2019 Rent Stabilization Changes and Implications for 421-a Properties

On June 14, 2019, Governor Andrew M. Cuomo signed into law the Housing Stability and Tenant Protection Act of 2019 ("HSTPA" or the "Act"), which implemented widespread changes to rent stabilized and rent controlled apartments throughout New York State. Then, on June 25, 2019, Gov. Cuomo signed into law certain technical amendments to the Act that are included in this summary. This memo focuses on the Act's impact on multifamily properties participating in the 421-a property tax exemption program in NYC.

Permanent Changes

The Act both renewed rent regulation statutes (due to expire on June 15, 2019) and removed any expiration date. This means that rent regulation statutes will remain in effect in perpetuity unless future legislation imposes an expiration date.

Major Changes

Vacancy Allowance Eliminated. Owners of rent-stabilized apartments must register a maximum legal rent (the "Legal Rent") with the NYS Division of Housing and Community Renewal ("DHCR"). On renewal this Legal Rent can only be increased as allowed by the rent guidelines board ("RGB")("RGB permitted increases"). Prior to the Act, the Legal Rent could be increased significantly on vacancy, by up to 20%, which was referred to as the "Vacancy Allowance." The Act repeals the Vacancy Allowance. Certain rent increases previously allowed following the vacancy of long-occupied rent stabilized apartments (the "Longevity Bonus") are also repealed.

Luxury Deregulation Curtailed. The Act repeals luxury deregulation including high rent deregulation (where an apartment's rent exceeds a threshold currently set at $2,774.76 as of January 1, 2019 - this is referred to as the High Rent Threshold or "HRT"). For market units in New 421-a properties only, high-rent deregulation is expected to remain as an option and the exact amount of the HRT is expected to continue to be indexed to RGB permitted increases for one (1) year leases, as per the law in effect prior to the Act. High rent deregulation has never been available to affordable units in New 421-a properties or to any market or affordable units in Old 421-a properties. In this sense, the repeal of the Vacancy Allowance is perhaps more significant for 421-a properties (Old and New) than the changes to Rent Stabilization.

Preferential Rents Changed. Owners can elect to charge tenants a rent that is below the Legal Rent, which is referred to as a "Preferential Rent." Prior to the Act, on lease renewal owners could increase the rent on a rent stabilized unit on lease renewal to the Legal Rent. The Act now requires that on lease renewal, a rent stabilized unit can only be charged the Preferential Rent plus RGB permitted increases. On vacancy, however, a rent stabilized unit can be charged the Legal Rent. This means that the possibility of higher rents for rent stabilized units exists on vacancy, provided that owners have preserved a Legal Rent in excess of a Preferential Rent.

IAIs / MCIs. Individual apartment improvements ("IAI") and major capital improvements ("MCI") are both significantly restricted by the Act, particularly with respect to the costs of improvements that may be charged to future tenants via rent increases. IAIs are capped at an aggregate of $15,000 over a 15-year period with a reduction in the increased rents that may be charged. MCIs are now subject to a maximum rent increase of 2% (lower than the previous limit).

No Reregulation of Deregulated Units. The technical amendment to the Act confirmed that units lawfully deregulated prior to June 14, 2019 remain deregulated.

421-a Properties: New and Old

NYC residential properties seeking or receiving tax exemption benefits under NYS Real Property Tax Law Section 421-a(16) ("Affordable New York Housing Program" aka "New 421-a") or under RPTL 421-a(1-15) ("Old 421-a") are affected in specific ways by the Act. To determine how a particular residential property seeking or receiving 421-a benefits may be affected by the Act, it is important to first understand what type of 421-a benefits the property may receive or is receiving.

New 421-a Properties -- Commencing Construction January 1, 2016 and after (with certain Properties with earlier Commencement Dates also eligible to "opt-in" to the New 421-a Program)

Affordable units in New 421-a Properties are largely unaffected by the Act. Under New 421-a affordable units remain affordable for 35 or 40 years, depending on project details, and remain rent stabilized thereafter until vacancy. If subject to other regulatory agreements, additional affordability and / or rent stabilization requirements may apply.

Market units in New 421-a Properties are somewhat affected by the Act, depending on the initial Legal Rent. Market units lawfully deregulated prior to June 14, 2019 (for rent in excess of the HRT) shall remain deregulated.

Market units that rent initially or at any time thereafter for a rent in excess of the applicable HRT will continue to be deregulated. Market units that initially rent for less than the applicable high rent deregulation threshold are subject to rent stabilization. Although these market units technically are allowed to achieve high rent deregulation, the repeal of vacancy allowances means leaves a question of whether any other increases (such as IAIs or MCIs) may be achieved that would be sufficient to bring the rent of a market unit above the HRT. Property-specific analyses will need to occur to assess whether this is achievable for a market unit in a particular property.

Certain New 421-a properties that "opted-in" to the New 421-a Program may have market units that were leased under Old 421-a at rents in excess of the HRT and which are nonetheless treated as rent stabilized. Upon vacancy, such market units with rents in excess of the HRT can be deregulated.

Owners, potential purchasers and lenders of / to New 421-a projects that contain market units currently leased below the high rent deregulation threshold (i.e. rent stabilized market units) should consider the possible implications of RGB permitted increases running below increases in market rents. Once market units are initially leased it may be difficult or impossible to achieve high rent deregulation.

For planned New 421-a projects, it is critical that developers consider high rent deregulation possibilities in the absence of the vacancy allowance. Lenders and potential purchasers will also need to properly evaluate these issues when valuing potential collateral or acquisitions.

This memo does not discuss "Homeownership Projects" under New 421-a which are very infrequent.

Old 421-a Properties

There are three main categories of "Old" 421-a properties to be considered:

[1] 80/20 421-a Properties with Commencement Date of June 30, 2008 and prior (includes those projects receiving Substantial Governmental Assistance for the Development of Affordable Housing ("SGA"))

Affordable units in these properties must be affordable and are subject to Rent Stabilization for at least the duration of the 421-a benefit (20 or 25 years), plus may be subject to Rent Stabilization thereafter until vacancy. SGA regulatory agreement(s) will typically impose additional affordability or Rent Stabilization requirements.

Market units in these properties are subject to Rent Stabilization for at least the duration of the 421-a benefit (20 or 25 years) and thereafter can exit Rent Stabilization either through vacancy or, if correct 421-a riders were used, through the expiration of the lease in effect at the end of 421-a benefits. These properties may also be eligible to extend their 421-a benefits under RPTL Section 421-a(17) (discussed below).

[2] 80/20 421-a Properties with Commencement Date of July 1, 2008 to December 31, 2015 (includes those Projects receiving SGA)

Affordable units in these properties must be affordable and are subject to Rent Stabilization for 35 years (i.e. longer than the duration of the 421-a benefit), plus subject to Rent Stabilization thereafter until vacancy. SGA Regulatory Agreement(s), if any, may also impose additional affordability or Rent Stabilization requirements.

Market units in these properties are subject to Rent Stabilization for at least the duration of the 421-a benefit (20 or 25 years) and thereafter can exit Rent Stabilization either through vacancy or, if correct 421-a riders were used, through the expiration of the lease in effect at the end of 421-a benefits.

[3] Market Rate 421-a Properties not subject to any Affordability Requirements

These are properties that are or will receive a 421-a benefits without making any apartments affordable. All units in these properties must be subject to Rent Stabilization for the duration of the 421-a benefits and thereafter can exit Rent Stabilization either through vacancy or, if correct 421-a riders were used, through the expiration of the lease in effect at the end of 421-a benefits.

Other Considerations for Old 421-a Properties

Market units for which a Legal Rent was properly established in excess of a Preferential Rent may, upon vacancy, charge up to the Legal Rent. Market units for which the Legal Rent is the only rent established will see rent increases entirely dependent on the RGB permitted increases. The valuation of Old 421-a properties may vary according to whether owners properly established a Legal Rent in excess of the currently charged Preferential Rent.

Market units are still eligible to exit rent stabilization following the expiration of Old 421-a benefits, either at vacancy or, if the proper 421-a rider was used, through the expiration of the lease in effect at the end of 421-a benefits.

2.2% rent surcharges are still permitted to be charged to tenants during the period of gradual diminution of Old 421-a benefits, provided the proper 421-a rider was used.

For Old 421-a properties that are just now leasing units, it will be critical to ensure that the appropriate Legal Rent is established and to utilize correct leases and riders.

Condominium or cooperative units in Old 421-a Properties are still exempt from Rent Stabilization. Even if rented out (provided they are not used for short-term rentals or as hotel units -- prohibited under both Old and New 421-a programs), such condominium and cooperative units are not subject to Rent Stabilization and are both eligible to achieve market rents and are also able to be sold to individual unit owners. Given the Act's imposition of limits on occupied building conversion plans, condominium or cooperative units in Old 421-a Properties will likely be viewed as more valuable to owners and lenders than rental units in similar Old 421-a Properties.

Beware of the RPTL Section 421-a(17) Extended Affordability Program

Under RPTL Section 421-a(17), Old 421-a properties with at least 20% affordable units and a Commencement Date of June 30, 2008 or prior ("Potential 421-a(17) Properties") may be able to apply to extend their Old 421-a benefits to a term of 35 years (from 20 or 25 years) by extending the affordability and rent stabilization of the existing 20% of units which are affordable and by making an additional 5% of units affordable at or below 130% of Area Median Income. The 75% of units which would not be subject to extended affordability or extended Rent Stabilization and would be able to exit Rent Stabilization requirements at the expiration of Old 421-a benefits (20 or 25 year benefits), either at vacancy or, if the proper 421-a rider was used, upon expiration of the lease in effect at the expiration of Old 421-a benefits.

Prior to the Act, owners of Potential 421-a(17) Properties had been considering the pros and cons of whether to participate in the 421-a(17) program and weighing the potential property tax savings from 10 or 15 years of additional 421-a benefits (at a 50% exemption of increases in assessed value above the assessed value) against the main requirements: (a) lower rents triggered by extended affordability and Rent Stabilization requirements for the 25% of units, (b) 421-a(17) application fees and (c) prevailing wage obligations for Building Service Employees. Under 421-a(17), at the end of the extended affordability period (the 10 or 15 years of additional 421-a benefits), the 25% of units which are affordable can exit affordability requirements but remain subject to Rent Stabilization until vacancy. Thereafter, these 25% of units can only exit Rent Stabilization through high rent deregulation if their rents exceed the HRT, which is now impossible for 421-a(17) Properties.

This is because the technical amendment failed to mention 421-a(17) properties as being able to utilize high rent deregulation (unlike New 421-a Properties under 421-a(16)) and so it is unclear how the 25% of affordable units in Potential 421-a(17) Properties can exit Rent Stabilization. It is unlikely that the NYS Legislature in passing 421-a(17) intended to impose permanent Rent Stabilization on 25% of the units. Owners of Potential 421-a(17) Properties will rightly hesitate to participate in the program without corrective legislation of some sort.

Next Steps

R&E will be carefully monitoring the implementation of the Act, including by NYS and NYC agencies and interacting with NYS and NYC agencies as to their guidance regarding the Act. It is also possible that further technical amendments to the Act could be enacted, though this is not possible to predict. For additional information about the Act, please see R&E's HSTPA of 2019 summary and effects handout written by our administrative and litigation teams: click here to view.

Property owners, asset managers, lenders and other stakeholders will want to focus on several issues including:

Establishing the correct Legal Rent for all units and making sure the correct leases and riders are used; Regulatory Agreement language; subsidy agreements including contract rents (not discussed herein); and for New 421-a properties whether market rents do or can exceed the high rent deregulation threshold.