Rental firms grieve over broker fees

The surprise ban on tenant-paid fees threatens an already strained sector as many brokerages find their business model in limbo

Mar.March 02, 2020 11:00 AM

(Illustration by Michael Glenwood)

A judge may have given broker fees a stay of execution, but firms are still reeling from the near-death experience of their business model.

Last month’s surprise guidance from state regulators banning most tenant-paid broker commissions has already sparked panic across the industry. Now several rental brokerages are struggling to make heads or tails of the potential impacts, and looking for their best options in a worst-case scenario.

For many firms already grappling with last year’s rent law overhaul, relentless competition and hefty StreetEasy fees, the sudden news was a brutal wake-up call.

Manhattan-based Mdrn. Residential, for one, confirmed on Feb. 13 — less than 10 days after The Real Deal first reported on the Department of State’s guidance — that it would be acquired by competitor Living New York. Living said it planned to absorb 40 Mdrn. agents and staffers for a total headcount of 125, while Bond New York recently hired veteran manager Cammy Cutler as well as 20 agents from Mdrn.

Mdrn. founder Zach Ehrlich, who is not joining the consolidated firms, said the merger deal was motivated, in part, by market “headwinds.”

And Kobi Lahav, Mdrn.’s former chief executive officer and now head of sales and a managing director at Living, said if Mdrn. had to continue on its own under the new DOS guidance, it “would’ve killed half our business.”

Living has more exclusive landlord clients than Mdrn., in part because Living, unlike Lahav’s former firm, also provides property management services on top of brokerage services. Still, the ban on tenant-paid fees could take a big chunk out of Living’s bottom line.

“Short-term, [it’s] probably going to take 15 to 20 percent of our business, and that’s a lot,” Lahav said.

On Feb. 10, state Supreme Court Judge Michael Mackey put the new rule on hold while he hears a lawsuit from real estate leaders claiming the DOS guidance is unlawful. But while the panic is on pause, brokerages that represent landlords are still cycling through the stages of grief as they face the possibility of a world without tenant-paid commissions.

“If the Department of State is telling us that they read the law a certain way, I obviously can’t ignore it,” Lahav said. “I can’t say to my agents, go and do whatever you want … because at the end of the day I’m risking their license and my license.”

Denial

However, Douglas Elliman — the city’s largest residential firm, with some 2,600 agents — did challenge the idea that the recent guidance has the force of law.

“This Guidance is not the law, but rather a position taken by the DOS as it relates to licensed real estate agents and brokers,” Kenneth Haber, the brokerage’s general counsel, wrote to agents in an email obtained by TRD. “We do not believe that this Guidance is consistent with the law.”

Initially, Corcoran Group’s COO, Gary Malin, dismissed the DOS guidance as merely an “advisory opinion,” and went so far as to tell his brokers to disregard it — even before the court put it on hold.

“Until further notice, we recommend continuing to conduct your business in accordance with the law and all applicable regulations, not advisory opinions promulgated in haste,” he wrote, according to an email cited first by the New York Times. But executives walked that back in a Feb. 7 conference call with 1,600 agents, instructing them to follow the state guidance.

Triplemint initially appeared to follow suit. “We have been advised to operate with business as usual,” co-founder Philip Lang wrote in a Feb. 6 email to agents. But reached later for comment, Lang said Triplemint is adhering to the guidance and that the email was meant to reference a memo he sent earlier that day, which said, “we can’t collect a fee directly from a tenant. For now, please speak with your landlord about raising the rent.”

Indeed, right before the industry filed its Article 78 petition to halt the ban, a handful of landlords and property managers told TRD that they’re prepared to raise market-rate rents and make cuts to their leasing teams to absorb the additional costs.

Related: Rental chaos raises tensions between tenants and landlords

Within 36 hours of finding out about state regulators’ interpretation of the new rent law, Lisa Management initially said it would no longer hire outside brokers.

The management company has a five-person in-house team that handles leasing for developer Hudson Companies’ rental buildings, including 2,200 units, and until early last month worked with two brokers exclusively for leasing 200 apartments owned by third-party landlords.

But after the fee news broke, Lisa’s President Jorge Jorge said an employee would take over the brokers’ role. Jorge said he decided to make the cuts after the firm’s landlord clients said they can’t afford to pay broker fees.

“I feel really bad for those agents,” he said at the time, noting that if they decided to become Lisa employees they would be making less money. The company put the changes on hold after the judge granted the temporary restraining order that effectively suspended the ban.

Most New York City rental brokers are already on the lower end of the pay scale among real estate agents — especially compared to luxury sales brokers — as that segment is where many new brokers start out.

A rental broker’s fee is typically 15 percent of the annual rent, amounting to a median fee of $6,298 for a Manhattan apartment.

Meena Ziabari, COO of Next Step Realty, which focuses on helping people moving to the city for the first time, said her firm rarely has landlord clients and mostly represents prospective tenants. But she cut her teeth in rentals and sales at the boutique New York City brokerage Elegran and has sympathy for the brokers the new rule would impact, she noted.

“I think we’re going to be able to adapt maybe a little more easily than a lot of the other firms and a lot of other agents,” said Ziabari. “That being said, I completely feel for the livelihoods of [brokers who represent landlords], considering I was one of them.”

And for many rental brokers across the five boroughs, working in the business can be incredibly competitive and pretty thankless as it is.

Jared Goldman, an agent on the Wilder Team at Compass, which exclusively manages a rental portfolio of about 1,200 apartments, noted that brokers don’t just get a listing for an apartment and rent it out the same day. Sometimes, it can take upwards of 50 showings to ink a deal — and there’s no charge to look.

“Tenants don’t see that,” Goldman said. “They just see what they see.”

Anger

For many rental brokers and brokerage executives, such a radical change coming without warning was infuriating. Now, even with the temporary restraining order, many are scrambling behind the scenes to prepare for survival if the guidance stands.

“There’s a lot of anger, stress and frustration,” said R New York’s residential sales manager, Mike Walker.

There are roughly 58,000 licensed real estate brokers and salespeople in New York City, according to the DOS. That includes more than 20,000 brokers.

Though some agents work exclusively in sales, and some rental brokers only represent tenants, the scale of the rental sector and the prevalence of tenant-paid fees made the new guidance seem to many like an attack on the entire industry.

“Rentals are really the majority of what’s happening in New York, so as a state government, when you attack that, you’re going after the whole marketplace, really,” said Blair Brandt, co-founder and executive chair of Next Step Realty.

Feeling completely blindsided, brokers complained that regulators suddenly upended the business model of a huge segment of the industry without allowing for any time to adapt.

“I am shocked not only with the new law, but also that there was no warning or grace period,” said David Schlamm, who heads the rental brokerage City Connections, calling it “wrong on so many levels.”

In fact, it came with even less than no warning — the DOS actually released the game-changing guidance quietly on Jan. 31, but did not publicize it. The industry wasn’t widely aware of the new policy until five days later, when the Real Estate Board of New York circulated an email and TRD broke the news.

“I first learned from our principal brokers that found out through the Real Estate Board of New York,” said Michael O’Brien of Bohemia Realty Group. “Because there was really no announcement. It just was dropped on the Department of State’s website with no warning. It was kind of surprising, actually, that all of a sudden a whole business model is changed overnight and no one bothered to tell anyone.”

Once the rule change started making headlines, brokers’ frustration turned from the lack of information to a flood of misinformation that only amplified the confusion. Several agents TRD spoke to complained that many media reports splashed bold headlines that implied that broker fees were entirely discontinued, even for brokers hired by tenants.

“It’s only on the landlord side,” said Compass’ Jed Wilder. “[Headlines] are basically saying, ‘I don’t care about all the brokers who make a living on the tenant side. I’m going to give news that sounds like there’s no broker fees in New York.’”

The greatest frustration for many in the brokerage community, however, is that amid the media frenzy celebrating tenants being freed from paying landlords’ broker fees, the impact on the brokers themselves is being forgotten.

Jordan Sachs, co-founder of Bold New York, said most of his firm’s commissions from rentals were already paid by owners, but he acknowledged it wasn’t the case for many.

“Do you know how many people are going to be out of a job?” he said.

Bargaining

To adapt to the new landscape, Living’s Lahav said, brokers might need to consider lowering the fees charged to owners or focusing more on the tenant representation side of the business. Or brokerages may just have to accept losing some landlord clients altogether.

In the meantime, many brokers have been negotiating with their landlords and trying to figure out what to do with their listings if the new rule is upheld.

“I think it did open the eyes of landlords that the tenant was paying the fee,” Wilder said. “I think it opened their eyes to: Oh, maybe I can charge more rent.”

“The whole issue with the law is that if you’re trying to make things more affordable for New Yorkers, which I’m all for, this is not the answer,” he added.

Compass also encouraged agents to “have conversations with your landlords immediately and try to revise your agreements” to protect their commissions.

“I think brokerages, to survive in the future, will have to have a component of management capability, whether they manage the buildings or provide brokerage services,” said Lahav.

Depression

In a populist political climate that produced not only the radical rent law on which the fee guidance is based, but also tax hikes on high-end home sales and growing calls for a pied-à-terre tax, brokers feel they are being unfairly vilified alongside big landlords and billionaire jet-setters.

“I’m tired of agents being seen as overcompensated enemies of the general population,” Warburg Realty’s CEO, Frederick Peters, said of the DOS guidance.

Despite the fact that many of the city’s rental brokers aren’t getting rich off their fees in the first place, the New York Residential Agent Continuum, a group that represents New York City brokers, said it is expecting income loss.

“We anticipate that tenants or landlords or both will decide not to use the services of an agent,” said Cathy Taub, a Sotheby’s International Realty broker and co-founder of NYRAC.

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.

Rejection

With a big chunk of their livelihoods now in the balance, the mood among brokers and their firms is one of anything but acceptance.

The brokerage community is expected to fight the DOS guidance as hard as it did against the city’s proposed cap on broker commissions last year.

In February 2019, 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 — even marching on City Hall — and a year later, the bill remains stuck in committee.

Schlamm at City Connections holds out hope that the guidance could even be pulled back by the regulators themselves.

“I am hoping that this will be reversed as fast as it was implemented,” he said.

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

That’s unlikely to happen in this case. One of the rent law’s sponsors, state Sen. Julia Salazar, said in a statement that “our intent is to eliminate barriers that currently prevent low-income and vulnerable people from obtaining housing.”

Nonetheless, the lawsuit filed by the Real Estate Board of New York, the New York State Association of Realtors and 12 brokerage firms including Corcoran, Elliman and BHS called the DOS guidance an “unlawful, erroneous, and arbitrary” interpretation of the rent law, arguing that the text doesn’t explicitly refer to real estate brokers.

“It is clear here the DOS has usurped the role of the Legislature and that its actions constitute an illegal exercise of legislative power,” the lawsuit said. “Clearly, if the Legislature had intended [the laws] to apply to agents of the landlord, or even more explicitly real estate brokers, it would have inserted those words into the statute.”

The entire rental brokerage community is waiting nervously for REBNY’s March 13 court date, but legal experts caution that, while there’s no need to fear the ban will be reimposed that day, the industry should not expect a resolution anytime soon.

“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 if the guidance reflects what they intended and amend the law to specify that.

“Then,” she said, “the law would have to be challenged.”

— Additional reporting by Kathryn Brenzel, E.B. Solomont and Sylvia Varnham O’Regan

Correction: A previous version of this story stated that Mdrn. Residential would merge with competitor Living New York, but Living says it was strictly an acquisition deal. Kobi Lahav’s title in the story was also updated to head of sales and a managing director.


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