The Housing Stability & Tenant Protection Act Part 2: Where Do We Go From Here?
by James Nelson
New York, New York – Last month the Housing Stability and Tenant Protection Act of 2019 (HSTPA) was signed into law, rocking the New York commercial real estate industry. For the July edition of The Nelson Report, I’m going to take you through what happened, as well as the outlook for the industry through two podcast interviews with four experienced real estate attorneys. For Part 1, I interviewed two very accomplished landlord/tenant attorneys, Nick Kamillatos and Christina Smyth. For Part 2, I interviewed Douglas Heller, Counsel at Herrick Feinstein LLP who specializes in condos and co-ops, and Craig L. Price, Partner at Belkin Burden Wenig & Goldman, LLP who specializes in transactions.
I began Part 2 by asking Heller to clarify what HSTPA means for condos.
Essentially, Heller said, “They eliminated eviction plans. So you can't get rid of anybody who doesn't buy…Basically to convert [a rental building to a condo], you need 51% of the units to be purchased by tenants in occupancy.” As we discussed in Part 1, HSTPA has essentially “frozen” apartments in the rent stabilization system. Therefore, tenants with affordable rents will most likely continue to stay where they are because it is less expensive to rent than it is to buy; there is no incentive to buy in this market.
“Before vacancy decontrol, before luxury decontrol, when everything was regulated, it was a big negotiation to get a relatively small number of buyers [to convert to a condo or co-op], you had to lower your prices, you had to do all kinds of wonderful things just to get a handful of [tenants] to buy,” said Heller, “To get 51% well, there haven't been any eviction plans under the same requirements. So we know it's virtually impossible to get 51% [of tenants] to agree.” This will likely mean that the only new condos in the city moving forward are going to be ground up or conversions from older office or retail spaces. According to Heller, we won’t see any rentals being converted to condos or co-ops moving forward. Notably, there was no public forum prior to the passage of the law to discuss whether this made sense.
“Basically, the whole industry, as far as I know, was completely surprised,” said Heller.Price, who represents owners in the sale of their properties, said that many of his clients had been hoping to convert their properties to condos or co-ops to offset costs and afford the increase of real estate taxes. Because that avenue has been taken away, he said investors may have to look at other asset classes or avenues within the multi-family spectrum, such as 421-a, or Affordable New York, which were carved out of HSTPA in a clarification bill signed by Governor Cuomo after the law was passed.
“We've been advising clients to take a deep breath,” Price said, “Going to the litigation path is certainly something that the industry groups are going to do. How successful are they going to be? We don't know. But I certainly would advise clients that they take a deep breath and see where the market goes to moving forward.”
I asked Price if he thought banks would lend on rent stabilized buildings.
“I think they'll become a little bit more hands-on in that process,” and review a borrower’s records more closely,” Price said. “They will need to see how the market recalibrates in terms of the pricing of the fully-stabilized buildings and moving forward I think they'll factor in the fact that the rent will not meaningfully go up at all.”We’re hearing from lenders that they are willing to look at acquisitions where they’re still going to get a reasonable loan to value on an asset at the market price. However, loans that were predicated on a business plan of rolling over units, which can no longer happen, might have problems.
Price agreed and added, “I think when rates reset for some of these loans and their loan to value is reassessed as part of the reset process, we'll see some fallout there. But [banks] can see what's in front of them and they can take what the present is, and if the present is sufficient to meet their needs, then that'll be okay.”
I asked Heller about the likelihood of organizations like CHIP or RESA going to the Supreme Court to get HSTPA overturned. “Well, if a community wants to stop conversions, they can do it,” he said. “As far as I know, nobody's ever been able to satisfactorily challenge conversion requirements. Good luck.”
As of Monday night, several days after our interview, the Rent Stabilization Association and the Community Housing Improvement Program, along with seven individual landlords, filed a federal lawsuit alleging that the HSTPA violates the U.S. Constitution’s Fifth Amendment, according to The Real Deal. This includes a clause that bars taking of private property without “just compensation,” and the Fourteenth Amendment’s due process clause. The complaint argues that changes to the rent law deprive “property owners of their core rights to exclude others from their property and to possess, use, and dispose of their property.”