R&E January 2022 Newsletter

On Behalf of | Jan 31, 2022 | Newsletters

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Featured Story #1

Good Cause Eviction – A Summary and Analysis

The New York State Legislature is currently considering the “Good Cause Eviction” bill (GCE), a sweeping proposal that would apply to virtually all free-market housing accommodations in New York State except for (1) apartments already subject to rent regulation, and (2) owner-occupied buildings with fewer than four units (together with other very narrow exceptions).  The bill would create, in effect, nearly universal rent control, and would essentially eliminate free-market residential apartments and fixed-term leases in New York State.

GCE provides that unless an owner establishes one of several specified grounds for removal, “[n]o landlord shall remove a tenant from any housing accommodation, or attempt such removal or exclusion from possession, notwithstanding that the tenant has no written lease or that the lease or other rental agreement has expired or otherwise terminated. . .”

In other words, the default position in any landlord-tenant dispute would be that unless the owner can affirmatively establish “good cause” to evict — with lease expiration not constituting good cause — the tenant would be entitled to remain in possession forever.   And, even where “good cause” appears to exist, the bill’s language ensures that the resulting litigation to recover possession would be time-consuming and expensive — especially in light of the fact that recent legislation affords many New York City tenants the right to counsel in eviction proceedings (with similar legislation being considered at the state level).

For example, the nonpayment of rent is a “good cause” to seek eviction.  On its face, the concept is simple and straightforward enough.  However, this basis is modified by the requirement that the unpaid rent not be the result of an “unreasonable” rent increase.   What, exactly, is an “unreasonable” rent increase?  The bill’s language is silent.  The bill declares that a rent increase above 3% or 150% of CPI, whichever is greater, is presumptively unreasonable, but notably does not provide that a rent increase below those amounts is presumptively reasonable.

Thus, the bill permits a tenant to challenge even a 1% or 2% rent increase (or less) as “unreasonable,” which would, in turn, force the owner to spend time and resources justifying any such increase before it could hope to obtain a judgment for the rent owed.  And if the rent increase is greater than 3% or 150% of CPI, the owner would bear a heavy burden to overcome the presumption of unreasonableness.

Moreover, even if the owner successfully runs the “unreasonableness” gauntlet, the tenant remains free to challenge any rent increase as having been imposed “for the purpose of circumventing the intent of this article,” even though GCE’s “intent” is nowhere defined in the bill’s language.  This nebulous standard would surely spark litigation in New York’s already overburdened courts.

Add it all up, and owners would be strongly incentivized to simply leave rents at current levels and avoid the time and expense necessary to justify even small rent increases in New York court proceedings.   This would lead to the deferral or avoidance of repairs and maintenance, and ultimately the degradation of New York’s rental apartment stock.

Similarly, GCE purports to confer “good cause” if a tenant violates a substantial obligation of the tenancy.  However, here again the tenant can raise a defense that the obligation was “imposed for the purpose of circumventing the intent of this article” — which would then become a flash point in litigation and divert focus away from the tenant’s wrongful conduct.

The so-called “good causes” to evict contain many other roadblocks and hurdles for owners.

GCE’s backers have sought to reassure the real estate industry that owner’s use is readily available as a “good cause” basis.  However, the bill’s language reveals that for buildings with 12 or more units, owner’s use recovery is entirely unavailable.  And, in buildings with fewer than 12 units,    recovery of a single apartment would only be available if the owner can demonstrate “immediate and compelling necessity” — a difficult standard to meet which would, again, require significant legal expense with no certainty of success.

“Good cause” also purportedly exists if occupancy by the tenant is in violation of law or causes a violation of law, and the owner is subject to criminal or civil penalties as a result — but only if a vacate order is issued.  This means, for example, that a tenant operating an illegal short-term rental business via Airbnb or similar platforms may continue to do so with impunity for so long as the local municipality does not issue a vacate order — which is often the case, with New York City usually opting instead to issue short-term rental violations to the owner.  Thus, an owner could be faced with a steady stream of government fines for the conduct of a tenant it is powerless to remove.

Other instances of “good cause” in the bill include nuisance, using the apartment for illegal purposes (such as, for example, drug dealing or prostitution) and refusal of access.  In general, however, all “good cause” bases would require discovery and extensive fact-finding, and considerable legal expense, to establish.

GCE’s overall aim appears to be not to give owners a reasonable basis to retake possession of their own property, but to render the prospect of litigating eviction proceedings so onerous, time-consuming and expensive that owners would be incentivized to permit tenants to stay in possession even where “good cause” exists.

On top of the foregoing, the bill would catch far more than prototypical landlord-tenant relationships within its ambit.   Rather, the bill’s definitions of “landlord,” “tenant,” “rent” and “housing accommodation” are so broad that they would grant virtually any person in occupancy of real property the right to stay in possession forever, notwithstanding the initial terms on which that person entered the property.  To use three examples among many others, (1) a roommate, (2) a college student living in a dormitory, and (3) a weeklong vacation home renter could not be evicted under GCE when their terms of occupancy expire unless “good cause” exists.

GCE, in short, would permit virtually any occupant, whether a tenant or otherwise, to unilaterally dictate the terms of possession and the duration of occupancy, thus obliterating the concept of a lease or other bilateral agreement to occupy real property.  Put another way, an occupant would essentially enjoy the status of owner with none of the attendant responsibilities, while the owner would bear all of the burdens of real estate ownership with almost none of the accompanying benefits.

Unsurprisingly, the expectation is that should GCE be enacted, multifamily property values would decrease due to the significant constraints placed on buildings’ cash flow.  This would, in turn, hurt tax assessments and thus revenue collected by local governments to fund essential services — a concern voiced by multiple Senators at the January 7 committee hearing on GCE.

In fact, we are already seeing lenders take notice that the Legislature is considering GCE and — although we understand that the bill does not yet have majority support — build the possibility of GCE’s enactment into their underwriting analysis.  The result is less favorable terms for multifamily property lending than we were seeing before GCE was on the Legislature’s agenda.

Should it become law, GCE would likely be challenged on multiple constitutional grounds.

The United States Supreme Court recently held that a state regulation compelling property owners to permit certain individuals access to real property for three hours per day, 120 days per year was a per se physical taking for which just compensation is required.   If requiring such limited access to real property is a physical taking requiring just compensation, then requiring perpetual occupancies and rendering it impossible to remove buildings from the rental market must also be an unconstitutional taking.

In addition, the United States Constitution’s Contract Clause provides that “no state may pass a Law impairing the Obligation of Contracts.”  GCE, however, impairs the obligation of contracts in that it impairs a lease or rental agreement for a defined period at the conclusion of which the tenant or occupant must vacate, and instead confers perpetual occupancy rights.  While temporary contractual impairments are more likely to be upheld in the face of Contract Clause challenges, the courts view permanent impairments like those occasioned by GCE far more skeptically.

As indicated, our current understanding is that GCE does not yet have majority support in the New York Legislature.  Additionally, Governor Hochul has been noncommittal on GCE and has not mentioned it in public appearances.  Nevertheless, given that 2022 is an election year and that the bill has a fervent and motivated base of support, we expect an effort to push GCE at some point during the current legislative session.  While industry representatives are working to oppose the bill because of its potential deleterious impacts across the real estate industry, we recommend that owners also contact their elected representatives to register opposition to GCE and detail the negative effects it will have on their properties and on New York State more generally.

Featured Story #2

NYC Affordable Housing; The End of 421-a and the future of housing incentives

by Daniel M. Bernstein, Member, Rosenberg & Estis, P.C.

New York City needs more housing and more affordable housing.  The 421-a property tax exemption program, currently the single most important program for NYC housing production, will expire on June 15, 2022, and is not expected to be renewed.  Now is the time to establish a new and improved program to incentivize construction of rental, coop and condominium apartments, on terms that deliver real public benefits (affordable housing, construction jobs, building service jobs) and which offset the considerable expenses of developing housing in NYC (a reasonable property tax exemption), all without requiring any cash outlay by government.

421-a Is Ending

Developers of new residential properties in New York should act now to lock in tax incentives provided under the city’s current 421-a program a/k/a The Affordable New York Housing Program or “ANYHP” before they expire on June 15, 2022.  NYC needs the uninterrupted residential developments, including critically important affordable housing units, that are incentivized under this program.

421-a of the Real Property Tax Law was first enacted in New York on July 1, 1971, to provide tax exemptions for any new construction on under-utilized or vacant land. The successful program has promoted the construction of nearly half of all new residential units built in New York since 2010, and some 200,000 apartments remain affordable today because of the program.

The program has been renewed in various forms several times since it was first established, the last time in 2017 following a 16-month gap which made it nearly impossible for developers to underwrite or build mixed-income housing. The creation of affordable homes by private developers virtually ground to a halt before 421-a was re-enacted as ANYHP with the addition of a benchmark construction labor agreement (for very large projects) for the first time in the program’s history and with a requirement that every project include a significant percentage of affordable units.

Now, ANYHP is about to sunset, and without a renewed version, history could repeat itself at a time of critical need for affordable housing.

Gov. Hochul’s Proposal: Affordable Neighborhoods for New Yorkers (“ANNY”)

This Month, Gov. Kathy Hochul proposed legislation to replace the sunsetting program. However, legislators have a history of allowing the 50-year-old incentive for affordable units in new ground-up developments to expire without replacement.

That’s why Gov. Hochul should be applauded for acting so early in the legislative session to propose replacing 421-a with a proposed version – Affordable Neighborhoods for New Yorkers, or ANNY for short. ANNY adds a new section 485-w to the city’s Real Property Tax law, replacing and updating aspects of the expiring 421-a program.

ANNY provides critical property tax incentives for residential developers to build affordable housing and does so with several key differences from the expiring 421-a program: For rental projects, compared to the expiring 421-a program, ANNY incorporates deeper affordability requirements with more units affordable at lower rents and income levels and it eliminates affordable rental project options above 90% of NYC’s area median income.  ANNY also ties the length of the affordability period to the size of the development – larger rental projects with 30 or more units would be required to maintain affordable units permanently while smaller projects would retain affordable units for 35 years. The new proposal also maintains construction worker pay protections from 421-a and redefines neighborhoods most in need of more affordable housing options as Prime Development Areas (PDAs). ANNY also contains an option for 100% affordable homeownership projects to receive a property tax benefit — much more useful than the current 421-a program option for homeownership projects.

Although ANNY is not without issues, Gov. Hochul has advanced a replacement program that promotes deeper affordability while balancing key provisions that justify participation by developers. ANNY asks more of developers than the current program, but it is certainly something that New York developers could rely on to underwrite their new construction projects.

It is vital that Gov. Hochul, the State Legislature and Mayor Eric Adams unite in the effort to replace the expiring 421-a program with incentives for new construction as well as for the conversion of underutilized hotel and office space into new housing. Without ANNY or a similar program, developers cannot afford to build multi-family rental housing with a significant below-market, or affordable, component on a scale New York needs to address its housing needs. Developers, along with their lenders and other stakeholders, need certainty to invest, and any gap in the program will undoubtedly disrupt the pipeline of residential projects, starving the city of new housing and new affordable housing at a time when it is struggling to rebound from the worst global crisis in recent history.

The coronavirus pandemic has laid bare the shortcomings of New York’s expensive and highly regulated housing construction environment.  The failure to replace the 421-a tax abatement would further exacerbate the crisis. Unless the Legislature wants housing construction to stop after June, a replacement program is needed. Without providing incentives that acknowledge developers’ costs and which ask for a reasonable public benefit (affordable housing and labor considerations), many developers will simply stop purchasing development sites, applying for new building permits or developing new housing.

Next Steps:

We are still some months away from NYS legislative approval of ANNY, or indeed any other iteration of the current 421-a abatement. In the meantime, the introduction of ANNY offers a glimmer of hope that there will be a viable residential tax incentive program that strikes a balance for both developers and affordable housing advocates.

Reasonable incentives from government can and should be used to spur private developers to build more housing and to help provide just what Gov. Hochul intended: affordable neighborhoods for New Yorkers.

Daniel M. Bernstein is a member and leader of the Rosenberg & Estis Tax Incentives & Affordable Housing Department. Mr. Bernstein’s practice involves affordable housing and urban development issues in New York, obtaining property tax exemptions and abatements, development rights bonuses and incentives / zoning requirements for New York City projects.