A major progressive-backed overhaul of rent regulations continues to cause chaos in New York City's real estate market, following the issuance of new regulatory guidance that bans real estate brokers from charging fees to the tenants they find for landlords.
It's common practice in New York City for landlords to hire real estate brokers to fill empty units. These brokers will then charge tenants a fee, which typically amounts to 15 percent of an apartment's annual rent.
In June 2019, state lawmakers passed a major update to the state's rental regulations that strengthened existing rent control laws, capped security deposits and apartment application fees, and also banned landlords from charging other fees at the beginning of a tenancy.
Yesterday, news broke that New York's Department of State had unexpectedly issued regulatory guidance interpreting that latter provision of the June rent law to ban the practice of applying these brokerage fees to tenants.
The industry has so far reacted with a mix of panic and confusion.
"That's insane," said real estate lawyer Bruce Cohen to The Real Deal. "It's an all-hands on deck thing because this came out of left field," a representative of the Real Estate Board of New York (REBNY), a trade association, told The New York Times, warning of "dire" consequences for the industry.
Without the ability to pass brokerage fees onto tenants, landlords are saying they will either just raise rents or forgo hiring brokers altogether. The first option is only available to the owners of unregulated, market-rate apartments in the city. Owners of rent-stabilized units—where rent increases are set by the city and landlords are limited in their ability to pass costs onto tenants—will have to find their own renters or absorb the full cost of these brokerage fees.
"Owners in rent-stabilized apartment units are going to have to make really tough decisions about whether they even invest in brokers, so you are putting the broker industry in huge jeopardy," says Jay Martin of the Community Housing Improvement Program (CHIP), which represents small landlords.
That would obviously be bad for the brokers themselves. It would also be bad for tenants and landlords, says Martin. The entire reason a brokerage industry for apartment rentals exists in New York City, he tells Reason, is because landlords often lack the financial or logistical bandwidth to show hundreds or even thousands of units to potential tenants.
"It's not really a situation where small building owners can just put a for rent sign out on their door. This is a situation where brokers serve a vital need as the link between tenants and owners," he says.
The sudden prohibition on charging renters brokerage fees is only the latest disruption landlords have experienced as a result of the state's new rent regulations.
That legislation also limited landlords' ability to pass on the costs of apartment improvements to tenants through rent increases. A survey of CHIP's members found 69 percent of them had decreased their spending on renovations by 75 percent or more.
Other provisions in the law revoked building owners' right to deregulate rent-stabilized apartments (charge market-rate rents) once rents reached a certain level. That's resulted in a near 40 percent drop in the sale of rent-stabilized buildings, and steep declines in these buildings' value. (There's some evidence that building sales are recovering slightly in response to the collapse in building values.)
"If the government keeps doing this, we are going to see a rapid insolvency of the housing market in New York state," Martin says.
The Department of State guidance, which was issued last Friday, is just that; guidance. That means the department can reverse it unilaterally, an outcome Martin said CHIP will be fighting for. RENBY has said that they are considering lawsuits to reverse the guidance.