Forever a Zero-Sum Game? - by Michael Ferruggia

Over the past several years, New York landlords, developers, investors and lenders have been realizing the impact and market disruptions affected by the Housing Stability and Tenant Protection Act of 2019 (HSTPA). This sweeping legislative initiative is an historic expansion of tenant privileges across the state. Critics claim that the added cost of compliance with the HSTPA and its reformation of the eviction process has driven many investors out of New York in search of more secure, passive income, real estate opportunities.

Ann Korchak is Board President of Small Property Owners of New York (SPONY), a coalition of New York property owners. SPONY, in close concert with other industry organizations such as the Real Estate Board of New York (REBNY), the Rent Stabilization Association (RSA), and the Community Housing Improvement Program (CHIP), to name a few, lobbies “law-makers and in the media about sound housing policy that won’t… put us out of business,” Korchak says. She stresses that many SPONY members are small, “legacy owners with multi-generational family businesses” that simply cannot withstand “the regulatory and compliance obligations (which are) just getting more and more complex.” She admits that, since the enactment of the HSTPA, many property owners have simply waived a white flag, decrying “That’s it! I’m done (with New York).”

But not all agree. Pilar Moya -Mancera is the Executive Director of Housing Help, Inc., a “tiny but mighty counseling agency” that works both “with tenants and… with the small… ‘mom and pop’ landlords of Long Island.” To her, the HSTPA “is not unreasonable.” Nor does she correlate the enactment of the HSTPA with the exodus of housing investors from New York. Rather, the period following the HTSPA “was the perfect time to (sell) because (landlords) were getting so much more for their house(s).”

Data does appear to support Moya-Mancera’s position. According to the New York State Association of REALTORS®, the median sales price of homes throughout the state was $299,000.00 in June of 2019 when the HSTPA was enacted. In June of 2021, however, this figure increased to $385,000.00; an increase of almost 30% in just two years. 

Regardless of causality, many investors did, in fact, exit New York. Others, those that possessed the business sophistication and financial stability to do so, instead pivoted. Adjustments to both short and long-term investment strategies and, in some instances, overall business models, were employed to compensate for the added cost of compliance with the HSTPA, its incumbent landlord obligations, and potential liabilities.

Unfortunately, not all these pivots are necessarily desirable or, for that matter, in keeping with the legislative intent of the HSTPA. Korchak claims that such legislation “definitely (serves as) a disincentive, especially in the rent-stabilized stock,” for landlords to invest in either maintenance, improvement, or renovation of rental properties. In fact, she adds that governmental forces are so big that the smaller guys are getting pushed out because government interference in business; in trying so hard to over-regulate… and over-legislate… destabilizes the smaller owners and if it’s not the big corporate investors that come in… (it’s) some community land trust or other corrupt, third-party non-profit."

The pivots do not stop there. Landlords have since come under much fire from tenant activists for intentionally refraining from placing vacant units back on the rental market. This practice is known as “warehousing” and it is relatively easy to quantify this trend within the rent stabilized sector. In 2019 there were 927,753 rent stabilized apartments registered with the New York State Division of Homes and Community Renewal. In 2021, this number decreased to 857,791, a difference of 69,962 fewer apartments in just two years.

Nevertheless, once landlords began to appreciate the full scope and reach of the HSTPA, they could attempt to make moves to compensate… or one would think. What no one, not even the most seasoned, well-positioned investor, could anticipate however was that, within six months of the HSTPA being signed into law, a global pandemic would wreak havoc upon the entire fabric of society as we know it.

The world-wide death toll, economic loss, stunted development opportunities, and long-term emotional damages caused by COVID-19 are, quite simply, incalculable. Viewed within the microcosm of the real estate markets however, one could attempt to quantify the financial costs of the resulting lockdowns, mandates, urban-flight, expanded entitlement programs, continuous states of emergencies, and ever-extended eviction moratoria. Such a task would be monumental to say the least. Suffice it to say that even the most conservative of social economists would conclude that the figure would be well into the trillions. So much for sophisticated investment strategies and positioning.

Undoubtedly, the “mom and pop” investors and the “legacy owners” of whom Korchak spoke were hit hardest within this microcosm. Ill-positioned to withstand both new and unforeseen challenges, many found themselves defaulting on mortgage obligations and frenziedly trying to navigate a whirlwind of COVID relief and forbearance programs. When the last eviction moratorium was finally lifted well over a year later, still more were faced with unmanageable court dockets and seemingly limitless “COVID defenses” asserted by tenants. Many landlords resigned themselves to, at their own cost and expense, negotiating voluntary surrender agreements also known as “cash for keys.”

The percolating tensions inherent in landlord-tenant relations are neither new nor subtle in New York. On the one hand, landlords are incentivized to raise rents in an effort to mitigate both the seen and unforeseen costs of doing business. On the other, tenants and tenant advocacy organizations clamor for lower or at least stabilized rents. According to Moya-Mancera and Housing Help, Inc., there exists a severe and urgent “housing crisis” throughout the state. “The need for affordable rental housing has only been exacerbated in the wake of COVID, the economic downturn, and rising inflation.” Can an equitable balance in the “push-pull” relationship between landlords and tenants ever be achieved? Or is it simply a zero-sum game?

To answer that question, the rules of the game first need to be clearly defined. Yet, the sheer volume of proposed bills directly relating to the landlord-tenant relationship and introduced in Albany this past legislative session alone is quite telling. The rules may be changing even still.

To some like Moya-Mancera and Housing Help, Inc., these “regulations don’t matter (much) because… being a landlord is more profitable now than it has ever been before.” Conversely, Korchak of SPONY cautions that if some of these bills were passed, they “definitely” would result in still more landlords divesting or repositioning their New York holdings because “income will not keep up with expenses.”

Here, the data seems to support the latter position. For the same period of 2019 through 2021, median rental prices throughout the state increased only 10-11.5% according to rentdata.org. The variance is dependent upon comparable square footage.

So where is that “sweet spot” where landlord and tenant interests are equitably balanced? Is it that governmental overreach is simply a systemic and unavoidable reality in coastal environs? Or is it that the “public interest” (assuming one accepts the concept) overrides private profit motives and property rights and therefore justifies such a level of legislative oversight?

Even Korchak of SPONY concedes that: "no regulation is not the answer… There are health and safety concerns (to consider). So, there is room for regulation. But… this idea that ‘you shouldn’t be making money off providing housing (because) it’s a human right,’ as opposed to ‘it’s a right to… enter into a contract for housing’ (imposes on landlords) the burden to carry (tenants and does not compensate) for the services that we are providing.”

To Moya-Mancera however, housing is “both” a human right and a right to contract. She admits that: "Albany can to a better job… in making legislation suitable for the multifamily landlords and the small (‘mom and pop’) landlords. I think there should be two different types of legislation. Legislation for five units or more (and different laws for) one to four units. I think that’s a big deal, that Albany is treating all landlords (the same)."

Perhaps Senate bill S4547A is a step in just that direction. This comprehensive bill would, if enacted, require all local municipalities, to establish and maintain ordinances, procedures, and appeal processes governing “Accessory Dwelling Units.” These municipal ordinances would be subject to the review and final approval of the New York State Division of Homes and Community Renewal. What’s more is that this bill establishes the Low and Moderate Income Homeowners Program which would effectively subsidize, through favorable lending programs, the cost of building such accessory dwelling units. These lending programs are to be funded through the state’s fiscal year housing program and would require program participants to offer “rent at a below-market rate for a period of fifteen years.”

Has Moya-Mancera identified the solution to the housing paradox; a different set of rules for differently positioned landlords? Will that achieve the proverbial “sweet spot” that is equitable to all? For her, it goes without saying. When “a tenant doesn’t pay the rent… two households are at risk of losing their home; the tenant as well as the homeowner.” We need to implement appropriately measured policies “to protect them both... It is everyone’s problem,” she says.

To do so, the New York State legislature cannot overlook the broad scope of interests that may be affected by over-reaching, ill-conceived, partisan legislation. For example, Korchak of SPONY warns that, should “Good Cause Eviction” (S3082) become the law of the land, the “uncertainty of actually being able to occupy a piece of property that you buy (becomes) a real problem.”

Perhaps Moya-Mancera of Housing Help, Inc. summarizes it most appropriately: "It’s both (landlords and tenants) coming together and figuring out what is fair. To solve this housing crisis, we need to be pro-landlord and we need to be pro-tenant. Otherwise, we’re not going to solve this crisis."

Is our legislature sincerely listening? With such lawmakers as New York State Senator Jabari Brisport, a member of the Democratic Socialists of America, in office, that appears dubious at best. According to Brisport, there should be no private ownership of rental housing whatsoever. Across the rental board, housing should be state owned, operated, and administered since, for him, “it’s clear that the market cannot make affordable housing.” What Brisport fails to consider however is that it may not be the “market” that creates barriers to affordable housing, but rather overreaching government interference with it.

That equitable “sweet spot” for which Moya-Mancera and Korchak advocate is simply unattainable without earnest dialogue, debate, and compromise. Only New York voters have the power to demand that that takes place. Until a philosophical renaissance is embraced in the halls of our capital, the tensions between tenants and landlords (at least for as long as they exist in the state) will sadly continue to percolate.

Michael Ferruggia is a partner of the law firm of Bruno, Gerbino, Soriano & Aitken, LLP, Melville, NY.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer(s), clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.