New rent regulations would squeeze landlords even more

Tenant advocates call it a loophole. Owners of rent-stabilized buildings call it their last hope.

Landlords’ ability to set the initial rent when they combine rent-stabilized apartments was among the few pro-owner provisions spared by the state’s rent law reform of 2019. Now it stands to be eliminated under a new proposal by the state.

The Division of Homes and Community Renewal, which oversees rent regulation, this week also floated other changes that landlord groups say would hurt owners and might not be authorized by the landmark rent law passed in 2019.

The draft rules, which had been in the works for two and a half years, were released nine days after Gothamist published a story headlined, “How NYC landlords continue to use a rent law loophole to spike regulated rents.”

The most significant of the proposals would set the initial rent of combined stabilized apartments as the sum of their previous rents. Today, landlords can choose the initial rent, although future increases are determined by the Rent Guidelines Board, as they are for all rent-stabilized units.

One unintended consequence of the current rule is that owners have left untold thousands of apartments vacant in the hope that an adjacent unit will also become vacant, allowing them to be combined and a new rent set. Some of those units cannot be re-rented individually, landlords say, because the renovation costs far exceed what they are allowed to charge in rent.

The difference between what landlords can charge now for a combined apartment and what they would be limited to under the proposal is typically thousands of dollars per month. Landlords say the extra revenue can be essential to the financial solvency of their buildings, given that the 2019 law snuffed out other opportunities to substantially raise rents, notably by making building-wide improvements and upgrading apartments.

Another way they can jack up rents is by replacing or extensively rehabilitating a building, which is already difficult to get approval to do. The property must be in terrible condition, which can be defined as 80 percent vacant, for its replacement to charge market-rate rents. Homes and Community Renewal would nix the 80 percent rule, turning a “bright line standard” into something fuzzy, said Sherwin Belkin, a landlord attorney.

The agency’s rationale is that a largely empty building could be perfectly habitable and thus should not qualify for gut renovation and removal from rent stabilization. But the change could incentivize landlords to cause or allow their buildings to deteriorate, as vacancy alone would no longer justify an overhaul or demolition.

Nor could owners leave a property’s foundation and shell in place when they rebuild it, as that would no longer be considered demolition under the agency’s draft regulations. For decades, if a person standing in the basement of a gutted building can see the sky, it has been considered demolished. The draft rules would require it to be leveled — no bones, no foundation, Belkin said.

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A third change would make it easier for tenants to pass a rent-stabilized lease to a relative, which can keep an apartment in a family for decades after the original tenant dies or moves out.

An heir claiming succession rights must have lived with the original tenant for at least two years leading up to the tenant’s departure. But, as Belkin put it, “You might not want to live with a 90-year-old grandmother for two years.” Tenants who cut corners can be hauled into court by the landlord.

The vast majority of succession cases are decided in court, where landlords can dispute that there was cohabitation or contest the date that a tenant gave up the unit. Typically they do the latter by showing the tenant continued to pay rent and sign renewal leases and thus maintained control of the apartment.

The state’s proposal would do away with that criteria and make it easier for someone claiming succession rights. “This is a way to game the system,” Belkin said.

The lawyer characterized the draft regulations as Homes and Community Renewal “capitulating to tenant advocacy.” Real Estate Board of New York President James Whelan, in a statement to Crain’s, said the rules would “further discourage investment in rental housing.” A spokesperson said via email that the amendments would “better protect New York’s approximately 2 million rent regulated tenants” and reflected the intent of the legislature in its passage of the 2019 rent law.

The draft rules will be subject to hearings Nov. 15 in Manhattan and Yonkers and undoubtedly intense lobbying by owner groups such as the Rent Stabilization Association, Community Housing Improvement Program and Real Estate Board of New York.

They could be adopted early next year. If not substantially changed, they would likely be challenged in court as not supported by the 2019 Housing Stability and Tenant Protection Act. The real estate industry previously defeated another state agency’s regulation on those grounds; the rule would have spared tenants from paying brokers hired by landlords.