Five Ways Landlords May Try To Raise Rents Now That Deregulation Is (Mostly) Dead

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In case you haven’t heard, it’s a very good time to be a rent-regulated tenant in New York City. The state’s new rent laws, passed in June, empowered the city’s 2.4 million rent-regulated tenants—and, to a lesser extent, market-rate ones as well—with a bevy of new protections from unexpected rent hikes and eviction attempts. Gone is vacancy decontrol, which allowed landlords to deregulate apartments once the rents reached a certain threshold, most recently set at $2,774 a month. Same with high-income deregulation, which allowed apartments to be removed from regulation if the tenant made more than $200,000 a year for two straight years.

So can landlords still find ways to jack up rents under the new laws? The short answer is: not very easily.

Overall, the Democratic state legislators who crafted the new legislation made a point of closing any possible loopholes. For example, they tightened the rules that govern condo and coop conversions, which became popular with developers during 1980s and are attributed with the deregulation of nearly 50,000 apartments since 1994. Conversions remain legal, but now 51 percent of all current tenants must sign on to enable a non-evict conversion (where residents may remain as tenants if they don't wish to buy their units), as opposed to 15 percent under the old law.

“Good luck with that,” scoffed Victor Sozio, the co-founder of Ariel Property Advisors, a real estate brokerage and debt underwriter who advises clients on multi-family assets. He said that legislators clearly showed foresight in making conversions less viable, as building owners would have naturally sought that strategy.

Still, property owners will certainly seek new ways to maximize their rent revenues. Some possible tactics:

File lawsuits:

Immediately following the passage of the new legislation on June 14, sources told the New York Post that two landlord groups, the Rent Stabilization Association and the Community Housing Improvement Program, were preparing to file a lawsuit in federal court arguing that the new rent laws violate landlords’ constitutional right against the “unlawful taking of property.”

The two groups declined to speak to Gothamist on the record, but a spokesperson confirmed the Post report and said that a legal challenge would likely be filed this summer by the law firm of Mayer Brown.

The news came as no surprise to many following the legislation, especially legal experts such as Ed Josephson, director of litigation and housing at Legal Services NYC, who noted the real estate industry's long history of filing lawsuits over tenant protections. But thus far, there has been relatively little concern among tenant advocates.

The argument that rent laws and tenant protections unconstitutionally infringe on property rights “has failed over and over again in state and federal courts,” according to Josephson. As recently as 2014, landlords unsuccessfully sued over the state's department of Homes and Community Renewal's (HCR) expansion of powers for its Tenant Protection Unit, charging that allowing the TPU to fine landlords for rent overcharges violated their due process rights. Prior to that, the U.S. Supreme Court had ruled in 1988 that rent control was not unconstitutional, a decision that has been frequently cited in subsequent court rulings.

“It’s a very, very well established body of law at this point,” said Josephson.

Make nice with the mayor and the Rent Guidelines Board:

As the body that sets annual permissible increases for rent-regulated leases, the Rent Guidelines Board now becomes even more important for landlords. To the outrage of tenants, the RGB voted in June to enact its highest increase since 2013: 1.5 percent for one-year leases and 2.5 percent for two-year renewals.

Over the 50 years of the board's existence, the board has voted to increase rents every year with the exception of two: 2015 and 2016, when Mayor Bill de Blasio called for rent freezes. The decisions of the RGB, which operates with its own research staff, are supposed to be based on data on economic conditions of the real estate industry, including property tax levels, water and sewer rates, and other landlord expenses. However, the board is still seen as a political arm of the mayor, who appoints the nine members to staggered terms. Now more than ever, the board is likely to be an important battleground for landlords seeking to prop up rent increases in the face of declining revenues and increasing operating costs.

'Convince' preferential rent tenants to move out:

Roughly one-quarter of the city’s one million rent-regulated units—266,000 apartments—receive preferential rent, where the actual rent is lower than the legal maximum for the unit. Under the old law, preferential rents were not locked in. This enabled landlords, especially in newly gentrifying neighborhoods, to raise rents to the maximum allowable during lease renewals, which resulted in jolting increases for some tenants.

Under the new rent laws, preferential rents can no longer be raised until a tenant moves out. And that worries some tenant advocates, who say landlords are now incentivized to push out preferential tenants in favor of new renters whose rents can legally be hiked to the limit.

In late June, the tenant watchdog group Housing Rights Initiative wrote to Governor Andrew Cuomo and HCR commissioner RuthAnne Visnauskas, urging them to issue letters to all preferential rent tenants that explain the new law and inform them that landlords cannot threaten to raise rents to scare them into moving.

"We believe the speculative model has changed," said Aaron Carr, the founder and executive director of the Housing Rights Initiative. "There's a bounty on the head of every preferential rent tenant."

Although there have not been many cases reported thus far, according to Carr, he has urged state regulators to be proactive. As with many of the new laws, he said, the larger question is: "Do they have the political will to educate all tenants on their rights?"

Resort to the nuclear option:

While it may be nearly impossible for building owners to deregulate existing apartments, they can still demolish a property with rent-regulated units and build a new market-rate project in its place.

Demolitions of rent-regulated buildings, which require approval from HCR, are relatively uncommon, but not entirely unheard of. In 2006, a developer sought the demolition of a postwar high-rise building on Central Park South, which would have resulted in the eviction of 80 tenants, 47 of them rent-regulated. The plan was initially approved by HCR but was challenged in state Supreme Court, which delayed the demolition. Ultimately, the developer wound up forking over huge buyouts, making way for a luxury skyscraper at 220 Central Park South that earlier this year saw the sale of a $240 million penthouse apartment to hedge fund manager Ken Griffin.

In part because of the 220 Central Park South case, demolitions have since become even more onerous, with HCR requiring not only relocation assistance to tenants, but also monthly stipends.

A less extreme strategy is to perform a gut rehab, defined by HCR as a complete replacement of 75 percent of the building-wide and apartment systems. However, buyouts would still likely be necessary, because in the case of rehabs, most rent-stabilized tenants retain the right to return to or stay in their apartments.

Own a 421a building:

Finally, even if deregulation is now all but impossible for most rent-regulated apartments, there's one exception: buildings that are regulated in exchange for receiving state tax breaks. For residents of the more than 60,000 units currently regulated under the 421-a program and its successor known as Affordable New York, for example, their apartments will still be deregulated under certain conditions. In the case of 421a, apartments designated "market rate" are deregulated upon the first lease renewal after the buildings’ tax breaks expire. Under Affordable New York, they can deregulate once their rents surpass a decontrol threshold, currently set at $2,700 a month.

As for the rest of the city's one million rent-regulated tenants, Ellen Davidson, a staff attorney for the Legal Aid Society, said she doesn't expect state agencies like HCR to bend to landlords. Still, she argued, it's an “immensely important time” for both sides in the rent wars, and it would be foolish to count out landlords: “You have a very powerful industry, with significant amounts of money to spend on lobbying."