKEHOLDERS
Tenants:

New York City renters have long had to pay thousands of dollars upfront to move in. Renters typically have to pay the first month’s rent, a security deposit and a broker’s fee. The fee in Manhattan is typically 15 percent of the annual rent, but varies in the outer boroughs.

If the Department of State guidance stands, tenants would no longer have to pay a broker’s fee when the agent is brought in to represent the landlord. However, prospective renters are still able to hire their own agent to guide them through the leasing process. In cases where the renter retains the agent, the renter would still be on the hook for the broker fee.

Rental agents & brokerages:

Many of the 25,000 agents in New York City cut their teeth in rentals or continue to pay the bills with them.

Though the average income for agents in the city was $104,180 in 2018, according to StreetEasy, rental agents typically earn less.

If the guidance is upheld, agents who work with landlords will be at the mercy of building owners who will consider the value of paying the broker versus going it alone. And very few people think landlords will be willing to pay up to 15 percent of annual rent to fill an apartment.

Landlords & property managers:

The impact of the broker-fee change would vary among landlords. Larger landlords and developers of luxury rental buildings are often equipped with in-house leasing teams, so the new rule would not affect them. Smaller landlords are more likely to feel the impact, as they would face the choice of paying a broker or marketing and leasing apartments on their own. Landlords could also opt to hire an individual or team in-house to handle leasing, but depending on the size of the landlord’s portfolio, that might not be financially feasible.

Landlords and their representatives say rents would be increased to cover agent fees. But owners of rent-stabilized buildings faced the prospect of an additional expense they could not recoup.

Everything you need to know about the sudden upheaval of rental commissions

HOW DID THIS HAPPEN…

SO FAST?

June 14, 2019

Gov. Andrew Cuomo signed the Housing Stability and Tenant Protection Act of 2019, which added protections for tenants in rent-stabilized housing and limited their landlords’ ability to increase rents.

Sept. 13

The Department of State released guidance on the new rent law, including capping application fees at $20 — which ate into rental brokerages’ bottom lines and sent some smaller firms reeling.

Jan. 31, 2020

The DOS quietly issued a second set of guidance, reversing the system in which tenants pay for rental agents hired by a landlord. The guidance was not widely released, and it is unclear if any stakeholders were initially aware of it.

Feb. 4

Gov. Andrew Cuomo and Secretary of State Rosana Rosado (Credit: Getty Images)

Gov. Andrew Cuomo and Secretary of State Rosana Rosado (Credit: Getty Images)

Around 9 p.m., the Real Estate Board of New York informs members of the residential board about the DOS guidance and begins to mobilize opposition.

Feb. 5

At 9:33 a.m., REBNY sends an email blast to members, encouraging them to call, write and tweet their opposition.

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

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

The trade group said it was exploring legal action and called the guidance a “body blow” to agents.

Feb. 6

Boston Mayor Martin Walsh (Credit: Getty Images)

Boston Mayor Martin Walsh (Credit: Getty Images)

Following New York’s example, Boston Mayor Martin Walsh announces he will form a working group to study rental fees. Boston is one of the only cities besides New York that has a tenant-pays system.

Meanwhile, New York City Mayor Bill de Blasio announced a plan to offer renters of city-financed homes a “choice to pay a security deposit or to sign up for renter security insurance.” The change would mean some renters — in an estimated 60,000 homes — could pay a lower, nonrefundable monthly fee instead of a deposit. He also said he would explore further legislation to open up alternatives to all the city’s renters.

Feb. 6

Chaos erupts at residential firms as agents grapple with pending deals, and confusion persists even after the DOS clarifies that the guidance only applies to future deals. At first, some firms instruct agents to conduct “business as usual.” Later, firms tell agents to comply with the guidance. “My head’s spinning,” said one brokerage chief. “People are lining up looking for refunds.”

Feb. 7

REBNY confirms it plans to sue the DOS and seek a restraining order to stop enforcement of the guidance. The industry heads into the weekend without much more clarity. Agents report that some landlords are already raising rents. For example, this one-bedroom on West 74th Street was listed on StreetEasy for $2,800 a month Feb. 5; on Feb. 7 it was $3,200.

But owners of rent-stabilized units did not have that option. “On stabilized apartments where the legal rent is fixed and cannot be increased due to the same laws, how would an owner recoup the cost?” asked Raphael Lipschitz of SCL Management.

Feb. 10

REBNY President James Whelan (Credit: iStock; Whelan photo by Anuja Shakya)

REBNY President James Whelan (Credit: iStock; Whelan photo by Anuja Shakya)

Early Monday morning, lawyers for REBNY boarded a train to Albany to file an Article 78 petition, in conjunction with New York State Association of Realtors and a dozen resi brokerages. The filing characterized the guidance as “unlawful, erroneous, and arbitrary,” and said it was wreaking “havoc and confusion.”

In an affidavit supporting the petition, Douglas Elliman’s Hal Gavzie said the firm was “working on hundreds of current rental transactions in which potential tenants are now threatening not to close.”

In the afternoon, Supreme Court Judge Michael Mackey in Albany County granted a temporary restraining order, meaning it was back to business as usual for rental agents.

WHAT’S NEXT?

The restraining order will remain in effect at least until March 13, when Judge Mackey has asked the Department of State to respond in court.

From there, the two sides will litigate whether the agency had the right to issue guidance concerning rental commissions. How long that process takes is anyone’s guess.

“I doubt the motion will be decided then and until it is, the TRO will stand,” said Lisa Faham-Selzer, a partner at Kucker Marino, which represents landlords and brokers. Calling the restraining order a “temporary victory,” she said, “It could take months before the underlying motion is decided and even longer before the case is decided.”

In the meantime, Faham-Selzer said lawmakers could decide the guidance reflects what they intended and amend the law to specify that. “Then,” she said, “the law would have to be challenged.”


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