Gov. Andrew Cuomo’s $193 billion budget proposes several provisions that could benefit real estate, but the next two months will determine if any of them survive the legislative gauntlet.
New York needs to close a $15 billion deficit, and the pressure is on to raise taxes on the wealthy. Cuomo has been reluctant to do that, however, but allows it would be necessary without ample federal aid.
The governor has also proposed legalizing marijuana and one-time revenue raisers such as licensing downstate casinos — a measure several prominent office landlords have pitched.
Progressive lawmakers appear to have other plans, however.
The state Senate, where Democrats won a veto-proof majority in November, has pushed for more taxes on the rich. The chamber’s move to the left in the past two election cycles has resulted in policies that favored tenants. Many in the real estate industry hope legislators will take a more moderate stance as New York tries to recover from the pandemic, but there is little evidence they will do so.
In a radio interview with WNYC, Senate Majority Leader Andrea Stewart-Cousins renewed her support for more taxes on high earners — regardless of how much federal aid materializes.
“The rich are getting richer, the middle class is shrinking and the poor are getting poorer,” said Stewart-Cousins. “I think we have to have a more progressive tax structure.”
The fear in the real estate industry is that layering on another millionaires’ tax would cause some high earners to flee or avoid New York, hurting the luxury market.
Cuomo’s budget proposal also includes measures to define rules for commercial evictions, pave the way for converting office buildings to residential, make it easier for building owners to abide by carbon emission caps and change taxation of short-term rental companies.
The final budget is due by April 1. Public hearings start Jan. 26, with each legislative body tackling a programmatic area. Housing will be discussed at a Feb. 2 hearing, and economic development and taxes on Feb. 23. But the final budget agreement will be hashed out behind the scenes by Cuomo, Stewart-Cousins and Assembly Speaker Carl Heastie.
Here are the portions of the proposed executive budget which could have the biggest impact on the real estate industry:
1) Commercial eviction ban
Cuomo proposed a ban on commercial evictions, but it includes disclosure requirements for commercial tenants that some see as a small concession to landlords.
To be eligible for protection from eviction for non-payment, commercial tenants must provide a form to their landlord declaring financial hardship. The state’s current eviction ban does not require that.
The ban would last until at least May 1, although some expect it would be renewed then.
One potential bright spot for landlords: Cuomo’s rule would have commercial tenants specify how much state, local and federal aid they have received. That may help landlords who sue tenants for money — a legal strategy not hindered by the eviction ban. The financial disclosures to ward off eviction could be evidence when landlords attempt to collect rent arrears.
2) Office and hotel conversions
In his initial State of the State address, Cuomo called for the conversion of vacant commercial space into mixed-income housing. His proposed budget includes legislation that would allow office, hotel and other commercial property owners to override certain local zoning regulations to move forward with residential conversions.
The bill lays out three options for owners: They can set aside at least 20 percent of apartments as affordable, create supportive housing, or fund construction of either type of housing elsewhere. The funds could also be used to “prevent homelessness.”
The state’s Division of Homes and Community Renewal is charged with determining how much funding is necessary to fulfill the off-site housing option and would likely set affordability levels for the other options. The agency did not respond to requests seeking more information.
The governor would allow office owners in Midtown and hotel owners in the outer boroughs and parts of Manhattan to avoid local light and air requirements for homes. That doesn’t cover the whole universe of local restrictions on residential construction, such as the required distance between two buildings on a single zoning lot.
Still, the industry largely views the proposal favorably.
“Having options and flexibility, that’s what we need to do,” said Mitch Korbey, partner and chair of Herrick Feinstein’s land use and zoning group.
3) Emission cap workaround
The proposed budget creates an alternative for New York City building owners to meet emission caps. It would permit building owners to buy renewable energy credits outside the city to offset their properties’ greenhouse-gas emissions — a priority for the real estate industry since the city passed Local Law 97.
The May 2019 law — which mandates a 40 percent reduction in citywide greenhouse-gas emissions by 2030 and 80 percent by 2050 — counts credits that building owners buy from renewable power generated within the city. But virtually no such power is produced in the five boroughs.
Passage of Cuomo’s proposal, which would make credits bought outside the city through the end of 2034 eligible, would be a major win for owners of the large buildings covered by the city law.
“Densely occupied and highly efficient buildings like LEED Platinum One Bryant Park can only significantly reduce emissions using renewable energy,” said a spokesman for the Durst Organization. “The proposed state law creates an urgently needed pathway for investment in renewable energy.”
4) Tax and disclosure changes
Airbnb and other short-term rental companies might have to start collecting state and local taxes, as well as the hotel nightly room-rental fee of $1.50. In his budget plan, the governor pitched the requirement to “create a level playing field between traditional hospitality industry participants such as hotels, motels, and B&Bs and the growing vacation rental sector.” According to the Wall Street Journal, the change could bring in $10 million in fiscal year 2022 and $18 million in subsequent years.
The proposed budget would also restrict how property transfer taxes are paid. It bars sellers from directly or indirectly passing that responsibility to the buyer. In cases where the taxes aren’t paid on time, the buyer must cover the costs but can then take legal action against the seller.
Cuomo also proposed amending a 2019 law that requires certain building owners, disguised through LLCs, to disclose their true identities. The measure mandates that owners, managers and agents of properties with one to four residential units reveal their names in a joint tax filing. The governor would exempt real estate investment trusts, mutual funds and publicly traded companies from the 2019 law.
Cuomo’s budget brief includes projects that run the total cost of his infrastructure plan to $306 billion. It would revamp transit systems, roads, bridges and airports, although some specifics have yet to be revealed. Real estate industry groups say investing in infrastructure is key to New York’s economic recovery. It also enhances property values.
The Real Estate Board of New York just reported that construction starts have dwindled to their lowest level in a decade.
In 2020, total square footage of new building filings in New York City was 28 percent lower than in 2019. Proposed construction of residential units declined 17 percent to 27,402.
“Governor Cuomo, Senator [Charles] Schumer and President [Joe] Biden recognize the importance of robust investment in new construction and infrastructure efforts as part of our recovery,” said James Whelan, president of REBNY, in a press release. “We must all work together to ensure their initiatives can be implemented as quickly as possible to get shovels in the ground and create tens of thousands of good jobs for New Yorkers.”