Derek Bestreich, Luke Sproviero and Justin Zeitchik of IPRG sit down with legal expert Alex Fotopoulos to discuss the implications of the recent amendments to the Rent Stabilization Code. You won't want to miss this detailed exploration of a topic that is shaping the future of New York's real estate landscape. Tune in for a well-rounded perspective that will leave you more knowledgeable and prepared to navigate the complexities of this crucial subject.
(1:00) - Amendments to the Rent Stabilization Code
(08:00) - Sub Rehab
(55:50) - Demolition
(58:20) - First Rents on Combos
(1:09) - Succession
(1:11:15) - Market Takes including 2nd order and 3rd order consequences of housing laws
Reach Alex:
Kourkoumelis & Fotopoulos PLLC
www.kflegalgroup.com
afotopoulos@kflegalgroup.com
Follow IPRG: @iprg_ny
www.IPRG.com
Follow IPRG: @iprg_ny
www.IPRG.com
Derek Bestreich, Luke Sproviero and Justin Zeitchik of IPRG sit down with legal expert Alex Fotopoulos to discuss the implications of the recent amendments to the Rent Stabilization Code. You won't want to miss this detailed exploration of a topic that is shaping the future of New York's real estate landscape. Tune in for a well-rounded perspective that will leave you more knowledgeable and prepared to navigate the complexities of this crucial subject.
(1:00) - Amendments to the Rent Stabilization Code
(08:00) - Sub Rehab
(55:50) - Demolition
(58:20) - First Rents on Combos
(1:09) - Succession
(1:11:15) - Market Takes including 2nd order and 3rd order consequences of housing laws
Reach Alex:
Kourkoumelis & Fotopoulos PLLC
www.kflegalgroup.com
afotopoulos@kflegalgroup.com
Follow IPRG: @iprg_ny
www.IPRG.com
Follow IPRG: @iprg_ny
www.IPRG.com
Welcome back. We're here at the real estate roundtable with IPRG. It's been a little while, so good to see you guys. We have a guest here today, alex Fotopoulos. Thanks for joining us, alex, thanks for having me. You're at the law firm Corcamelis in Fotopoulos. You got it All right, perfect, you got it, thanks, and you specialize in landlord representation with an emphasis on regulation and rent regulatory and DHCR issues, so we're happy to have you here, thank you. Thank you, also joined by Justin Zajcek here at IPRG. Yeah, welcome back. Thank you, and Luke Proviere. Yep, this is Derek Bestrick. So how are we doing guys? What's going on Doing? Well, nice, all right, alex. So we wanted to have you in. The DHCR just announced that it approved these amendments to the rent stabilization code.
Speaker 3:That's right. They're going to be adopted on November 8th this year, so the idea is hopefully it will only be a prospective application of the amendments on and after that date.
Speaker 1:Okay, so this stuff goes into effect after that date. Correct as of today. It's not in effect, but it's going to be in like a week or so. That is exactly right, all right. So we were talking before we started recording that we didn't really see this like happening, we didn't see this being approved. It kind of came out of left field for us and we just wanted to talk about. I mean, I guess we're paying more attention to the Senate bill that's on the governor's desk and I guess we want to talk about the similarities between these two bills, the differences, what they mean, how it's going to impact the market.
Speaker 3:Sure, so just give a little bit of background. The DHCR amendments were initially proposed back in August of 2022. They went through a period of notice and comment which, I believe, ended in November of last year and the DHCR had one year from November I think it was 15th of 2022 to actually adopt them. The DHCR, the governor's office, essentially went radio silent on them until last week when the DHCR published a notice saying that they were going to adopt these amendments as of November 8th. In the interim, as you just pointed out, the state legislature passed two bills, I think, in the special session in June of this year, one of which is essentially encompassed by what the amendments are going to do and the other one, which would have had a devastating effect, I think, on rent overcharges and calculation of rent overcharges. So I guess I'll just go through a little bit of what the amendments are going to be and I'll talk about what the key differences are between the legislation. Does that sound good? Yes, that sounds good. Okay, and if you guys have questions, just feel free to.
Speaker 1:We can go category by category. Real quick, real quick.
Speaker 4:Obviously, I know the Senate bill, but the one that was just approved. Who came up with this? It was DHCR.
Speaker 3:It's DHCR. There's a question as to who actually wrote the amendments themselves, because they're very tenant-friendly amendments. There's very little that's good in there for landlords. So the idea is that they were written by staff at DHCR and that they took the public's input out. But what's interesting is, despite the fact that many of the trade groups, RSA and SHIP, testified at the hearing or at the hearings, rather, DHCR made no significant changes to the amendments based on the public's input. So they basically took their initial amendments and said this is what you're getting and it's going to have some pretty serious consequences, I think, for landlords.
Speaker 4:Are they out of the lab by doing this? Is this their position in life to create new laws, or are they here to enforce laws?
Speaker 2:I think what we're all confused about is we always viewed DHCR as a government agency, which essentially they are right. They're a government agency. They don't make policy, they protect policy. So we always thought the policy makers are the ones that create these laws and then they enforce these laws. So that's where I think the biggest confusion from us and, I think, a lot of the other real estate community is. So if you can explain that a little bit further, I think that would be great.
Speaker 3:So I'll try not to bore you with a legal lesson. But there are statutes and then there are regulations. So the legislature passes laws. So the rent stabilization law, the emergency tenant protection act, those are all laws. The DHCR then enact or adopt regulations. The rent stabilization code to which is the DHCR's interpretation of those laws, the DHCR's regulations.
Speaker 3:The rent stabilization code cannot go further than the law, the statute allows it to go, and I think that what's happening in some of these amendments is that the DHCR may be exceeding the authority allotted to it by the state legislature. There's a lot, you see the Supreme Court of the United States actually taking up this issue. I don't know if you've heard about these cases challenging the EPA's authority to institute regulations, but it's the same idea of what's called delegation. Can the legislature delegate its authority to a state agency to actually enforce the law, and under what parameters can that be done? Here it looks like the DHCR may be overstepping some of its authority, but I think the flip side of that is the legislature may be even more extreme than the DHCR is at this point. You have factions of the state legislature which are just so far to the left that you would probably end up worse off if the state legislature got its way. But to make a long story short, the DHCR is supposed to enforce the laws that the legislature passes.
Speaker 3:That's the long and the short of it.
Speaker 2:It's very confusing. It's just like you don't know who's making the rules and who's really enforcing them.
Speaker 3:Well, I think that you'll hear from a lot of people in the legal industry that practice this is that, depending on which judge you're before, or which rent administrator you're before and what time of the day it is, you'll get a different result every time. So there is not a lot of, I think, clarity in the law and it's up for a lot of interpretation even right now, and it's unfortunate because you're talking about very valuable assets and you're talking about making investment millions of dollar investments with very little clarity.
Speaker 1:Yeah, it's a big issue. The lack of clarity is creating a lot of problems in the market and just the uncertainty and the amount of work that it takes in order to get clarity on what you can do with these assets and what the legal rents are and what the exposure is. It's a big thing and I'm sure we can touch on that more as the conversation progresses. But let's go through the amendments that they made to the code. So I have on my list here and this could be completely. There might be more to it, but it starts with sub rehab, substantial rehabilitation, Then I guess they eliminate the demolition.
Speaker 3:They make demolition much harder. They make demolishing buildings much harder.
Speaker 1:Okay, and then it's the elimination of the first rent rule upon the combination creation. That's the big one. Are those the three, or is there?
Speaker 3:more. There are some other provisions in there. There are going to be some changes to how overcharges are calculated. There's an elimination of the safe harbor against the default formula. If you buy in the context of a foreclosure sale, landlords are now going to be obligated to add domestic partners to leases rather than just spouses, and one of the other major changes is that the person's ability to succeed to a rent stabilize tendency is now made much simpler, so children can succeed to their parents in a much more easy fashion than they could before these amendments go into effect.
Speaker 1:If it's okay, we'd like to go through these topics one by one. So, starting with sub rehab, it says here on my sheet they're making it a more onerous process. They've removed the provision where the presumption that a building is in a substandard condition if it's 80% vacant. And then and I'd like some clarification around this it used to be that you had to replace 75% of the building wide system. Now it's at least 75%.
Speaker 3:Is that what it is? Now it's at least 75%, and what does that mean? Does that mean in some cases it's 80%, in some cases it's 100%, in some cases it's only 75?
Speaker 1:So let's go through under sub rehab, let's go through bullet number one. So that's, the presumption that it was in a substandard condition is now is now eliminated. That's totally agree, so it used to be that if it was 80% vacant, it was assumed to be in a substandard condition, automatically eligible for substantial rehabilitation if you did the required work.
Speaker 3:I agree with just about everything you said, except that it was a rebuttable presumption. So if at some point in time a landlord got challenged they would have to, and a tenant or somebody said, you know, hey look, the building wasn't in fact in substandard condition just because it was 80% vacant, they would be able to. The tenant would be able to rebut that presumption. But generally what you're saying is true. Okay, now, even before the amendments go into effect, or even on November 8, there were, I think, two or three cases that were decided between the spring and the fall of this year where the DHCR held that in order to be in substandard condition, the building has to be essentially uninhabitable. That, in my view, is wrong on the law, because the law is very clear, says substandard or seriously deteriorated. I think any logical person would think that there's a difference between substandard and uninhabitable. I mean, that's just the dictionary for that.
Speaker 3:And then they also went a step further and the decisions. There are two decisions in particular that held that where a landlord buys out a rent stabilized tenant, that vacancy can't be counted towards the 80% vacancy threshold, and the thinking was that you the apartment was habitable because you're paying money to get the apartment back. It's a sea change in the way that the DHCR Processed or interpreted the law and I think it puts a lot of landlords in a difficult position because they were relying on the 80% threshold. Now, with that being said, I Always tried to make sure, and I always try to make sure, that the building actually was in substandard condition. So how do you show that? Photographs, an architect's affidavit based on an inspection, hpd violations, dob violations but if you're trying to prove uninhabitability, that's a very high bar to me. So which one is it?
Speaker 3:well, that goes to the gray area that the lack of clarity right there. I suppose, if you follow these two cases, it's uninhabitability, which means that very few buildings in New York, at least today, would be candidates for substantial rehabilitation right and Absolutely.
Speaker 2:I mean I think we, we've all been doing this for over a decade and To call something uninhabitable I mean I've seen people live in really, really garbage apartments, but Inhabitability is something I haven't really seen.
Speaker 4:But going back, you said something interesting. So you said if someone buys it and it out, they don't count that towards 80%. Is that in the? Is that in? Is that written down anywhere? Nope, so what? Why are we talking about that?
Speaker 3:at a, because that goes back to what we.
Speaker 3:Discussed well, it goes back to habitability, but it also goes back to the question of the DHCR's interpretation of the law. The law says Substandard or seriously deteriorated. So the question becomes is the DHCR's Interpretation that a buyout means that of an apartment is not in substandard or uninhabitable condition? Yeah, does that exceed its statutory authority? It, does it exceed its authority to the law? And I think it does. I Believe that at least one of the cases that I mentioned there is going to be is being appealed to Supreme Court and hopefully it will be overturned. But this is going to be a non-ish. I mean, the 80% vacancy is going to be a non-issue come November 8th because what the DHCR is now telling us is Forget how vacant your building is. You need to be in substandard or seriously deteriorated condition. Question is what does that mean?
Speaker 3:yeah and if you don't have the presumption of Substandard condition based on the vacancy anymore, the question becomes is anybody going to want to invest millions of dollars only to be told after they've done it that you didn't qualify in the first instance because the building was not in Substandard or seriously deteriorated?
Speaker 1:What about these people that are already doing the work or already completed the work, based on the presumption of the last law yeah, the last law, but they haven't filed the application and they don't have approval at this time they have permits, they have all.
Speaker 4:Pictures are almost done.
Speaker 1:No, they don't have. They don't have pre-construction photos, they have during construction photos well, so there's no proof that it was in a substandard Condition they're relying on.
Speaker 4:That's a lot that's. I know it's not good for that guy.
Speaker 1:It's not good for that. A lot of people in that boat.
Speaker 3:I know, but well, I think that.
Speaker 4:There are. I know I believe you.
Speaker 3:I think that probably anyone who didn't, anyone who started a project in the last couple of years and doesn't have pictures, is going to be in some trouble pre-construction, pre-construction. And I would imagine that If that Person had consulted a lawyer any lawyer that that works in this field, you know the lawyer would have told him get photographs, get an affidavit from a, an architect or an engineer, a testing to the condition of the building. So but in your specific, you know, to your specific question, that person is going to be in in some trouble.
Speaker 4:I mean the pre the photos, pre-construction, that I mean People are doing that in 2015. I mean that, but they getting the an actual someone, through the building and saying, hey Well, how's this building? What's a condition report? A lot of people didn't do that, like getting your architects opinion. You know people didn't do that.
Speaker 2:I think I think a lot of people thought to like these buildings are all built in the early 1900s, so presumably they're gonna be in substandard condition because they're already. They're just so old right.
Speaker 3:So that that's you know, and that really gets into the nitty-gritty. So what happens when you have a building that was built in 1900? But you know, and you have, I don't know, 15 apartments, but seven of them were renovated previously and made market, you know, because through higher in vacancy decontrol, right yeah, where does that?
Speaker 2:leave you. That's what never. That's. What I never understood was how can you actually do a sub rehab on a building that was partially free market in the first place? It makes complete sense if the building was completely rent, stabilized and then you do a sub rehab on it. But to do it well enough on a partially free market building never really made sense to me.
Speaker 1:Well, I think I know.
Speaker 2:I mean see people do them on mostly free market buildings.
Speaker 3:I I think like an insurance kind of exactly.
Speaker 2:I think it's insurance.
Speaker 3:But after the 2019 law, after the housing stability and tenant protection act, because they became stuck with the Rent, stabilized units that weren't previously deregulated. This was the only way out. It was the only way to really unlock value, absolutely. So, yes, I mean, you know it's an interesting question why would you spend millions of dollars to do a substantial rehabilitation if some or most of your units are independently fair market?
Speaker 3:But I think one of the biggest weaknesses in these proposed amendments is that there's no way to get a binding Order or opinion from the DHCR as to whether or not you are in substandard condition prior to doing the work there, and I don't know if that's intentional on their part. It very well, maybe, because it's a way to keep apartments stabilized, but you have to be a very courageous or aggressive owner. You know to invest this kind of money, replace 75 or at least 75 percent of systems, and not know that. The answer to that threshold question. I think that that's that's going to be a very big Issue and I think there probably will be litigation over it makes sense.
Speaker 1:You think there's gonna be situations where DHCR because they provide opinion letters right on if they think it will qualify, so we're. They provide an opinion saying they believe it should qualify for substantial rehabilitation and then they go to file the application and it gets denied. Do you know of cases where that's happened?
Speaker 3:I Usually try to get prior or in the past I've tried to get prior opinions.
Speaker 3:Mm-hmm, they.
Speaker 3:They are useful because you do take the agency's temperature on Project as a whole and you do get you know, you get some feedback from them.
Speaker 3:The problem with with doing the prior opinion I had clients come to me from another law firm a very big and prestigious law firm and they filed for a prior opinion letter and they had already started the work and what DHCR told them in the prior opinion letter was that they would not qualify under any circumstances because the building was not 80% vacant when the work started. So now you're in a position they were in a position where it started the work, they had had people leave, they were mid construction, but you have this prior opinion which, although is not a binding order, basically says to you you're never going to qualify and that's the risk that you run with filing prior opinions or for prior opinions. So to your question yes, I think that In the past I've always recommended getting the prior opinions, even though it's not a binding order. But you don't even know what the DHCR will do To you in the context of getting the prior opinion.
Speaker 1:What about, like the term constructive occupancy, where Someone it's not, the building is not fully vacant, but you get a tenant to temporarily relocate to a different apartment, so the building does become completely vacant and then the person renovates. You know the full, the full building. Does constructive occupancy count towards it being completely vacant?
Speaker 3:So I Think you're asking if it counts towards the 80% yeah so, or a hundred percent, or whatever it is. So I think the DHCR, you technically don't need to do anything in the rent stabilized Occupied rent stabilized apartments in order to effectuate a substantial rehabilitation, so you could essentially leave those apartments alone, not do anything and be alright and still qualify. But what I think a lot of landlords find is that it's very hard to do construction work around an occupied.
Speaker 1:You know when there's an occupied apartment you have to do a hundred percent of the work to 75% of the systems, right? So if I'm replacing a hundred percent of the plumbing systems, that's one of the systems. How can I do that with someone still living there, right?
Speaker 3:There are cases which are still good law that say that you don't have to Do work in systems in occupied apartments. But I understand your question. Yeah, how do you replace risers Because that's you know that get to the fifth floor of a building if there's a rent stabilized tenant on the fourth floor? The agency's position, at least historically, and I would say even today, is that, in that you don't need to do work in occupied rent stabilized units. However, however, most at least my experience is that we do get the tenants out and we do the work so that we do in fact do a hundred percent Of 75%. That's the better practice, for sure.
Speaker 2:I've seen a lot of clients just end up taking Tennis and getting them in a hotel room for like a month and then and then bringing them back in or putting in another Apartment, having another building while they're doing the work. Yeah, so what about fires? So does that mean that any building that's had a fire would automatically qualify for sub rehab?
Speaker 3:No, I mean the Genesis.
Speaker 3:A lot of the older Cases that that deal with substantial rehabilitation's are the product of fires, where there's a big fire in the building.
Speaker 3:Now what's interesting and one thing that I we didn't touch on in what the amendments do is that right now, at the law stands today the laws a little unclear as to whether or not you have to restore A tenant who's rendered out of possession because of a fire. And what landlords did historically or at least what some landlords did Was if they reconfigured the apartment that the tenant was out of possession of Substantially enough, they would make an argument to the DHCR, which was actually approved by the DHCR, that the unit no longer existed and therefore the tenant didn't have to be restored. Hmm, the DHCR has now amended, or is now amending, the code to say, as Long as the tenant gets what's called a fire order it's those $1 orders that that same pay landlord $1 a month following a fire or a vacate order doesn't necessarily need to be a fire. The landlord cannot reconfigure the unit and the landlord must restore the tenant to possession, irrespective of what he chooses to do Um to the apartment.
Speaker 2:But how would a fire not In fact make the building substandard condition if it's not livable?
Speaker 3:so this there are fires that only affect one floor, one apartment.
Speaker 4:Yeah, so.
Speaker 3:The fire would have to affect the whole building and render the whole building uninhabitable most fires I've seen in buildings.
Speaker 2:The whole entire building vacates and then a lot of times they want to come, they want to come back. There was actually a soldier in Hell's Kitchen Not that long ago where that that was the case. The building was just not you couldn't no one could live in there For no numerous different reasons, and then so that owner ended up doing a sub rehab. Mm-hmm and then the, then half the tenants came back. So now, if you ever want to resell it, the, the selling point is, if these red stabilized, and relieved.
Speaker 3:That's right. They're actually a free market. That's correct. Yeah, that's correct. Yeah, I mean that perversely creates some value, you know yeah to the for the owner. Absolutely that's. That's right. But yeah, it's going to be Interesting to see how they interpret the new amendments with respect to fires.
Speaker 2:So and what about? So I know this is more on the state legislation side, but there was something of the state legislation correct me if I'm wrong that they were gonna enforce owners to file the sub rehab. Yeah, I know this. This doesn't have to do with it. You do DHCR amendments, but can you explain that a little bit? That's a good question.
Speaker 3:That is a great question, and that's, I would say, probably One of the two biggest differences between the legislation and the DHCR amendments.
Speaker 3:So the legislation, in addition to doing everything that we just discussed, would force owners to file Um, that's right exemption applications on any building that was ever where. That was where they would ever want to claim an exemption based on substantial rehabilitation, regardless of when the sub rehab occurred within. It was either six months or a year of the effective date of the legislation. Now Aside, we'll talk about why that would be terrible for landlords Institution, that that would be the worst for the unintended consequence Would be the DHCR. The DHCR has a years-long backlog on overcharge complaints. Now Can you imagine? You know, even if you're talking about three or four hundred applications, sub rehab application, and it would probably be more they would be inundated. They don't have the manpower, they don't have the the ability to handle that kind of volume, and I think that's why the, the amendments, which again are promulgated by the DHCR, don't have that requirement.
Speaker 3:Hmm, now, it's also good for landlords, right, because you never really want to take the fight to DHCR or to court if you don't have to. And the way that the law is set up today, you only have to prove the sub rehab if you're challenged. And let's think about where we could be challenged. We could be challenged in just an ordinary overcharge complaint at DHCR or in Supreme Court, could be investigated or audited by the tenant protection unit. It could come up in the context of a non-payment proceeding or a holdover proceeding.
Speaker 3:So if you had a problem tenant, but the place where it'll definitely come up is and you're almost sure this is in the context of a sale. So if you're buying a building now and you want to sub rehab it, you want to exit at some point in time. You're going to have to prove to your next buyer that you did the work. So it's not like the lack of the filing requirement is, you know, absolves the owner of any responsibility. He'll still have to prove the sub rehab at some point in time if he ever wants to exit. But at least you don't have to go to the agency, put it in their face and say did I do a good job, right?
Speaker 2:Yeah, well, I think for brokers it actually makes it a lot better, because it gives like a lot more transparency to clarity, to clarity, everything, obviously like we don't have as much skin in the game as a lot of our clients do.
Speaker 1:So I'm sure if you have to file.
Speaker 2:If you have to file then it gives a lot more transparency and clarity on everything.
Speaker 1:So the thing is the brokers for a client to come to you and be like, yeah, I have a free market building, I sub rehabbed it, and you're like, oh great, you know, it looks great. They did a lot of work.
Speaker 3:But then, like you don't have someone like me digging in and picking every single document, they don't have 50% of the stuff that you're going to want.
Speaker 2:Imagine a world even and I know, like you said, like DHR doesn't have the manpower for this but even in the past, if people were just able to get like certificates once they did an IAAI on a unit, it would make life so much easier. But the problem is is there's so much gray area and that's what makes our jobs so difficult.
Speaker 3:I think the flip side of that, though, is, if this requirement did go into effect, you would have many buildings that didn't qualify for some rehab, that are being treated as fair market on that basis, and then you know the effects of that are, you know, could be devastating in some buildings or could be not so bad in others, depending on what your records look like and what your registration history looks like. So it's a double-edged sword, but I think you do raise a good point. Clarity and and and certainty are, I mean they're important in this business, but I think everybody that buys or most people that buy real estate in New York, are Not they're not risk averse people, I think I mean they're. They understand that there is going to be a certain degree of risk here, and I think that's where a lot of opportunities born.
Speaker 2:And there are. There are buildings with the sub rehab certificates Like what are you so like? What would you look? What would you think? A building with the sub rehab certificate Like what's the difference as far as value? Like how much more can the owner get with for having that?
Speaker 4:It's really hard.
Speaker 2:obviously I need to put a number on that On a cab, on a base on a cab.
Speaker 4:You have certainty? I mean, listen, we've. We have sold deals with, with the cert and it. People are very interested in that.
Speaker 4:It's not something we see, often we were actively. I mean, if this means anything, there's a, there's a, there's a big fund buying a lot of this stuff. We were actively executing a deal with them. This building did not have the sub rehab, although it had a very, very, very good file for one, and it was getting done at three point two million dollars Okay. And while the contract was being negotiated, dhcr delivered a sub rehab and the price went from three to three, six. So that's the. I do know that. I don't know how that buyer did come up in price. I don't know if there was an exact dollar amount or a formula.
Speaker 2:That was wrong, I mean, I think. I think, like anything right, less risky, the less of a return someone's willing to take. So if you have the sub, rehab in effect should add value to the building or something Absolutely.
Speaker 3:I mean that is essentially. I mean it's gold, I mean it's unassailable and it's a guarantee that that is a guarantee, that's a true guarantee. But owners that do have the certificate aren't going to negotiate on their price and it probably means that not every buyer will be interested in buying a building for top dollar, because people do look for opportunity. So again, I think it's a double edged sword. You know, I don't know that everybody wants to pay top dollar for a building. Some people are willing to take the risk and pay less.
Speaker 2:What I'm thinking of in particular early is a lot of these buildings that go through the sub rehab, especially in Manhattan mostly Manhattan and like really good parts of Brooklyn, end up getting sold To a foreign buyer, for the most part a lot of Japanese firms especially, and if you have the sub rehab, I feel like a buyer like that will definitely like, since they're looking for something that's easy to manage, clean, well maintained them having that certainty is going to as good to add a ton of value to that type of sale.
Speaker 1:Let's keep going through these amendments to the rent stabilization code, because I want to get through them and then we can give our opinions on the market and all that stuff. But just one thing I want to touch on real quick, because these amendments to the code that just got passed in the Senate bill we talked about this before we started recording, but there's a lot of similarities between the two and you mentioned. You think your opinion is that now maybe the Senate bill doesn't get signed because these new laws went into effect. So you're basically saying that you think all of a sudden the requirement to file for sub rehab may not be on the table anymore.
Speaker 3:That's right. I think that because I mean, listen, I don't have a crystal ball, but if I'm Kathy Huckle and if I'm the state legislature, now most of what I wanted, well, most of what the legislature wanted, is enshrined in these amendments, so the legislation for the most part, becomes good. Are there some things that aren't incorporated in here? Yes, the D. The legislation makes it easier for there to be a finding a fraud in the context of certain J 51 buildings and it gives you a different formula for calculating rents based on overcharges. What's interesting about that and I don't know if you guys want to discuss this is that essentially, what those are are Regina repealer bills.
Speaker 1:So there was a very Senate bill. That's part of the Senate bill, Like the legislation, legislation. And just to clarify, you call the Senate bill the legislation and you call these amendments to the rents.
Speaker 3:The R amendments Okay, got it. So the legislation? Well, the DHCR amendments encapsulate almost everything that the legislation does, but for the requirement to file the application based on substantial rehabilitation and what I'm going to call the Regina repealer aspects of the legislation. And what the legislation seeks to do is make it much easier for a landlord to be found guilty of fraud and and have what's called the default formula applied to calculate rents. And you know the legislature you know wants to is much more tenant for the legislation, rather is much more tenant friendly on the overcharge aspects than the DHCR amendments are. And I think we're get the industry will be pretty lucky if we're able to avoid the legislation this term, because if the legislation is signed and there are two bills actually, and and the second bill which really hasn't been discussed, a lot would really change the way that we look at overcharges where we can't prove deregulations. So fingers crossed that nothing happens with them.
Speaker 1:Man, maybe we can come back to this stuff.
Speaker 4:It's just a lot of nitty gritty, complex stuff like women. This the steed your thing at a left field.
Speaker 1:We don't know yet Maybe we don't send the legislation he believes it should be.
Speaker 3:I listen, kathy Hogle. So the way that it'll work is the legislation is currently currently has not been sent to the governor. The legislation does not have to be sent to the governor. If it doesn't go to her desk by the end of the term, which is, I think, either the end of the year or the first week of January, the legislation dies by itself. If it goes to the governor, she has to sign or veto it. If she does neither, it automatically becomes law. So oh, wow, oh, that's stupid. That's the way it goes. But I think my own opinion is that this probably won't even get sent to her now, because the legislature got so much of what it wanted in the amendments that Kathy Hogle won't ask for it and the legislature won't send it. It'll just die and she won't have to look like a bad guy to tenants.
Speaker 4:There's people out there that thought that was going to happen anyway, and now that it has introduced this DHHCR amendments that just kind of screwed that up. This could have just died altogether, and now they just involve themselves.
Speaker 3:So it's like crazy.
Speaker 3:You raise, I think, one of the best points, where you touch on one of the best or most important points here.
Speaker 3:We all are part of an industry that is maybe, after finance, the biggest industry in New York the real estate industry and I don't think that there's anybody in our industry that has aligned to Albany, that has aligned to the governor's office, that has aligned to, you know, the leadership in the assembly and in the senate that will talk to us, that will tell us what's going on, that will listen to us, and that is, you know, I think, partly a product of the fact that real estate is viewed as toxic by far left, but I think it's also a product of the fact that real estate as an industry is not working together enough, and I think that anybody listening to this podcast needs to think about that, because it's not for a watt of money I mean, that's one thing that the industry has plenty of.
Speaker 3:So it really is a problem. We don't have a voice in Albany, nobody is talking to us, and I don't know if that's been your experience, but I think that that's a fact. There's nobody that you can call that. Nobody told us these were coming on November 8th. Nobody you would think that the lobby or the strategists or whoever it is that's that's, you know, running the real estate industry show here would have some insight, and it's that puts us at a very big disadvantage and that, I think, has to change, because, yes, there are bad landlords out there.
Speaker 3:There are, of course, but it's bad tenants out there too, yeah, but there are plenty of small landlords and plenty of good landlords and this stuff, these amendments, are going to really, if not put them out of business, make it very difficult to own in New York and a very these amendments are yeah, so what's so?
Speaker 1:what's so unattractive about these minutes? I mean, we touched on sub rehab. I don't think we need to go back there.
Speaker 4:This guy your trader?
Speaker 1:No no, I feel like the demolition clause is really not applicable it's.
Speaker 3:it happens so infrequently. We can get to that.
Speaker 1:Okay, so now we're going to what?
Speaker 4:What's the sub rehab? I kind of agree with you, because in the sub rehab there's no, there there's there. Wasn't a big surprise to me, I was not doing sub rehab.
Speaker 1:It's a very small portion of the market and their professional developers that are doing it.
Speaker 3:It's really the elimination of the first race.
Speaker 2:That's really the combination, the combination, the combination let's get into the combination.
Speaker 4:Are we done with sub rehab though?
Speaker 1:Yeah, I mean we could get super, we could get his nitty gritty, talk to me, talk to me.
Speaker 4:So maybe I wasn't paying attention enough, but you mentioned, so it's hard to follow You're doing a great job.
Speaker 3:I'm doing my best. I'm doing my best.
Speaker 4:Everyone's talking about buildings being in substandard condition. Right, and we could all say what we think it is. But at least substandard is something obtainable. Right, lollies building for substandard condition? There's easy ways to figure it out. You could figure out when something is not who it's past its useful life. You could. You could have pictures pre construction. You have someone's opinion, yes, this is in bad shape. But you said uninhabitable. Right, unhabitable can be something without a roof Like that. That is insane. So I have a little me as a shell. Is that is that is uninhabitable? Is that in any legislation? It's not.
Speaker 3:It's scary with this the word uninhabitable. The word uninhabitable does not appear in the legislation and it doesn't appear in the DHCR amendments or the rent stabilization code. Where it does appear, okay, is in some recent cases that were decided by DHCR and we're stuck before these people, whether we like it or not. Yeah, so if that's the new test that they're going to apply and I'm not saying that it is, I'm just saying this is what they did, very in the most recent cases that they decided Okay, that constitutes a change, and I think what I'm saying to, what I'm saying to you is it's subjective.
Speaker 3:A presumption is not subjective. You've got the 80% vacancy and it's a fact Right Now. Might you need to prove that it actually was some standard condition if you were challenged? Yes, but now we're moving away from that and we're going to a completely subjective standard. What is substandard or seriously deteriorated? There's not a lot of case law on it, because for the last 30 years, maybe more, we've basically relied on the presumption. Everybody relied on the presumption and it's very hard to rebut that presumption, because who's there to say what the building was before the work was done? There's nobody left.
Speaker 1:What is the context of the word uninhabitable that they're using and these denials of these sub-rehab applications?
Speaker 4:This is new to me. I didn't even know there was a denial for that.
Speaker 1:How is it being written with the word uninhabitable? I haven't seen these cases.
Speaker 3:I'll say there's an 18-page decision. It's a lot of fun.
Speaker 1:It's a recent one Within the last three or four months.
Speaker 3:Was there other reasons why it was denied?
Speaker 1:beyond, yes, All the denials I've seen. There's this whole thing about the PW3s matching the staff of David's. And there's the other one with the PW1 and the occupancy, the altering 50% or more of the property where they're like. Well, you check, no, that you weren't altering 50% or more of the property at the OB. But then you come to DHCR and you say it's more than 75% and you told the OB that you spent 250 grand on a million.
Speaker 3:You respect a million too.
Speaker 1:You give us your seats for so it's a series of a number of things that come together where I've seen the denials.
Speaker 3:In the cases that I'm referring to. Yes, some of the cases it was an absolutely egregious application that was put together, and that's why I strongly suggest to everyone that they use lawyers. It doesn't necessarily have to be me, I'd love it but you have to use a lawyer. And what I think a lot of owners out there did was they don't want to spend tens of thousands of dollars doing an application, so they go to other people, other outfits, and it doesn't necessarily work out for them. But in the context of the cases that I'm talking about, there were buyouts that were done. The owner wouldn't have qualified, even putting aside the substandard condition, because they didn't do enough of the work. They claim that they spent something ridiculous like $75,000 sub rehabbing a building. That's what the PW3 showed.
Speaker 3:So it was just an egregious underestimate or misrepresentation, if you will, depending on how you look at it to the DOB. So do I think these cases are outliers? I hope so. I think so, but that's what we're dealing with today, and if someone comes to me today and says I want to substantially rehabilitate, you have to tell a client. You have to tell a person this is what is out there now and you have to make your own decision because there is no real clarity. There is no clearness or certainty in what the DHCR is going to do with this threshold issue. So it just makes it also very hard to practice as an attorney.
Speaker 4:So just touching it and then we'll put this one to bed. And obviously I'm not asking you to go through every little step. But if someone came to you and I said, hey, I'm buying this building, do you give this your blessing? Obviously, I'm not going to have you go through the PW3s and all that stuff right now, but I think the easiest thing that we come up to on the phone is hey, this building doesn't qualify, it's not substandard. So, in your opinion, right, if I showed you a building, what to you tells you it's substandard? If I showed you a six family in Williamsburg, what are you asking for?
Speaker 3:from me to show you it's substandard. I just want to be clear. I'm not offering a legal opinion, I know. I know I'd want to see photographs showing holes in the walls, sagging floors, rusted windows, very old radiators that are rusted. I'd want to know what kind of electrical services provided. Maybe the apps aren't up to modern standards.
Speaker 3:I'd want to see old bathrooms, old kitchens. I'd want to see old stairways that look like they're very old. I'd want to see a facade that looks like it hasn't been pointed in years. Those are the things I'd want to see in terms of pictures. I'd want an affidavit from a registered architect or professional engineer who went and inspected, maybe did some invasive tests also, to see what was there. I'd like to look at HPD violations. Hp actions started by tenants are also a good place to start. If the tenants are alleging conditions in the building that make it uninhabitable, that could be used to your advantage. But you have to be careful with that, because if an owner is creating conditions just to make the building substandard or seriously deteriorated for the purpose of doing a sub rehab, you're not going to be rewarded for that.
Speaker 4:Can they prove that how?
Speaker 3:does it stop someone from?
Speaker 4:buying a building, going in destroying houses, destroying it and being like they can never in their life prove it. They can cut a hole in the ceiling and, oh, it rained really hard. And look at this.
Speaker 3:It's a good question. I generally tell my clients not to do it. No, it's not.
Speaker 2:It's something.
Speaker 3:I thought about, though no so look, it's subjective. I mean this just goes back to it's subjective.
Speaker 1:These are building-wide systems. There's a lot of systems that are building-wide, that you can't just intentionally damage and say it doesn't work If you're saying it's in a substandard or seriously deteriorated condition. To me I like looking at the IRS useful life schedule.
Speaker 1:And there's a useful life schedule in the rent stabilization code with respect to MCIs major categories Even if you look at just depreciation for an apartment building of like 27 and a half years and let's just say like these things were here from longer than 27 and a half years ago, you can tell. You can tell if the electrical systems were upgraded or not. You can tell if the heating systems were upgraded or not. You can tell with the facade and the roof and the fire escapes and the kitchens and the walls and the floors and the structural components of the property.
Speaker 1:And I think the whole cohesive story, the whole building, tells the story of is it in a substandard condition or not, not just someone like breaking down their doors, yeah kicking a hole in the wall and if there's like water coming into the building from like someone cutting a hole in the roof, it's just like well, like that's weird, you got to go through every system and see if every system is up to four.
Speaker 4:It's the whole story. It's got to be. It's got to be the story. I mean, brokers are like going to street, like a lot of people are talking about street easy. Now like oh, these units run street easy and they look fine, they're getting $25,000 a month, they should. I mean, do you take that into consideration?
Speaker 1:And then we'll stop with this. It's information. It's information you take it online.
Speaker 2:I think the problem is in New York that such a crappy apartment can still fetch a decent rent for sure.
Speaker 3:So this just goes back to if you have three or four apartments in a building that can go for that much money because you've even done a cosmetic renovation, or how does that play into substandard or seriously deteriorated. You could have a nice apartment in a substandard building, right, I mean, they exist, they exist a lot. So it's going to become a very happily contested point of litigation going forward.
Speaker 4:Because even with you, like, obviously we're not going to get into addresses or names or anything like that, but obviously you're very well respected, we wouldn't have you on this podcast. So there's buildings that we've, mom, yeah, but hold on. We've heard of deals that you've given, maybe on this one Right. So deals that we're actively working on, and obviously we take that very seriously coming from you. So what gives what in your head Substandard?
Speaker 1:Yeah.
Speaker 4:Like oh, you've made comments about that building when he's not a good candidate for substandard. Now, is it because of what we just discussed. Like you don't have pictures. These units run street easy, Like what needs to be shown to you.
Speaker 3:I mean, you kind of discovered it, obviously, but I think if you have 70% of units just to talk about, talk about, perhaps, a building that we were discussing and passing before we're 60 or 70% of the units are being rented out at market rate. How can you make that argument with a straight face? Right, you can't do it there. You know the idea right, if you go back to the history of this right, when rent stabilization, substantial rehabilitation and this whole idea of rehabilitating buildings was enacted, you know the Bronx was burning, new York was in a debt crisis, we were facing bankruptcy.
Speaker 2:The idea, was we're getting close to that now.
Speaker 3:Well.
Speaker 1:I mean that's the vacant buildings were seriously deteriorated at that point.
Speaker 3:Yeah, that's right. That's really the genesis of this. So, if you bring it back to that, what we're talking about is sort of out of touch with reality because you're, I think the idea was, or the intention was, buildings like the ones you just discussed empty buildings that were really in need of help, and it's sort of grown into or evolved into something different than that, I think. So it's just subjective.
Speaker 2:No, it's just you know what.
Speaker 3:when you see it, it's sort of like what a mess you know when you see it, hopefully.
Speaker 1:No, they change the laws and people still want to find avenues for investment.
Speaker 4:I personally feel like this is an avenue to really add value to a building. It's a good business plan.
Speaker 1:And the city needs it.
Speaker 4:in some cases it's also a clear you know treasure map to get it done.
Speaker 3:And we're going to talk about the consequences of all of this in a minute. But one of the biggest consequences of the Housing Stability and Tent and Protection Act that was passed in 2019 is that owners are keeping apartments vacant. Yes, you're getting apartments back and they're not renting them, because who in their right mind is going to rent a $1,200 apartment? Which landlord in his right mind is gonna put a $1,200 apartment on the market?
Speaker 4:They won't do it. And there's way worse. Right and there's way worse.
Speaker 3:Yeah, so to your point vacant buildings, vacant departments. We're probably not that far off from that. You know, if the laws don't change, you're going to see a lot of apartments that are going to remain vacant until the landlords can at least hit a number in terms of rent that allows them to break even. Right, you rent a $1,200 apartment now in Manhattan. If you got to call a plumber, paint it every two years, heat it, do the water. You're maybe breaking even with the taxes and yeah, yeah.
Speaker 3:Right, so it's you know, each building is a little bit different than what your break even number is, but it's really sad because it's driving the price of fair market units up tremendously Right. You've got probably over 50,000 rent stabilized units sitting vacant today. That number is only going to grow year over year over year. At some point, I mean and this is the silver lining in all of this at some point market forces are going to force the legislature to act. Now, whether it'll force them to act in the right way or the wrong way, I don't know, but something will have to change. They'll either try to impose a vacancy tax on owners for keeping apartments vacant, which I think is unconstitutional.
Speaker 3:Yeah, that's a sad thing and there was a case many years ago with respect to SRO units, which held that that was unconstitutional or they'll change. I mean listen, all they have to do is change the IAI form or the individual apartment improvement formulas to make this a better situation.
Speaker 4:Definitely I'm not even saying that you bring deregulation back.
Speaker 3:I'm saying make it a 140th calculation and cap it at $100,000. That gives you the ability to raise the rent by $2,500, and you're at least creating some value for yourself, putting a biddable apartment, a nice apartment, back on the market and creating housing. And that's what I think the people making policy don't understand.
Speaker 1:Yeah, 100%. The big problem is the taxes, the expenses and the finance. They're definitely not going to reduce the taxes, the finance side of things that's for sure, and we can touch on all that, I think we can drop stuff we can drop, stuff we can get into this.
Speaker 4:Obviously. For us it's a very clear way to add value to New York. People are just very afraid of it because there's no clear cut answer.
Speaker 2:It's all or nothing.
Speaker 4:There's all this gray. No one really knows, but it's upsetting because it's actually a good way to do it. Where we'll get into Frankenstein and all that stuff, but Frankenstein 2 was always like a back door. Let's keep it moving. Yeah, let's keep it moving.
Speaker 1:And then Griff told me he just gave me the one hour signal.
Speaker 3:We talked about sub rehabs for an hour. Sub rehab is the biggest one. Maybe it brings into episodes We'll hold up.
Speaker 4:So what's next then?
Speaker 1:All right, so just putting this into the bullet points. We just touched on bullet point number one sub rehab Next bullet point number two of I think three or four, and then we can talk about the priorities.
Speaker 3:We can start charging you guys. We can start charging you by the hour.
Speaker 2:Well, we got to make sure that your name and information is on here. That could be quite expensive.
Speaker 1:But the demolition clause it's not really applicable to a lot of stuff that we see where people are.
Speaker 3:I think it's. You know, I think I've seen maybe three, four or five demo applications. You know, in 10 years of doing this, you know there was I know a guy that was doing it I think it was either on First Avenue in 86th or Third Avenue in 86th, where, where the owner, you know, there was one holdout tenant the DHCR had gotten it all wrong. They applied the wrong standard. They said that not only did the owner have to show that he had the financial ability to demolish the building, but also the financial ability to put up whatever was going to go there. And the court, you know, to its credit, said no, dhcr, that's not the standard.
Speaker 3:The standard is just the financial ability to demolish the property, but very quickly, what the amendments seek to do to demolition is, in essence, say you need to completely demolish not only the building so that it's a shell, but also get rid of the foundation, get rid of everything that's there and that has, you know, in addition to being inefficient, I think it also has significant tax consequences for owners, because when you I believe you can check with the tax attorney once you start removing the foundation or you touch more than a certain percentage of the foundation. I think your tax class also is affected.
Speaker 1:Or is it a filing where, like people could have filed maybe an old one previously and now it's like a new build.
Speaker 2:That would have a bigger impact. That's what I was thinking. We'd have to talk to an architect?
Speaker 3:I do. Dov is not my area, but those look. I don't know how many owners are actually doing demolitions and how many owners are actually relying on demolitions to get people out.
Speaker 4:I don't know I really have. These are big counter projects that are doing that.
Speaker 1:Yeah, big major like things, you see on First Avenue. For sure Right.
Speaker 4:The major, like the Neftali, like those are the guys that are doing that stuff.
Speaker 1:I don't know if he is or isn't, but yeah, like a lot of these guys are demoing blah.
Speaker 3:They're putting together huge assemblages. They're demoing buildings and Right you get one guy that will pull you over for years.
Speaker 1:So now you can't do that anymore, or?
Speaker 3:Well, it just becomes harder. It becomes harder to do. It's still available.
Speaker 1:I don't think we're bumping into that too much. But now this, this elimination of the first rent rule upon combination or creation of new units. So this was, this was something that everyone started doing after the rent laws went into effect in 2019. Everyone was making new units, setting first market rents. That's right, right.
Speaker 3:Subject to stabilization Right. So you're not selecting them to stabilization, but setting a new first rent Right, yes, okay.
Speaker 1:All right. So now it's basically you have to keep the legal rents and you can, if you're changing the size of the unit, you can, you know, pro rata adjust the rents for the units.
Speaker 3:So let's go through what's really clear. Okay, what's really clear is that when you're combining Any stabilized unit with another stabilized unit, however you choose to reconfigure that, those apartments will never yield you more than the sum of the two ranks. So if you had an apartment that rented for $700, an apartment that rented for $1,200, you combine them together, it's 1200 bucks. And if you reapportion them or change the outer perimeter, no matter how you do it, you're still going to be stuck at that $1,200 number. Right? So you can add the $89 for IAIs. So congratulations, so you can add $89 on each apartment.
Speaker 4:So all right $180.
Speaker 3:I had a client tell me that you could buy a towel rack for $180. So that's the easy part. What's also easy, I think, is if you have an apartment or rent stabilized apartment on the first floor let's call it a thousand square feet with a $2,000 rent, and you duplex down and into and you create a recreational rule Right.
Speaker 4:Yeah.
Speaker 3:And that's a thousand square, that's another thousand square feet. All you're going to be able to do there is double the rent. You'll be able to take a corresponding increase on the rent that that corresponds with however many square feet you're adding to the apartment. So maybe in that situation where you're duplexing down, there's some value to be had there. What is, I think, at best, at best for landlords unclear is what happens when you take a rent stabilized apartment and you start combining it with a fair market unit. So what we know for sure is that that combined unit is going to be a rent stabilized apartment. We know that for sure and that's not a change.
Speaker 3:Question is what do you do with the rent? There's a reading of the rent of the amendments that says or there's there's, I think, a legitimate reading of the amendments that may say that you're only going to be able to add to the legal regulated rent the corresponding increase that results from the square footage that's added Again, meaning that you'd essentially be tied to whatever the legal regulated rent is. Now I think that's draconian and I think that the DHCR might be exceeding its authority there. So it's going to remain an open issue as to how rents are set in that context, and I think it's going to be quite some time before we know what the DHCR's answer is to that. The good news is that it doesn't appear that they're trying to capture any unit which was rented prior to November 8th. So this is only going to capture units that are rented and I should say rented, I'm sorry Before November 8th. So anything that's been done already should be similar to HSTPA.
Speaker 2:Similar to HSTPA.
Speaker 1:Yeah, same thing.
Speaker 3:Similar to HSTPA. So, but the rental date, the lease commencement date, is going to be what controls for this? Yeah, but this was really the vehicle that most of the owners, or most landlords, used after 2019 to develop their rent rule. Right, it was combining apartments, duplexing.
Speaker 2:I always thought it was kind of like a weak loophole to HSTPA. It was just something like I always felt like it was always something that you just like forgot about and people took advantage of it. So, yeah, and I think honestly, like when we're selling buildings, buildings that have these combined, these like high rent, stabilized rents they're never really that attractive to buyers in my opinion, to run a resale value. Why do you think that is? I don't know. I just think that people, I think having the free market status and giving you that freedom and ability to dictate what the market is is a lot more attractive Then this kind of we, this loophole, yeah, and financing on how banks really look at them.
Speaker 3:So what's interesting about the first rent policy, though, is that the first rents are also. They're found nowhere in the rent stabilization law. It's entirely an agency created policy, right? So um, two Please. And you know, I think there's been some talk about whether or not the DHCR has exceeded its authority in doing away with first rents, and this is one place where I think the DHCR might be well within its power, because the whole idea of first rents was birthed and created by DHCR, and if it was DHCR's policy to begin with, I think that, as long as they follow the notice and comment requirements, which they did, they can take it back, so I am not particularly gung-ho on a challenge to this. What will be interesting, though, is what they do with stabilized and fair market combinations, because once something is exempted from rent stabilization, it's a permanent exemption. That deregulation is permanent, so how they choose to bring it back in and how they choose to set the rents will be interesting.
Speaker 1:Yeah, or landlords just shouldn't mess around with combining rent, stabilized and free market units.
Speaker 3:I think that that's also not a bad idea. But you know, I guess really the market of each particular building will dictate that. I think you know for right now. If you can't, you know if you're in the middle of a project already obviously get the lease to commence before November 8th, Actually November 7th. But to the extent that you're thinking about doing this in the future, you know I've already advised clients to take a wait-and-see approach Because you know, like you said, like you both said, you want, you don't want to lose a fair market apartment. Fair market apartments are gold, right. It's the only place that you can really develop your, your rent. So if you're taking this, thank you. If you're taking this apartment and and subjecting it to stabilization, that's not great to begin with, but if there's a limitation on your rent also, I mean that's catastrophic, that that's. That doesn't make any sense. So it's really a wait-and-see approach, I think on that, for me.
Speaker 4:I mean a lot. I don't know a lot of clients that did this as a business plan, right, like some rehab. Obviously there's a lot of that right person bad building sub rehabbing it that makes sense. But have people really paid a premium? Say, you know, I'm gonna buy this building a frankincense, you know? I think a lot of the time I hear about it's like yeah, because of course they got, they got screwed by the 2019 law and this is a backdoor way to To regain some, some equity and some and some upside. But it's Everyone kind of uses as a back, like as a loophole backdoor thing where it's like okay, I'm in the.
Speaker 3:No, well, it doesn't really work in small. I mean, you know you really need a large building for it to work as a building, as a business plan. Yeah, um, you know it doesn't work. You know what are you gonna do in a ten unit building? How many units can you possibly combine?
Speaker 1:Yeah, chief people do plexing units in the middle of the building, right? Yeah, and that's not the best use.
Speaker 3:I mean that that doesn't necessarily give you an optimal rent roll either. It's just better than what the alternative is, which is two five hundred dollar rents. But you know, I don't think there aren't a lot of people who do this as a. You're right.
Speaker 3:I mean to be told. You know, this really only became a thing After June of 2019, and then you had COVID, which also threw a wrench into it. So you're right, I don't think a lot of people have executed it as a business plan, and I think probably in the middle market which we're dealing with, it's not particularly attractive because, yeah, you don't have enough room to do with the buildings. Just don't lend themselves, even physically to do it.
Speaker 4:I haven't done it already, like you're fine, you might have doing it anyway, right, like everyone that did this was like, oh right, 2021, like they had it. They like, oh, we got these vacant. But, honestly, like, the only thing that really I saw on this was again, we talked about it a lot. It's a rehab and, yeah, this Frankenstein it's. It's not a good thing. It's for landlords. I think it's bad because if you do clear up to our SU, it's next to each other. You can't do it anymore. But I always looked at that as, like I said, a backdoor loophole that them closing.
Speaker 3:It's an obvious closure for them, like they should close it, I mean well, but you know then, yeah, there's really no way to develop your rent roll now then, other than just doing value adds to fair market units. I mean that that's really all that's left. That's it, that's it, that's it. That's really all there is, and All that means is that the price, the rents on these fair market units are just going to continue to climb. That's, that's, that's all it means, which Is also not great for the city, right?
Speaker 2:Yeah, it's also not great for the second.
Speaker 1:It's not good for any of us, right yeah right, yeah. No, I mean, I think, I think that's the main thing. I think we can, you know, maybe talk about this last point here on the amendments and then just talk about the broader market, what we're seeing and the consequences of HSTPA and the second order, third order events that have happened. But Moving on from the combination of units and setting the first trend, the last main amendment that I understand is Succession rights succession rights.
Speaker 3:Okay, so, yeah, go ahead. So you know again, after 2019, green, gaining possession of a rent stabilized department from an owner's perspective is a lot less valuable. Right that you really don't want rent state. I Suppose you'd want them for the purpose of combining, but you know there's no real impetus to get them back anymore. But what?
Speaker 3:What the DHCR amendments are going to do to succession is that one and I don't know that this necessarily falls under succession, but we'll put it there it requires an owner to add a domestic partner to a lease, so it's not limited to spouses anymore and to what it also does is it relaxes the standard that a successor or a putative successor needs to show in order to become the rent stabilized tenant.
Speaker 3:So what it means, I think what the amendments do is that they essentially say that you know the time is measured from the date that the rent stabilized tenant vague, it's the apartment and even if the rent stabilized and even if the rent stabilized tenant continues to sign leases or remit rent after the point that they say that they vacated, that's not fraud, it's merely a Factor that you consider and whether or not the son or the daughter or the niece or the nephew should have succession. It's really. I mean, they're really allowing tenants to pass these apartments on. It's just like circus battalions, I mean, is what it is. But again, I think from a landlord's perspective now there's no real Motivation to get these apartments back, and that's exactly what the legislature wants.
Speaker 2:The legislature wanted the owners want the rent stabilized Tents to keep their units at this point that they don't want them back.
Speaker 3:It's not just nothing, it's see, I'm not even sure that it's that and this really goes to consequences. What it really is is they don't want a landlord to want the apartment back. They don't want the landlord to Create housing instability. They don't want there to be a financial motive for the landlord to say that a part of it is worth something to me now. I don't think the Ted, the legislature, cares whether it's me, you or Joe Schmoe that's occupying the apartment as a stabilized.
Speaker 1:I don't care if it's a millionaire or someone that actually needs. They don't. They don't.
Speaker 3:But what they do care about is that the landlord doesn't have an incentive to try to get the tenants out, and they've succeeded, marvellous, marvelously, in doing that.
Speaker 2:I don't want to go too long on this, but one just very curious question what are the tenants rights to renovate their rent stabilized apartment? I don't know. Do they have the ability to do whatever they want? Can they make it in this luxury apartment? So?
Speaker 3:it really depends on what the lease says and what the landlord allows them to do. They Generally are not allowed to alter the apartment significantly without the landlord's permission.
Speaker 2:So it's just, it's up to the owner. It's actually said.
Speaker 3:Usually it's based on what the lease says, but I would say 95% of cases that's.
Speaker 2:How and how, like our owners, open to letting tenants do that, and you're in your experience.
Speaker 3:I Think it really depends on the owner and and what the circumstances is. You know what? What you're seeing a lot of now? What I'm seeing a lot of now is that a lot of Older tenants and rent stabilized apartments want to make renovations so that they're Kids can have a nice apartment.
Speaker 3:Well, no reasonable accommodations based on the fact that they have mobility issues. So they want walk-in showers or they want, you know, bigger kitchens because their mobility is, is, is, is Is declining. So what you're also going to see, I think, is a lot of rents to older rent stabilized tenants Really hanging on to bigger, these bigger apartments, because they have nowhere to go. It's just too expensive to go anywhere else, and that's one of these other unintended consequences. These tenants, the other unintended consequence. Actually, thank you, yeah, I reminded myself.
Speaker 3:So, prior to 2019, any rent stabilized tenant Almost anywhere maybe with the exception of the Bronx and Staten Island was sitting on what was essentially equity, because landlords were going to buy them out of their leases so they could move to Florida, so that they could, you know, go live with their kids, whatever. That no longer exists here. So tenants are stuck, rent stabilized tenants are stuck. They don't have that, I mean essentially a nest egg. They don't have that $60,000, a hundred thousand dollar nest egg, that that they would have had prior to the enactment of the 2019 law, and I think that what you're seeing is these tenants are hanging on to the apartments, basically until they die because they're priced out of going anywhere else you know, it's interesting.
Speaker 3:I had a tenant in my client at a tenet in Brooklyn. We're trying to make a deal with him for years and every time we would come close to a deal he'd need renege. Now he's calling me three times a month trying to get you know, any sort of money for the apartment. He's just saying give me my moving expenses. And I said my client won't do it because there's no Financial motivation.
Speaker 3:Wow, there's no financial motivation, so it's just they got it. The legislature got exactly what it wanted in this, but it's going to also get terribly dilapidated housing.
Speaker 1:It wanted to eliminate the incentive for landlords to To vacate apartments. That's that's really what it was going for. That's like we were talking about before the show, like the viewpoint On the other side, like what their goals are, what they're trying to accomplish. So that's basically it eliminate the incentive to to for to destabilize housing in New York or cause Units to become vacant.
Speaker 3:That's right, got it and they're not Hiding it, for you know the legislators aren't Legislators. Excuse me, aren't hiding it from you either. Now client pointed out to me about two weeks ago an interview that I think it's Julie Salazar, I don't remember if she's a state senator or assembly person gave the real deal a couple years ago and she came right out and said it we don't believe that People should make profit on housing. That's what a large segment of the Hands-on by the hate landlords. Democratic.
Speaker 1:Party wants Just a Democrat, Socialist type of the DSA wants that's what they want, that they don't believe in it.
Speaker 3:They think housing is a human right and maybe it is okay, but if housing is a human right, then the government should provide it. It shouldn't be on our clients or private property owners to provide it.
Speaker 1:What's so backwards and unfair about it is just the pressure it's putting on people that didn't get that lucky rent stabilized. Yes sure, and what it's done to rents across the city, and then they get rid of the 421A and just the incentives to build and supply and there's just so much demand, it's just a lack of supply, so it's-.
Speaker 2:I think, too, like what I'm seeing from somebody in their early to mid-30s is usually this is the time where we wanna start having our own families and having kids and so forth, and a lot of people in my friendship circle they can't even they can't figure out how to be able to stay in the city, even though as much as they enjoy living here no three roommates, Because it's impossible financially-. I was having To raise a family in the city, unless you're a really high earner.
Speaker 1:I was having a conversation just this past weekend with people in my neighborhood and we talk a lot about what it's done to the fair market rents. But that's also translated into housing prices for like home purchases and condo purchases. There's just people wanna be in the city and there's not enough supply of these units, so people are paying millions of dollars for townhouses and condos and meanwhile all these units are just taken out of the market. So I guess it worked with this finite subset of the population, but all the rest of the population has put all this pressure on. It's been really a bad outcome for the rest of us.
Speaker 4:What's crazy, too, is like the city offices oh, you can raise it $100 and it doesn't cost anything to renovate apartments. But then I was talking to a friend that's a landlord in the Bronx and with all these programs, the homeless programs and whatever it is the city is paying huge rents to landlords to put these types of people in buildings Like they entered regulatory agreements.
Speaker 3:Yeah for them. It's like oh a studio.
Speaker 4:I've heard crazy things Studios in the Bronx $2,900. Yeah, yep, they're paying huge money to house these people and who's paying that money?
Speaker 1:Us bears. So it's crazy.
Speaker 4:So they'll pay that much. But then they're like oh no, no, no, no, no, you can't this apartment. You have to charge 500 bucks and here's a dollar to renovate the kitchen. It's like. But they're completely out of touch with reality. It's like the hypocrisy and like the. It's just, it's just insane.
Speaker 2:So what is it gonna take for the other side to actually understand because we're obviously a little biased, but where, like? What's it gonna take for them to understand, like, how devastating these laws are and how this is all gonna change?
Speaker 3:Derek asked me when we came in what he wanted, I think, to hear what's the other sides are. So confession I grew up in a rent stabilized apartment, you know. I think that what you have to understand on the other side is okay, let's assume rent stabilization went away, right, you've now pulled from under them, or pulled from under the. You've pulled the rug from under a million, two million people in New York. Where do they go? Their life assumptions have been completely turned upside down. What happens? You know? I think rent stabilization is probably the single most important piece of legislation in New York. It affects millions of people and it keeps blue collar people here. It keeps the middle class here. The people who are protected are protected. So I think the flip side of this is okay. In a landlord's perfect world, rent stabilization doesn't exist.
Speaker 3:And I've heard people say to me and I've heard studies done well, that would actually have the effect of driving down rents as a whole. Nobody knows what would happen Absent rent stabilization. Nobody knows what would happen if these protections are taken away. So I think we need to find a middle ground and I think that between 1997 and 2019, so 1997 was the rent reform act that really allowed deregulation and IAIs In 2019, which was the end of that, the pendulum had really swung in favor of the landlords and there was a lot of abuse of the system because DHCR didn't make you file a certificate to get IAIs.
Speaker 3:Dhcr didn't look into how tenants were, how apartments were vacated, so there were guys out there that were not doing the right thing, and that's part of the reason why I think our industry is looked at as being toxic, absolutely. So unfortunately, we're not gonna come back to a middle until things get really bad. Really bad is probably having 150,000 empty apartments in New York City that will not be rented until they can be brought to something more than the $1,200 rents that the outgoing tenant paid. I don't know how you make the other side understand. I think that you have to. Chip did a very good. Well, chip did a very good or tried to do a marketing campaign where they showed all these vacant apartments and how little small time owners were getting hurt. But it needs to be bigger than that. It needs to be people can't live in this city because there's no housing. It needs to be rents on these markets. It needs to be only the really rich or the really poor are going to be able to live here.
Speaker 2:That's where it's becoming. It's becoming a city where it's either you're a really, really high net worth individual or earner, or you're somebody on the complete opposite side of the spectrum, but in between which a majority of people are are in between.
Speaker 3:These are the people that are getting left in the dust and I think, pushed out, and that's what rent stabilization you know, I'll, I think, I think I think generally in the tax code too.
Speaker 2:That's also kind of similar type of situation in the tax code, where the high net worth individuals get away with paying less in taxes and so do the complete opposite, but the people who are in the upper tier middle class are the ones who get left behind.
Speaker 3:I probably risk losing some phone calls by saying this, but rent stabilization as an idea is not a bad thing. I mean, it's there to make sure that there is a middle class that can afford.
Speaker 4:I think most people agree with that.
Speaker 3:So it's just gotten so perverted and so distorted that these apartments essentially become you know, they've become life. They essentially become property of the tenants. Is what's happened. And if you don't, if you're not able to unlock some of that value as those apartments become vacant, it becomes just a rich, a really rich city on the one end and a really poor city on the other, and there's gotta be a middle ground. Maybe what we had up to 2019 wasn't it.
Speaker 3:Because we were losing tens of thousands of rent stabilized apartments a year but maybe there's a way that you bring back IAIs and you don't bring back deregulation, or you bring back deregulation in phases or, you know, or only in certain parts of the city. I mean, there are ways that this can be done, but there's just no political appetite for it.
Speaker 2:And I think we're also forgetting too that there's no 421A tax abatement, so that we're not so that that lottery of affordable houses, affordable houses, that's gonna dry up eventually, right, if it's not renewed next session.
Speaker 2:yeah, and by the way, like those income thresholds on, I think on those lotteries too, are they're pretty strict, like it's tough to get an apartment, tough to qualify, because most likely if you're looking for that apartment you weren't living in New York anyways, because you weren't making enough money to live in New York. So it's like it doesn't. It's just crazy, it doesn't make sense.
Speaker 4:So you think that's the only way, hal, that there needs to be like just a huge amount of vacancy? I mean, the thing with Chip is they did a decent job, but it's a very small subset of people who even know what Chip is Like, just like my sister. Right, she's not in real estate but she knows New York. She used to live here, but she has no Chip. There's no one that would. So they have to like bring it to, like the masses.
Speaker 2:I think it's the tenants need to speak out more than the landlords Cause I think at the end of the day, the government officials view landlords as the enemy. But if tenants more in, like the middle to upper class, start lobbying in some sort of sense, be like how do we live here Like that? That's the main.
Speaker 1:There's going to be no money in these run stabilized buildings to do basic repairs Roof repairs, heating repairs, facade. No one's going to have money in these properties, especially when the value I mean there's been sales now. So this is like we know where the value has gone and like the one portfolio in upper Manhattan sold for like a 44% discount.
Speaker 3:Talking about the signature, no, talking about it Okay.
Speaker 1:But I mean, I just saw this week in in Pickett's there was a $72 million yes For closure going on on a portfolio.
Speaker 2:But my point is is that that means something to us as people who work in the industry? That doesn't mean anything to the public.
Speaker 1:I don't agree with you.
Speaker 2:I think the politicians, all they, they just see rich people losing a little bit of money.
Speaker 4:That's what they see from that.
Speaker 1:I think what they care more about is the tenants, the people who are actually living in the city Wait until owners can't do repairs to buildings and HPD is going to have to start coming in and doing emergency repairs. They're going to start filing leans on properties where owners can't pay and these properties and people are going to start walking away from the buildings because there's no financial cash flow to maintain the property. So I mean, there's a clear scenario where that starts to happen.
Speaker 2:Well, like we, like we went through. I went through the living expense numbers and what you actually have to earn to raise a family here and like to be able to actually raise a family here. You have to combine with your, with your partner, somewhere at least in the vicinity of $400, $450,000 a year, which is I don't know the exact numbers, but I guarantee you it's much higher than 95 to 98% of the rest of the country.
Speaker 1:I also saw something in Koreans that said, basically, people need to get out and vote. When's the elections?
Speaker 4:November 7th it's next week there's an election.
Speaker 1:But people need to get out and vote and it said voter turnout in New York is abysmal. So so people.
Speaker 3:And the people that do turn out to vote vote are very partisan and they vote for the fringes, they vote for. You know. The primaries are really where elections in New York are decided and it's you know.
Speaker 2:you get very extreme people Well going back to what you were saying earlier, people are uneducated, like I know a majority of my friends that aren't in real estate. They know nothing. They know nothing about how the economics of how it actually is to operate buildings in the city and how housing actually works in the city. So I think that's another issue, too is the majority of New Yorkers are like why is my rent so high? And they just go in CNBC and they say inflation is high and that's the reason.
Speaker 3:But there's so much, but it's not that, it's not just that.
Speaker 2:It's not just that. I mean it's partially that, but it's much, much more, and I don't think the politicians are gonna realize it until the tenants start speaking up Until the New Yorkers are speaking up, is the people that aren't rent stabilized?
Speaker 1:That's my point the people that aren't rent stabilized, they're gonna start speaking up too and their buildings become complete shitholes, which is gonna start to happen. But everyone else that's accepted these 4,000 a month rents for one bedrooms is just like oh, that's just the market rent. That's the problem. That shouldn't be the market rent.
Speaker 2:They need to open up supply to ease the pressure on this huge amount of New Yorkers that are just getting squeezed so hard, or at least bring back the 421A and then having the housing lottery be a little bit more lenient and raising the income levels as far as the lottery, so the middle market, like the middle income earners, can actually get a decent apartment.
Speaker 1:The demand is there, the people wanna build, the money is there, it's just all the regulations and lack of support for housing that's just getting in the way, including these rent laws.
Speaker 4:Which is a lack of support for housing, and they're outside too, their housing that they control.
Speaker 3:But Niche is the worst landlord in New York City.
Speaker 4:Yeah, but it's like unbelievable. Yeah, the whole thing is just so crazy.
Speaker 2:Yeah, it's a lot of doom and gloom. Is there any optimism you can give us at the end of this? Is there anything that we can hang our hat on? Is there any light at the end of the tunnel?
Speaker 3:I mean again. I think that eventually I don't know when that is, but that market forces are going to force the legislature to act At some point. The problem becomes so big that they don't have a choice. If you have all of these vacant apartments at some point, something is going to have to give. I don't have any good. I mean, the only possible good short term news that we have is that there are still two cases alive before the New York's, before excuse me the United States Supreme Court challenging rent stabilization in what's called as applied challenges. Chip's lawsuit was dismissed several weeks ago. The court decided that it wasn't going to hear the appeal, but there still are these two cases that could be heard and if they are heard, I would imagine that, given the composition of what the court is now, the court might say some or all of rent stabilization is unconstitutional, but I think that that's a pipe tree. Honestly, I think it's a pipe tree.
Speaker 1:They're going to have to make changes. It's only going to be a matter of time. What they did, it's just going to have so many detrimental effects. We're already seeing it. You're starting to see the foreclosures coming in. It's only going to be more of it, and the disrepair of these buildings you're going to fall into there's only going to be more of it. This is just the beginning. They're going to have to see the science of what's going on.
Speaker 3:And it affects a whole ecosystem of people. It affects lawyers, it affects brokers, it affects construction workers empty apartments, affects the super, affects the supermarkets, the bodegas, the restaurants, ubers it's just you know, I don't think people are really. Whoever's making the policy isn't thinking. It's much more than just owners. It's an ecosystem of people that surrounds owners.
Speaker 1:They just wanted to stop tenant harassment. I feel like owners got way too aggressive, trying to raise rents on rents from us. Yeah, I think the industry is a whole. There's a lot of dislocation, there's a lot of, yeah, just people moving to these neighborhoods and tenants kind of getting bought out or forced out and renovation of units, and I think they just didn't want that happening so quickly. I mean all the gentrification Someone put it really.
Speaker 2:I don't want to get too much into politics, but someone one time made a really I thought an interesting point to me was how it all. If you look back and have this all turned out, whether you're on the left or the right, it doesn't matter. Donald Trump coming into office was polarizing in a sense, and it caused this domino effect of politicians like Julius Salazar, aoc, getting elected, and these are the type of politicians who are super on the left, super anti-Trump that ended up, who end up coming up with these policies it created, it caused people to go to the left.
Speaker 2:I'm not just solely blaming it on the I think Donald Trump getting elected, but it just kind of.
Speaker 3:He was a catalyst for what happened, I think, in New York City. Whether you like him or not, I mean, I think that's a fact. He was a catalyst for the rise of the far left. The far left has given us a lot of these really terrible laws.
Speaker 1:Well, I think we could probably leave it there.
Speaker 3:I really appreciate you coming in and giving us the education on the amendments and the Senate bill and all the stuff that goes in there.
Speaker 1:Not sure who's left listening. I'm sure they're still.
Speaker 2:Maybe not so great if you want to run stabilized building.
Speaker 1:We'll make sure to put your information on the podcast and show notes and for anyone that has DHCR questions or landlord tenant questions or just nitty gritty stuff, Anything. Anybody can reach out to Alexander Fotopoulos, Corcomelis and Fotopoulos.
Speaker 3:You did it.
Speaker 4:You did it Perfect.
Speaker 1:That was really great. Thank you, really appreciate your perspective on all that. Thank you, guys. Thank you, okay. Thanks so much. Bye, bye, bye, bye, bye, bye Well.