“Good Cause Eviction” Could Kill Value-Add Projects in NY

The new good cause eviction law is causing some real estate investors to rethink their commitment to New York City.

While many have already turned their attention to more developer-friendly cities, those who remain are questioning whether they should continue to sink money into the five boroughs. The new law limits evictions, requires lease renewals for tenants up-to-date on rent and effectively caps rent increases for most market-rate apartments.

“A lot of our peers have gone out of state, especially since the 2019 rent laws,” said Ilya Tolmasov of Prospect Acquisitions. “Now, after this latest rent law, it’s making things difficult. We love the city, we have confidence in the city, but why are we going to invest in a place that punishes us for doing business?”

Investors already faced sky-high construction costs, onerous city inspections and other regulatory headaches, Tolmasov said.

“And on top of that you can only increase rent 10 percent a year? Who wants to deal with that?” he said. “It will definitely prevent a lot of landlords from investing in New York.”

In most years, the de facto cap on rent hikes will be less than that: Tenants can challenge evictions resulting from rent increases greater than 10 percent, or 5 percent plus inflation, whichever is less, in apartments subject to good cause.

The new lease-renewal rights will complicate value-add projects, which often rely on not renewing leases so units can be vacated and renovated. Large developments, which typically require demolitions to clear a site, will also be harder to pull off if tenants can cling to their rentals.

The Raisner Group invests mostly in vacant buildings. But its principal, Remy Raisner, said the new law poses a threat to landlords who have to offer very low rents to fill units, as they did when Covid hit in 2020. The cap on increases would make it hard to work their way back financially, he said.

“These laws are not welcome by the landlord community overall,” Raisner said. “The better way to solve the housing crisis is simply to build much more supply. That’s mathematics.”

Tenants in market-rate apartments will benefit because good cause makes it harder to evict them. It’s an advantage they didn’t have before, said attorney Sherwin Belkin of Belkin Burden Goldman, and could result in larger buyouts.

“A tenant now has some bargaining leverage, and it may very well give tenants some value that owners will have to compensate for in order to get tenants out,” Belkin said. “How much that would be is really dependent on what the owner is going to do with the space.”

Danny Fishman of Gaia Real Estate didn’t wait for the legislature to settle on a new housing bill before he took his business elsewhere. Gaia has invested $200 million in Florida, Nashville, Texas and Las Vegas in recent months.

“Generally, we see the city as too much of a risk, and good cause eviction, together with other regulatory risks, was one of the main reasons,” Fishman said. “Even for a free-market unit it’s very hard to evict someone.”

Tenants’ ability to stay in a unit, even without paying, have increased since Covid. An eviction moratorium and the state’s Emergency Rental Assistance Program protected them from removal for more than two years, and even now, a housing court backlog and free legal services can buy them a year or more.

But city Democrats in the state legislature made enhanced tenant protections a condition of their supporting measures to increase housing supply, resulting in good cause being included with them in the state budget. The new policy covers New York City, but beyond the five boroughs, localities are excluded unless they opt in.

Tenant advocates who had tried for five years to pass a stronger version of good cause were upset with the result, but so were many landlords. Previously, only rent-stabilized tenants were guaranteed lease renewals if current on rent.

“At the end of the day,” said Fishman, “I would say most people doing business in the city are fed up.”