Real estate after the midterm ‘shellacking’

What will the new governor, new AG and new Congress mean for NYC real estate?

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Steven Spinola

While Democrats took a “shellacking” (President Obama’s words) in last month’s midterm elections nationally, in New York State they captured both the governor’s mansion and attorney general’s office.

But the question remains: What will the election results mean for the real estate industry in New York City once these newly minted officials are ushered into office next month?

In this month’s Q & A, The Real Deal talked to real estate executives and those in the industry who are keeping an eye on politics and government to find out what they’d like to see, particularly from Governor-elect Andrew Cuomo and Attorney General-elect Eric Schneiderman.

Top billing for most of those we talked to was creating a more business-friendly atmosphere with lower taxes. Extending the 421a tax abatement program to spur stalled development projects was a big concern, as well as modifying rent regulations laws. But the list of issues that the industry will be watching also includes how the new batch of elected officials handle Ground Zero development, the processing of condo offering plans, and disputes between buyers and developers.

Those in the industry seem to have high hopes for both Schneiderman and Cuomo — who raked in millions in campaign contributions from the real estate industry as candidates. As one source noted, Cuomo should be savvy on the public- and private-sector fronts in the industry because he worked both as U.S. Secretary of Housing and Urban Development under President Clinton and then for real estate magnate Andrew Farkas.

For more on which taxes the industry is looking to eliminate, rent regulations, and other areas real estate players will be watching, we turn to our panel of experts.

Steven Spinola

president, REBNY

What impact do you think Cuomo will have as governor on real estate and development in New York City?

I think the main issue that will determine his impact is his position on spending and taxes. If he continues, which I believe he will, to say we’re not going to raise taxes and we are going to bring the state’s fiscal house into order, then I think that will spur economic development around the state, especially in the city. Businesses won’t be taxed out of the state.

What are some of the big real estate issues Albany is taking up this year that you’re keeping an eye on?

This year the governor and state legislature are going to have to extend rent regulations. ÖThere is also a series of incentive programs, for instance, the 421a tax program that ends on Dec. 31st. The state legislature will hopefully take it up early next year and extend it or make modifications to it. We have made some suggestions to Albany already to provide some additional changes that will spur new development and restart some projects that are stalled.

We know Cuomo has gotten support from big NYC developers; how pro-development do you expect him to be?

I expect that he’s going to be very supportive. I assume that it will take form in his position that he is not going to raise taxes, in how he distributes tax-exempt bonds for housing projects, and in how he looks at incentives for economic growth.

Do you think the state should spend more money on affordable housing?

The problem right now is the state needs to stop spending more money on anything because it doesn’t have the money. Ö On the other hand, I believe that there could be incentive programs that would encourage developers to build more affordable housing. … We had an $8 billion deficit projected for next year. Until we have control over how we’re going to deal with that and what level of spending we have, even though I would love to spend more money on affordable housing, I think all of us need to say, ‘Let’s look at the full picture.’

On the AG front, there has been a lot made about the Real Estate Bureau being inundated with requests for returned buyers’ deposits. How do you expect the new AG, Eric Schneiderman, to change the bureau?

Eric Schneiderman is very honest and straightforward. There are buyers who are looking for outs because they think the market collapsed after they made a payment. We would expect the new attorney general to do what the current attorney general is doing — to look at the claims and make a decision as to whether it is in contradiction to the offering plan. The last thing we want is for no decisions to be made. Knowing Eric Schneiderman, I expect decisions will be made.

The pendulum seems to be swinging in Albany to strengthen rent laws in favor of tenants. What effect will this election have on that effort?

I’m not sure about the pendulum swinging. Ö We still don’t know whether the senate will be in the hands of the Republicans or the Democrats, though I’m guessing the Republicans will take it back with a very small margin. Ö But I’m not convinced that we’re going to see dramatic changes in it. We don’t want to see rent regulations end. We believe the law is an appropriate process that protects certain people. We have problems with some of it. We don’t know why there isn’t an income test for anybody in a rent-regulated apartment building, and we do believe that private property should be viewed as private property. But we have an awful lot of people who are dependent upon being in rent-regulated apartments. We are also finding that legal rents are very close to market rents, so we think that the differential of the protection that [it] provides in terms of capping rent is clearly disappearing. So I expect that we will see a multiyear extension of rent regulations and I would expect that there will be only minor changes to the bill.

On a local level, do you think real estate taxes are too high? If so, which ones should the new governor target?

In New York City, fortunately for Cuomo, he doesn’t have anything to do with real estate taxes. But real estate taxes are too high. People who own rental apartment buildings are paying 30 percent of their gross income in taxes to the city. If there is a system in the city that’s unfair, [it’s that] office buildings and hotels are paying very high taxes while people who own co-ops in Manhattan and people who own single-family homes are subsidized dramatically and are paying lower taxes.

Hal Fetner

president/ CEO, Durst Fetner Residential

Do you think the state should spend more money on affordable housing?

Given the state’s fiscal woes, I would be concerned with additional state funding for any new programs at this point. However, I wholeheartedly support spending money on affordable housing. And, given Cuomo’s success as Secretary of Housing and Urban Development, I believe he’ll emerge as a leader in affordable housing. Currently, New York State has excess volume cap as a result of the small amount of new 80/20 construction projects. By increasing the amount of bond allocation per affordable apartment, you would take otherwise marginal developments and transform them into viable, income-producing, job-creating projects. I also think the state should be focused on creating housing for middle-income New Yorkers, with a focus on municipal employees such as firefighters and police officers. I think it’s an embarrassment that New York’s Finest and Bravest cannot afford to live near the community they protect.

With the shift of power in the House of Representatives in Washington, what pieces of legislature that impact New York real estate will you be watching?

There are a number of regulatory changes in Washington that would have a detrimental impact on New York. The proposed changes to carried interest would penalize 1.2 million real estate partnerships with nearly $3 trillion in assets and stifle new investment and job creation. That’s especially true in New York, which has a unique tradition of real estate families.

Should Cuomo end the “millionaires’ tax,” or is it a fair way to raise revenue?

New York is one of the highest tax states in the nation, and the richest 1 percent of New Yorkers already pay almost 40 percent of the state’s income tax. This formula is inherently dangerous, as evidenced by the exodus of 1 million New Yorkers over the last decade. Wherever possible, we should look to lower taxes.

What’s the best or worst thing that government has done for real estate recently?

After the unmitigated disaster of how government dealt with the Kingsbridge Armory [in the Bronx], anything is an improvement. In the midst of a global recession, in a county with among the highest unemployment rates in the country, our municipal government killed a project that would create more than a thousand new jobs. We are confident that the new governor understands the critical role that the real estate industry plays in job creation.

Kevin Fullington

co-chair of the government relations practice group, Herrick, Feinstein

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How pro-development do you expect Cuomo to be?

Thus far, he has spoken about a lot of the right issues — reducing government spending, capping property tax increases at 2 percent annually and stimulating economic growth. If he follows through executing those broad goals, he will create a more pro-development landscape. The biggest anti-development move he could make would be to roll back the changes that have been made to the rent-stabilization laws. There will be a big push to repeal luxury and vacancy decontrol, and how he handles this will be a massive test of his commitment to economic growth.

What do you think the new AG, Eric Schneiderman, needs to do in his new role?

As for the operations of the Real Estate Finance Bureau, Attorney General Schneiderman should do two things to help it be more effective. First, he should hire a strong chief to fill the current vacancy. Second, he should set staffing for the bureau at a level sufficient to meet the demand. … Defending the state from lawsuits and initiating enforcement actions get the bulk of the AG’s resources, but there are ample reasons for the Bureau to get back to the critical task of timely filing of condo offerings and amendments, and giving real estate concerns appropriate consideration. The AG’s office expected neither the number of offering-related complaints it received from purchasers seeking rescission, nor the complexity of them. The bureau should [also] consider requiring mediation, which the city Bar [Association] could assist with, or getting an outside party to arbitrate.

What effect do you think this election will have on rent regulation laws?

[Right now], three Senate seats remain unresolved. If the Republicans take control of the Senate, expect the rent laws to remain largely unchanged. If Democrats take control, expect a big push for changes that will benefit tenants.

What’s the most pressing real estate issue the government needs to address?

Without question, it’s extending the 421a [tax abatement] program [to spur development] and preserving or even enhancing its benefits. Unless the legislature acts between now and Dec. 28, the sunset provisions kick in and the benefits — to developers and sponsors, for sure, but also to New York City residents who own or buy units — will be eliminated. This could dramatically slow down multifamily development in the five boroughs, eliminate the construction jobs that come with development, and cost renters and unit-owners dearly.

Patrick Siconolfi

executive director, Community Housing Improvement Program

What impact do you think Cuomo will have as governor on real estate and development in New York City?

I think he fully understands the need for affordable housing in New York City and around the state. He is probably going to be receptive and helpful in that regard, but his housing policy has not been articulated in detail, so I think part of this is unknown.

Do you think the state should spend more money on affordable housing?

The affordable housing need is so large that government can never do it on its own. The only answer to providing housing [here] is that the private sector has to provide [it]. What the government needs to do is get out of the way and let the private-sector real estate community provide that housing. They provide it at all levels, whether it’s affordable, middle-income or high-end housing. [But] right now there are many disincentives for developers. The zealous regulations and tax policies are just ruinous. Ö The city and state have been using real estate like an ATM machine. Every time there is a budget shortage, whether it is directly or indirectly, they end up taxing the real estate industry. That doesn’t help anybody. It doesn’t help the real estate industry and, most of all, it doesn’t help tenants because taxes are the largest single cost in running multifamily property.

What effect will this election have on rent regulation?

We still don’t know what the makeup of the state Senate is going to be, [and] that’s going to have a big impact on the answer to this question. I would not call the package of legislation that the Democrats tried to pass last year a pro-tenant package, although the tenants wanted it. I would call that an anti-housing package. There were 11 bills, and two of the most damaging would have eliminated investment incentives in maintaining existing housing stock. New York enacted those investment incentives back in the mid-80s because in the decades before, when there were no investment incentives, we had that “Bronx is Burning” situation and wide-scale abandonment when owners could not afford to keep up their properties. [But] that’s exactly what New York doesn’t need.

Peter Hauspurg

chairman/CEO, Eastern Consolidated

What impact do you think Cuomo will have as governor on real estate and development in New York City?

Well, I hope he has more impact than his predecessors had at Ground Zero, which is probably one of the biggest issues facing all of us in real estate in New York. You had Pataki pick the architect. Ö You had Mayor Bloomberg, who was pretty much focused on Hudson Yards for a long time. Spitzer didn’t focus at all on ground zero and, of course, Paterson didn’t focus on it. So what we’re hoping is that this guy finally takes hold of it and gets it done.

What would you like to see Cuomo do to change the way Albany operates in connection with the real estate industry?

One case alone, Stuy Town, pretty much made the whole community of landlords basically fear Albany. We followed the [Division of Housing and Community Renewal] rules for years, and then all of a sudden in one fell swoop, we were told that everything we were told is not in the rule book anymore. All the [development] community wants is to operate under a set of predictable rules. We are hoping that he gives some guidance and some clarity.

How pro-development do you expect Cuomo to be?

Well, he worked for [real estate investor] Andrew Farkas, so that gives hope to us that he understands the private sector and understands the issues that face the development community. Between Farkas and HUD he has got a really great real estate background, so we are hoping he brings that to bear in a really positive way.

On a local level, do you think real estate taxes are too high?

It is confiscatory. They are literally taking the equity out of the properties in New York with these kinds of tax increases that have happened over the last couple of years.

Should Cuomo end the “millionaire’s tax,” or does it seem like a fair way to raise revenue?

His father, Mario Cuomo, slapped a 10 percent tax on New York State real estate in addition to all the other federal, state and city taxes. It suppressed real estate activity in New York to a gigantic degree and it only returned when that tax was lifted. Andrew would be a political genius if he got rid of that millionaire’s tax, given the fact that everybody in real estate remembers how bad the Cuomo tax was.

Sam Chandan

global chief economist/executive vice president, Real Capital Analytics

What effect, if any, do you think the shift in power in Washington will have on New York real estate?

In principle, the 112th Congress will be one that is more favorable to business outcomes and the financial services sector. Apart from external pressures from the Republican counterparts, the Democratic leadership has communicated that as part of its takeaway from the election results, they need to focus more directly on outcomes in the economy and the labor market, which will support real estate in New York City and nationally.

Broadly speaking, government stimulus seems mostly dead now. Do you think that’s a good or a bad thing for New York?

[It] presents some real challenges in New York. The management of the state’s budget deficit, projected at more than $9 billion for the upcoming fiscal year, is a case in point. Fewer federal dollars coincides with an increase in risk aversion in municipal bond markets, increasing pressure on the state budget. On the spending side, the easy cuts have already been made. As a result, the governor-elect will have to make spending and expenditure adjustments that will be more difficult than we have experienced so far.

Republicans are also calling for the Bush tax cuts for the wealthy to remain in place. Do you think these tax cuts help New York real estate?

I think they do. Setting aside the question of whether they are good tax policy, I think our high-income earners and high-net-worth individuals are overweighed in New York City compared to a national perspective. Ö The uncertainty regarding the direction in the permanence of those tax cuts acts as a drag on housing investment.