for rent sign

NY city is changing the real estate game implementing a ban on the NYC rental broker fee and making a host of other changes.  At the same time New York leads all U.S. metro areas as the largest net loser with 277 people moving every day.  What are the new laws?  How are they impacting real estate?  What does this mean for the rest of the country?  Will your state be a winner?


What is in the new law?

NY is leading the charge on trying to reduce housing costs for residents, their primary target is regulation of multifamily housing.  Their primary tool to help with rising costs is to regulate rent increases.  As a result, NY has passed a series of laws to help better regulate the apartment industry to force the market to adopt lower prices.

  1. Cap the increase in rents to 1.5% per year (covers over 1 million apartments)
  2. Outlaw landlords from banning certain tenants, for example if a tenant damaged a prior unit this couldn’t be taken into consideration for the new rental unit
  3. Require 30 days to cure defaults for tenants
  4. If you’re over the age of 62 or disabled, you may be able to get a rent freeze.
  5. Renters no longer able to be charged broker fees
  6. It also included a number of other requirements in regards to heating seasons, bed bugs, notice on increases, etc…


Elimination of broker fees:

I thought this was a perplexing part of the law and uncertain how/why it got into the mix.  Essentially the law bans brokers from charging tenants fees.  In NY the majority of apartment rentals are done through realtors, these realtors get a fee up to 15% off the first years rent.  By banning realtors from charging these fees, the landlord will pass these on somehow.  Think of how cars are bought and sold, when you buy a new car you don’t pay a broker to buy the car, the dealership bakes this into the cost of the vehicle.  The same thing will occur in real estate with the larger apartment owners bringing staff in house as opposed to using a third party.   Unfortunately many real estate brokers are out of business that specialized in Apartment rentals.  It does lead to the question can NY also ban realtor fees on commercial leases or sales?  Lawsuits have already been filed so the courts will get the final say.

Distorts the market

If you are the tenant, all of the above sounds great.  If you are a realtor or property owner you are less than pleased.  Unfortunately, there is no free lunch and there will be economic consequences as a result.

The downside:

Decades of bipartisan research tell us that controls on rent suppress real estate values, diminish property taxes, and reduce investments in housing. A 1988 Peat Marwick study estimated that rent controls resulted in a $4 billion loss of taxable assessed residential property in New York, depriving the city of $370 million in annual property taxes—the equivalent of more than $800 million in today’s dollars. A 1994 study in Berkeley, California, a city of 110,000 residents that had rent regulations for more than a decade, found that the city lost some $1.6 million a year in property taxes, the equivalent of $3 million in today’s dollars.

Rent regulation has insidious consequences. Unable to recoup their costs, landlords invest less. Conditions in buildings, especially those with lower-income tenants, worsen. Higher-income renters spend their own money on upkeep, and the additional costs wipe out much of the money they save from cheaper rent. “The benefits of rent control, from the tenant’s standpoint, are likely to decline steadily over time,” a 1997 study by the Department of Housing and Urban Development found.

Rent controls also interfere with the dynamics of the housing market in more subtle ways. Because discounts under rent regulation increase the longer a tenant occupies an apartment, they create an incentive not to move that grows stronger over time. The result: little turnover in the housing stock. As the U.S. Department of Housing and Urban Development reported recently, “Even moderate rent-control ordinances reduce mobility noticeably, thereby leading tenants to occupy units whose characteristics are not well-suited to their current circumstances, such as family size and job location.” That’s why so many elderly singles in New York live in spacious apartments while families with two or three children live doubled up with friends or relatives.


Will your state be a winner?

New York’s policies (taxation, rent control, etc..)   have led to scores of people are leaving the New York City area behind every day. New York leads all U.S. metro areas as the largest net loser with 277 people moving every day — more than double the exodus of 132 just one year ago.  This large exodus creates opportunities for Sunbelt states and the mountain West.


Why the move?

Residents are fleeing high cost areas for lower cost locals like Denver, Atlanta, etc… This trend will likely accelerate as residents leave high cost areas as taxes will have to increase in order to make up for the loss in revenues.  The “beneficiary” cities highlighted above will continue to thrive.


Real estate experiment will end badly

We’ve seen a hundred times how the “experiment” in New York will play out.  Unfortunately, instead of creating affordable rents the laws will merely stifle new supply coming on the market creating a downward spiral. 

On the flip side economics is like a bathtub that relatively quickly levels out.  In this case migration is the economic leveling force as high earners migrate to alternative lower cost areas.  Look for this trend to only accelerate in the future with states like Colorado, Georgia, Florida, and Texas large beneficiaries of this economic leveling.

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.


Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all we need is our simple one page application (no upfront fees or other games).


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