7.17.19 | Benjamin Paltiel
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While some New York real estate professionals have adjusted to the state’s new rent regulation laws, many are still outraged. Convinced that the laws have killed NYC real estate, a handful of owners and investors say they have decided to wash their hands of the multifamily market for good.
For owners and investors who are able to keep cool heads and willing to take a longer view of the market, the new laws present a juicy opportunity. Disaffected landlords may be willing to part with their assets for low prices, giving other owners a chance to expand their holdings and pursue new business models going forward.
“As long as there’s instability, there’s going to be good deals,” Berdon principal Matthew Doty said. “There are certainly owners who have acted on emotion and tried to offload their holdings, and there are others waiting in the wings to snap them up. To thrive, owners have to embrace the changes and lean into the punch.”
The new law, dubbed the Housing Stability and Tenant Protection Act of 2019, eliminated many of the paths that New York’s landlords could take to raise rents on their rent-regulated tenants. The law kneecapped the Major Capital Improvements and Individual Apartment Improvements programs, which let landlords pass the cost of renovating and repairing buildings along to tenants. The law also eliminated the threshold at which a landlord could deregulate a rent-stabilized apartment and bring it up to full market value.
Many landlords had acquired assets with the plan to renovate and deregulate units, then resell the asset in a matter of a few years. Now, those landlords have to throw those business plans out the window.
Doty described how on the Monday after the new law was passed, many landlords outright canceled contracts they had submitted for asset improvements, realizing that they would not be able to receive the returns they expected trough the MCI and IAI programs.
“People were irate, and understandably so,” Doty said. “But it’s just not accurate to say that New York real estate is ruined. It’s going to take a lot more than this to eliminate the benefits of owning real estate in New York.”
While landlords certainly took a hit with the new law, Doty said it could have been much worse — proposals were floating around Albany to eliminate MCIs and IAIs entirely. Plus, real estate owners still get depreciation and interest deductions and favorable write-offs.
Doty expects that institutional investors and private equity groups will likely try to slough off many of their New York real estate holdings. In response, he sees an opportunity for families, friends and other closely knit groups of investors to find great deals on assets that others have abandoned.
The window for these deals may be closing. Now that the new law is on the books, a certain amount of stability is returning to the investment sales market.
“Everyone is licking their wounds right now and working to come up with new strategies going forward,” Doty said. “The real estate community here will always find a way to be lucrative.”
Now that landlords have fewer avenues to increase their top lines, many will begin to look for ways to cut costs. Many landlords will probably eliminate staff, which Doty described as one of the most unfortunate side effects of the new law. He expects landlords to tighten their belts within their own offices and to hire fewer on-site employees, like property managers and security staff.
But landlords can also cut costs through proactive tax planning. A cost segregation study can segment what parts of a building count as personal property, potentially saving owners hundreds of thousands of dollars a year in taxes. Those savings could help make up for lost income as a result of the new law.
Some multifamily investors may begin to look outside the city, and even outside New York State for opportunities. But developers and owners should not discount just how profitable even rent-regulated apartments can be.
“Developers who got into affordable housing not to deregulate as soon as possible, but to keep it as a long-term asset, have discovered that can be a very lucrative model,” Doty said.
He added that even though the rent regulation laws no longer have to be renewed every few years, they are not necessarily around forever.
“These laws are a reflection of the political culture in Albany in the year 2019,” Doty said. “But the pendulum could swing right back in the other direction. We’ve digested regulatory changes before, and we’ll do it again.”
This feature was produced by Bisnow Branded Content in collaboration with Berdon. Bisnow news staff was not involved in the production of this content.