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Unintended consequences?

NYC Rent Regulation: Rent Control/Rent Stabilized, DHCR Practice/Procedures

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Unintended consequences?

Postby BubbaJoe123 » Wed Aug 28, 2019 8:59 am

Was thinking about the new rent laws, and while I understand the rationale for most of them, at least one area seems likely to create some unintended consequences: the preferential rent restrictions.

A significant part of the rationale for eliminating the vacancy increase for rent-stabilized apartments was to eliminate the incentive for landlords to push out a tenant to get a big rent step-up, and to prefer tenants who are likely to be short-term.

Eliminating the ability of landlords to raise preferential rents to legal rents until the current tenant departs seems to create that incentive all over again, however.

Also, I would think the new preferential rent rules create at least some incentive to warehouse apartments if rents are weak, rather than potentially get locked into a low rent for a long-term tenant. A similar problem exists in commercial leasing, particularly in areas where real estate values are rising rapidly, given the length of commercial leases, and it leads to vacant storefronts.
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Re: Unintended consequences?

Postby TenantNet » Wed Aug 28, 2019 10:00 am

Spoken like a true landlord.
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Re: Unintended consequences?

Postby BubbaJoe123 » Wed Aug 28, 2019 7:25 pm

Not a landlord, never have been. Just someone who believes that people follow the incentives set out for them.
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Re: Unintended consequences?

Postby hellskitchener » Sat Sep 28, 2019 11:41 pm

Is the warehousing of rent regulated apartments legal?
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Re: Unintended consequences?

Postby TenantNet » Sun Sep 29, 2019 3:05 am

Meaning keeping a unit off the market? Yes, that's not illegal. However, for coop conversions, there are restrictions on vacant units for non-eviction plans. But for regular rentals, AFAIK LLs can keep units off market.

There's been talk that some LL's want to keep units off-market and wait for an adjoining unit to open up so they can combine units and declare a "first rent" that would not depend on a RS history. There is also talk on how to restrict that from occurring.

Stytown and some other large LLs were talking about that, but some have relented to political pressure. Stytown stand to gain a lot from the city based on the sale agreement from a few years ago. It depends on the LL and location. Are you seeing this in HK or at 350?
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Re: Unintended consequences?

Postby hellskitchener » Sun Sep 29, 2019 5:51 am

A very, very long-time RS tenant with a 2 Bedroom apartment died recently. Another RS tenant who just had a baby just inquired about the now vacant larger unit, and was told, in writing by both the management company and the super that "Ownership has decided not to put on the market."

We know that with the new rent laws, the warehousing of RS apartments is happening because LLs are hoping to get the laws overturned through the courts. However, our landlord has also been crying poverty in the last few years, and illegally doing short-term rentals with vacant units through underground brokers, (it's been difficult to track and report them). Our LL also has 2 major violations (a 3rd is in the works) of the Certificate of Occupancy (thanks to the work of the TA), and several other DOB violations, and they are unable to sell, or re-finance the building.. and with the restrictions of the Special Clinton District, are highly unlikely to achieve a revised CO.

We think the only way out for the LL is for the building to be converted, but we suspect that he is just going to do short-term rentals on this vacant unit to make more money than they ever could get on re-renting. It's a shame that the package of new laws didn't include restrictions on warehousing at least RS, or RC apartments.
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Re: Unintended consequences?

Postby Sky » Sun Sep 29, 2019 10:33 pm

I don't know about all the permutations regarding running a residential real estate business, but I was told that when a LL keeps a commercial space vacant it's often to reduce his taxes. In a typical building with a ground floor commercial unit and several floors of residential units above, the commercial space may rent for many X what the residential units rent for, possibly more than the value of all the residential units combined (and/or with the LL also inflating the value of the commercial space) ... in such a scenario if the LL keeps the commercial space vacant he can claim a loss and offset having to pay any income taxes, thus it's profitable to keep the unit vacant.

??
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Re: Unintended consequences?

Postby TenantNet » Sun Sep 29, 2019 11:28 pm

Sky, this has nothing to do with commercial spaces. It's a residential building. While (like some) it might have a doctor's office on the ground floor, it's not retail. I know the building and the local zoning (R8).
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Re: Unintended consequences?

Postby Sky » Mon Sep 30, 2019 4:04 pm

I realize that. Please refer to my qualifying prelude, "I don't know about all the permutations regarding running a residential real estate business, but I was told that when a LL keeps a commercial space vacant..."

Again, I don't know the permutations of running a residential real estate business and how warehousing and reporting losses impacts (+/-) the LL's bottom line after everything is factored in. My sense is that most people who are not in real estate, not running a real estate empire, and not privy to the sophisticated machinations employed, likely understand the industry in a naive manner as it's curated for broader public consumption.
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Re: Unintended consequences?

Postby BubbaJoe123 » Mon Sep 30, 2019 6:45 pm

Sky wrote:I don't know about all the permutations regarding running a residential real estate business, but I was told that when a LL keeps a commercial space vacant it's often to reduce his taxes. In a typical building with a ground floor commercial unit and several floors of residential units above, the commercial space may rent for many X what the residential units rent for, possibly more than the value of all the residential units combined (and/or with the LL also inflating the value of the commercial space) ... in such a scenario if the LL keeps the commercial space vacant he can claim a loss and offset having to pay any income taxes, thus it's profitable to keep the unit vacant.

??


There's no way that taxes can magically make keeping a unit (commercial or residential) vacant more profitable than having it rented. The only impact taxes can have is to lower the loss somewhat.

As an example (made up numbers), assume that a commercial property rents for $1000/month. The landlord pays $300/month in maintenance/property taxes/etc, and $500/month in interest. So, if the property is rented for $1000/month, the LL makes a $200/month profit. With a 25% tax rate, that's $150/month in profit after tax. Now, say the property is vacant. The rent is now zero. The expenses (300+500) don't change, so the LL is losing $800/month. Assuming the LL has other profitable properties, he can apply that $800 loss to offset taxable income from those properties, thereby saving $200 (800*0.25) in taxes. Still, the LL is losing $800-200=$600/month.

So why keep a property vacant? Number of potential reasons.

If it's a commercial property, they typically rent out on 10-year leases, so if the LL thinks that rents are likely to rise near-term, or wants to get a high-quality tenant, they might hold off. If it's a residential property, similar rationale (wait, and get a higher price), particularly if the LL can't get the full legal rent at the moment, and doesn't want to be locked into a lower preferential rent.

Another reason is that the LL wants to replace the building, and is in the process of vacating it, something which can take a really long time.
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Re: Unintended consequences?

Postby TenantNet » Mon Sep 30, 2019 7:00 pm

If the building has residential tenants - especially rent regulated tenants - it is difficult (near impossible) to empty the building in the near term.

That's why in zoning and planning, one looks at "soft spots" (just commercial) and non-soft spots (bldgs with RS tenants).
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