Cost of paint law still hidden

The legislative debate over new, stringent lead paint regulations ended last summer when the New York City Council overrode Mayor Michael Bloomberg’s veto and put a rigorous new law into place. But its practical effects remain hazy, as unhappy commercial brokers and landlords await an accurate measure of its costs, which have proved hard to quantify in a robust market.

Though the council voted 44-5 to pass Local Law 1, opposition from commercial brokers and landlords never wavered, and they braced themselves for higher liability insurance and greater administrative overhead costs. Backers cited an urgent need to cut children’s exposure to lead-based paint in older buildings, while opponents worried it would bring sales of those properties to a halt.

Commercial brokers call the current climate one of the hottest markets ever, and say demand remains undiminished. According to commercial real estate firm Cushman & Wakefield, investment sales activity in Manhattan alone hit $14.5 billion in 2004, surpassing the record set the previous year.

“We haven’t seen any decline in developments or the price of buildings,” says Marcia Rose Yawitz, senior director at commercial real estate investment banking firm Eastern Consolidated. “If there’s any resistance to buying, it’s from people waiting for the market to cool off, not people concerned about lead paint.”

Brokers believed the new regulations would cause the cost of buildings built before 1960 which constitute two-thirds of the city’s housing stock to skyrocket based on insurance costs. But demand remains high even in neighborhoods that have higher levels of lead paint risks, Yawitz says.

Opponents had charged that the new law needlessly targeted buildings outside of the city’s “lead belt” the regions most impacted by lead poisoning cases. They include Bedford-Stuyvesant and Bushwick in Brooklyn, South Jamaica in Queens and Mott Haven in the Bronx. But a shortage of apartment inventory, resulting in low vacancy levels, has further propelled building sales.

“Some of the more marginal areas with primarily tenement-housing stock are still selling well. Even since the law, we’re seeing prices that are very high for historical standards,” Yawitz says.

Though prices aren’t falling because of the law, market veterans remain leery. Robert Knakal, chairman of Massey Knakal Real Estate Services, says in time, the cost of the new law will become clear.

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“The effect of the law on the market hasn’t been felt yet. I don’t think it has seeped into the psyche of the average building owner yet,” he says. “People overlook a lot of things when the market is going well. When the market turns, people will see this as an important point.”

The new law requires landlords to inspect every property and identify tenants under age 7. These dwellings must be inspected annually, and if a lead hazard like flaking paint is found, they have three weeks to complete repairs. The previous law said a landlord could be fined if a child tenant contracted lead poisoning in a building constructed before the 1960s the building was presumed to be the source. The new legislation extends this assumption to civil courts, potentially exposing landlords to large civil suits.

For their part, insurance rates related to liability have yet to become a major factor. Knakal believes that the costs of the new liability will become more apparent once the first major civil suit is filed against a building owner. That will also alert insurance companies to the scale of potential liability, and drive up premiums.

Knakal says he’s surprised the effects of the lead law haven’t been felt yet.

“This law imposes significant burdens on owners. And insurance expenses are up from where they were two years ago by a significant multiple,” he says. “Overall, the costs of building operations have skyrocketed, and yet building prices are still up.”

But Harlem Councilman Bill Perkins, who sponsored the bill, says his efforts have been vindicated.

“The sky has not fallen,” he says. “Quite the opposite, children are being saved from being poisoned, and the city is enforcing lead laws for the first time.”

The Real Deal

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