Caps on IAIs and MCIs could spell disaster for landlords, lenders and workers: real estate pros

The new bill will limit MCI and IAI increases to $15,000

(Credit: iStock)
The program currently allows landlords to pass costs to tenants permanently. (Credit: iStock)

Real estate industry players say the caps on Major Capital Improvement and Individual Apartment Improvement programs will disincentivize investment and lead to a deterioration in the housing stock — and the effects may come swiftly.

The new bill places a limit of $15,000 on Individual Apartment Improvements — in which landlords pass the cost of improvements to bathrooms and kitchens, for example — to over 15 years. The program currently allows landlords to pass costs to tenants permanently.

The bill also lowers the rent increase cap on Major Capital Improvements — for things like boilers and new roofs — from six percent to two percent in New York City, and from 15 percent to two percent statewide. The new rules limit the term of the increases to 30 years, require that 25 percent of MCIs be audited, and mandates that owners resolve hazardous violations before collecting any increases.

Treetop Development's Adam Mermelstein

Treetop Development’s Adam Mermelstein

Adam Mermelstein, whose firm Treetop Development is heavily invested in multifamily housing, said that the effects of the new caps will reverberate throughout the industry.

“I think on the macro level, this is devastating to NYC multi-family operators,” said Mermelstein. “I think that not only is it going to erode values within multi-family sector overnight, it’s going to create a ripple effect that will hurt the banking industry, and landlords will start giving buildings back to the bank because they simply won’t be able to meet debt service requirements and expenses.”

Ken Fisher, an attorney at Cozen O’Connor who represents real estate clients, said that already tight margins don’t leave room to inspire lender confidence.

“When they ultimately have to make replacements, landlords will have a hard time convincing the bank to amortize the loan over time,” Fisher said. “Margins are already pretty tight.”

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There may also be an increase in foreclosures if owners are not able to pay taxes and resolve violations if they cannot make repairs, according to Fisher.

“We won’t see it right away — but over time we’ll see an increase in the number of buildings” owners lose, he said. “The turnover will be less visible to the public, but there will be an increase in 7a receivership.”

David Weinraub, a lobbyist at Brown & Weinraub who represents Taconic Investment Partners and Cammeby’s, said that the cap on IAIs and MCIs may also affect working class people whose job it is to maintain the buildings. Powerful building worker unions like 32BJ S.E.I.U. joined the landlord lobby in attempting to prevent the caps on IAIs and MCIs.

“I know many in the industry are looking at laying off staff and vendors as a result of the $15,000 cap,” Weinraub said.

In January, The Real Deal reported that many landlords were rushing through MCI increases in anticipation of caps or a full-stop elimination of the program.

Real estate law experts are also examining the new framework to understand what it may mean for their clients. For investors who are able to maneuver, rent regulated housing may no longer be the best bet, according to Blaine Schwadel, who supervises the regulatory law group at Rosenberg & Estis, P.C.

“Those affordable apartments won’t look as nice,” he said. “They are going to do what they have to do, but they aren’t going to do more,” said Schwadel. “They are going to invest in something else.”