2019 Rent Stabilization Changes: NYC Property Update Including Old and New 421-a Property Implications

On June 14, 2019, Governor Andrew M. Cuomo signed into law the Housing Stability and Tenant Protections Act of 2019 (the "Act"), which implemented wide-spread changes to rent stabilized and rent controlled apartments throughout New York State. Today 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 rents and subsidies for affordable and mixed-income multifamily properties, including properties participating in the 421-a property tax exemption program in NYC. High-rent deregulation has been restored to "New" 421-a properties (see below).

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previously allowed following the vacancy of long-occupied rent stabilized apartments (the "Longevity Bonus") are also repealed.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)

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 where 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 amendments 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 (including the technical amendment signed into law on June 25, 2019).

New 421-a Properties

Affordable units are largely unaffected by the Act. Under New 421-a they 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 are somewhat affected by the Act, depending on the initial Legal Rent. Market units lawfully deregulated prior to June 14, 2019 shall remain deregulated. Market units that rent initially or at any time thereafter for a rent in excess of the applicable high rent deregulation threshold will continue to be deregulated.

Market units that initially rented 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, without the ability to apply a vacancy allowance or other increase in excess of RGB permitted increases, the market units' rents will only increase at the Rent Guidelines Board permitted percentages and the high rent deregulation threshold ($2,774.76 as of January 1, 2019) will increase according to the same RGB permitted increases.

If your New 421-a project has market units which are currently below the high rent deregulation threshold, please speak with us about long term implications in light of the Act. 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 / acquisitions.

Old 421-a Properties

Affordable units are largely unaffected by the Act. Under Old 421-a they remain affordable for at least the duration of the property's Old 421-a benefits and possibly for up to thirty-five (35) years, depending on project details, and may remain rent stabilized thereafter until vacancy. If subject to other regulatory agreements, additional affordability and / or rent stabilization requirements may apply.

Market units are significantly affected by the Act, for example very likely only being able to charge RGB increases on renewal leases and no increases on vacancy. DHCR guidance is expected to provide further clarification of whether market units may impose any rent increases upon vacancy.

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 dependent largely on the RGB permitted increases.

Market units are still eligible to exit rent stabilization at the expiration of Old 421-a benefits, either at vacancy or, if the proper 421-a rider was used, upon notice.

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.

Other Changes

Section 8 Property Exception. If there is any good news in the Act for owners and developers of affordable properties, it may be for properties that are subject to the Act due to being subject to a regulatory agreement and which have project-based assistance. Rents at such properties can be increased on renewal leases to the previously established Legal Rent, as adjusted by RGB increases or other increases permitted by law (the "Section 8 Property Exception").

The Section 8 Property Exception is intended to ensure that subsidy for properties with project-based assistance will not be lost if the contract rents under the project-based assistance exceed the permitted preferential rent upon renewal. However, please note that properties qualifying for the Section 8 Property Exception might still see reduced subsidies because they will be unable to increase the Legal Rent in excess of RGB permitted increases due to the repeal of Vacancy Allowances and changes to IAIs and MCIs.

Please also note that the Section 8 Property Exception applies only to properties that receive federal project-based rental assistance that have a regulatory agreement with a local governmental agency. Critical attention will have to be paid to the scope of the Section 8 Property Exception and which properties and subsidies it will include. For properties that do not have project-based assistance but contain units occupied by tenants holding vouchers, the Act could limit subsidy payments if RGB permitted increases are lower than increases in payment standards. Prior to the Act, this would not have been an issue provided the Legal Rent was in excess of the payment standard since upon lease renewal the Preferential Rent could increase to the payment standard. The Act could impose this potential subsidy limitation until vacancy.

Other Affordable Housing Properties

Unless an affordable housing property qualifies for the Section 8 Property Exception, it is unclear how they can avoid having rents capped at RGB permitted increases, even where RGB permitted increases grow more slowly than the maximum rents that can be charged under a particular affordability band (i.e. a rent of 30% of a 60% of Area Median Income or "AMI Rent"). If an RGB permitted increase is 1% and the AMI Rent increases by 2%, the rent that can be charged and collected for an affordable unit may not keep up with AMI Rents.

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.

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 as they relate to the Section 8 Property Exception; for New 421-a properties whether market rents will exceed the high rent deregulation threshold; and for Old 421-a properties whether the correct leases and riders have been used.