Are there any winners in the NYC multifamily marketplace?

 

The Housing Stability and Tenant Protection Act of 2019 (the “Act”) that was signed into law June 14, 2019, has a little bit of something inside for most of the participants in NYC’s multifamily real estate market!

For building owners, developers, tradespeople, banks, alternative lenders and more the impact is likely going to range from negative to extremely negative.

For potential buyers looking to come-in (at some point after the dust settles) and pick at the carcasses of owners who may have been decimated by the law and who are looking or needing to sell, it may be a positive. Of course, whether the bottom ultimately will be a 5 cap, 6 cap, 7 cap or somewhere else is anybody’s guess.

At least in the near-term, the affordable housing sector may see a boost as it will remain as a viable investment option for developers.

Tenants and prospective tenants on the surface appear to be winners, although the unintended consequences of this legislation may ultimately prove to be negative. This negativity could manifest in different ways, such as through deteriorating building conditions, a lack of improvements or renovations to lobby’s or apartments or through the inability of prospective tenants with shoddy credit to get into an apartment.

The following are the thoughts of Schwartz Sladkus Reich Greenberg Atlas attorneys (cited at the end) concerning the ‘negative consequences the Act will have for cooperative corporations and its applicability to condominium associations, along with suggestions for successfully navigating them’.

1. Application Fees: Pursuant to the Act, a lessor (which would include a cooperative corporation pursuant to its proprietary lease) may not charge an application/processing fee in connection with a new tenancy.  As such, cooperative boards are no longer permitted to charge an application fee or processing fee in connection with the sale or lease of a cooperative apartment.

In addition, the Act limits charges for background checks to the actual cost of the background check or $20.00, whichever is less.

While individual condominium unit owners would also be prohibited under the Act from charging application/processing fees in connection with the leasing of their own condominium units, the Act does not prohibit a condominium board, or its managing agent, from charging an application/processing fee to a unit owner in connection with the unit owner’s application for a waiver of the condominium’s right of first refusal.


Suggestion: Because this section of the Act does not specifically mention “managing agents” like other sections of the Act do, an argument can be made that managing agents may collect application and/or processing fees for their handling of sales and leases of cooperative apartments.


2. Security Deposits: The Act prohibits a lessor (including a cooperative board) from collecting security deposits or advances that are in excess of one month’s rent.  Thus, cooperative boards may no longer condition the approval of a purchase application on the deposit of a maintenance escrow in excess of one month’s maintenance.  That said, boards may still condition their approval of a purchase application upon the execution of a maintenance guaranty by a financially-responsible guarantor.


Suggestions: A) The Act expressly provides that it does not affect any security deposit arrangements for leases that were entered into before July 14, 2019.  Thus, if a cooperative has a maintenance escrow in place prior to July 14, 2019, the cooperative may continue to hold the escrow, draw upon it pursuant to the terms of any pre-existing escrow agreement and, if provided in the agreement, require replenishment.

B) While the Act prohibits a landlord (board) from requiring a tenant (shareholder) to deposit more than one month’s rent, it does not prohibit a landlord from requiring a tenant to provide a guaranty.  So a possible workaround may be for a landlord to require a lease guarantor to post an escrow to secure the guarantor’s obligation under the guaranty.

C) Products such as security deposit insurance policies may become more prevalent to protect landlords.


3. Late Fees:  The Act prohibits a lessor (including a cooperative board) from requiring any payment, fee or charge for the late payment of rent that is in excess of five (5%) percent of the monthly rent or $50.00, whichever is less. Thus, irrespective of the terms of a cooperative’s proprietary lease (many of which specifically provide for a late fee to be determined by the cooperative board from time to time and for the imposition of an interest charge), a cooperative board may not charge fees and/or interest in excess of $50.00 per month on delinquent maintenance payments.  Condominium boards are not similarly restrained, due to the lack of a landlord-tenant relationship between the condominium and the unit owner.

Suggestion: While cooperative boards are prevented from charging late fees in excess of $50.00, they may nonetheless seek the imposition of pre-judgment interest from the date of the initial default in any resulting litigation against the delinquent shareholder.


4. Receipt for Payment of Rent (Maintenance):  The Act requires a lessor (cooperative board) to provide a written receipt in connection with all payments of rent (maintenance) that are made in cash or in any manner other than the lessee’s (shareholder’s) personal check, and also requires the lessor to maintain records of cash payments by tenants for at least three (3) years.

Suggestion: This means that cooperative boards (or their agents) will have to provide payment receipts to any shareholders who make ACH, direct deposit, Clickpay, wire or other similar forms of payment.  Auto replies that include the date, the payment amount, the identity of the premises, the period for which the payment is made, and the signature and title of the person receiving the rent may constitute a valid written receipt.


5. Notices of Non-Payment:  In a significant departure from prior law, the Act now requires a lessor (or cooperative board) to provide a notice by certified mail to any tenant who is at least five (5) days late in the payment of maintenance charges.  Failure to send such a notice may bar the cooperative from recovering the unpaid rent in a summary proceeding.


Suggestion:  Management companies must now carefully monitor delinquent accounts and ensure that notices are timely sent.


6. Reimbursement of Attorneys’ Fees/ Late Fees / Repair Fees / Etc.: The Act provides that lessors (cooperative boards) may not pursue any fees or charges other than basic rent in a summary landlord-tenant proceeding.  As such, a board will have to pursue two separate actions – a summary eviction proceeding for unpaid maintenance and a plenary action for unpaid assessments, legal fees, late fees, repair fees, sublet fees and any other amounts due and owing.


Suggestion:  There is an inconsistency in the Act’s revisions to the Real Property Law and the Real Property Actions and Proceedings Law, which makes it unclear whether a Court will permit a cooperative to recover legal fees in a non-payment proceeding.  Given this discrepancy, we will continue to request awards of attorneys’ fees.

7. Tenant’s (Shareholder’s) Rights to Cure Non-Monetary Defaults: In the case of a non-monetary default, the Act provides a tenant (shareholder) with a thirty (30) day period to begin curing a default after the lessor (cooperative board) obtains a judgment in connection with the default.

Suggestion:  If the tenant’s (shareholder’s) breach involves the creation of a nuisance, the cooperative board may, if permitted under the lease, exercise its right to terminate the lease for objectionable conduct, which is a non-curable default.  This would result in an eviction if the Court agrees that a nuisance exists and that the shareholder is responsible for causing the nuisance.

The Act imposes numerous obligations and restrictions on landlords which we are ready and able to discuss with our clients.  Industry-wide efforts have already begun to exempt cooperative corporations from various provisions of the Act, and SSRGA is taking an active role in those efforts.
Jeffrey M. Schwartz, Esq.
Steven D. Sladkus, Esq.
Jeffrey S. Reich, Esq.
Maria I. Beltrani, Esq.
Schwartz Sladkus Reich Greenberg Atlas LLP is a dynamic law firm with deep experience and a passionate commitment to providing smart, effective solutions for our clients.
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