This week's guest: Kara Rakowski Partner & Co-Chair of Administrative Dept. Belkin Burden Goldman, LLP

0:00 Speaker 1 Good morning. This is Michael Stoler for the Stolar Real Estate Report on the Cats Around Table. What’s going on in the real estate market with regard to the legislation, what’s happening with the four twenty one a’s what’s happening with items like MIMA and other topics good cause of viction.

0:13 I don’t know the answers, but today I brought the expert over here. I have a partner who is the co chair of the firm Administrative Lord Department at Belkin, Burden and Goldman.

0:23 Speaker 2 Carol Ratowski, Hi, good morning.

0:26 Speaker 1 Thanks for being here. So let’s talk about the end of the year. A lot of the legislation was pending. What’s really happening.

0:34 Speaker 2 Well, in June, the legislature has two bills that were extremely damaging to owners and they have been sitting there waiting for the governor to act. We were hoping that she would not act and just let them die.

0:52 Speaker 1 What effect to owners? You said they were drastically having an effect.

0:56 Speaker 2 Just a couple of highlights under Rent Stabilization Code, If prior to the enactment or the passage of these bills, if you had two apartments that were vacant and you combine them.

1:11 Speaker 1 That was the guard father perversion.

1:13 Speaker 2 It was the Frankenstein or.

1:14 Speaker 1 The Frankenstein Okay, god father Frankenstein.

1:17 Speaker 2 If you combined two vacant units, you were able to then charge a first rent, and that first rent would be subject to stabilization, but you were able to then bump up the rent to what market would bear at that point. And most of these units have been vacant for either occupied by long term regulated tenant for decades

1:42 or vacant for a while, So to be able to create new housing, new quality housing, was very important, and it also gave the owners the ability to now recoup some of what they’ve lost over the years. You know, these these market rate units, whether they’re deregulated units or they’re just market rates stabilized, that’s what subsidizes the regulated

2:07 units in the building. And if you’re not able to do that, and you’re not able to bring rents up to at least a portion of the building.

2:15 Speaker 1 Right, I mean taxes, insurance and.

2:17 Speaker 2 All these insurances off the wall, taxes, water sewer, everything. So that that was a provision which owners relied on. And under the new legislation there is going to be now a different methodology for calculating that first rent and what that means. So currently, if the bill is passed is signed without amendments to that section, then for if

2:44 you have two rent regulated units rent stabilized and you can bind them, you are only able to charge the last legal rent of each of those units combined plus any improvement increase, which is a maximum of either eighty three dollars or eighty eight dollars.

3:01 Speaker 1 And it’s even pay for the plumbers to just walk into the building.

3:05 Speaker 2 It’s not even correct. I mean, I had a client. I was on the phone this morning with a client who said to make the cost of renovating a recently vacated unit that had been occupied for thirty years, although maintained, it needs to be updated, and the cost of that was a minimum of sixty five thousand dollars. And I

3:25 had to tell him that because his building has more than thirty five units in it, the maximum he’s going to get is eighty three dollars a month. So does it pay for owners to do those renovations. No, it no longer pays for owners to do those renovations. The problem is is that owners are not the only ones

3:44 that are losing on a provision like that, So are the tenants. So are the tenants. You have owners who are going to be forced to make choices. Just like prior to the enactment of the HSTPA in June of twenty nineteen, when they were proposing changes to the major Capital Improvement increases, we warned that there is going to

4:08 be less capital improvements performed because it’s not it will no longer be economically feasible for owners to take on those huge projects. And that’s exactly what happened. I mean, there’s some owners that are still filing MCIs. We do file them in my firm, but they’re much fewer and they’re only on necessity items. So you have owners who

4:33 are taking on repairs and regular maintenance and trying to you know, drag things out as long as possible, as opposed to replacing items that have exceeded their useful lives. So that’s just this is just a continuation of that.

4:50 So you have the issue of recalculate re calculating the method for the calculation of the first rent, right you. So that’s one issue. Then there’s the issue of substantial rehabilitation. Buildings that have been substantially rehabilitated after January first seventy four are exempt from stabilization, except for those units that remained occupied up until now. Owners are not required to

5:23 file for an application for an order. Excuse may file an application for an order granting the sub rehab. It’s by operation of law. If you do the work, it’s the building a sub rehab There are going to be substantial changes. Now owners are going to have to file for an order within a year of the project being completed.

5:47 That is definitely going to slow things down. Those applications at DHCR typically take years to process. In the meantime, the owner there could be opposition to it. The owner has spent a fortune of money. They can’t keep the building vacant. The buildings will have to be occupied, and it’s going to create issues with tenants. In addition, there’s

6:15 the possibility that buildings that were sub rehabbed years ago. In fact, the current version of the bill that was signed by the governor has a provision in there requiring that all buildings that had been sub rehabbed and owners required to file for an order from DHDR. So if you the current the current bill that was signed states

6:37 that if an owner of subreab that building twenty years ago, or a border building that was sub rehabbed twenty years ago, there have been five owners since within sixty within six months from the effective date of the statute, an owner would be required to file an application.

6:56 Speaker 1 Yeah, So my question is why would an owner even get involved in this today? Why would people go out and buy new buildings now, I mean not built in new buildings, but you know, buy investment sales property.

7:08 Speaker 2 Well, I mean that’s a good question. I mean, the bottom line is that New York is still unique and real estate is cyclical. And if you look back to when I was a child in the seventies to where we are now, you can see the pattern. You can see what happened to housing over the years and how

7:30 it’s come full circle. So I think that there are owners out there. I know there are because I deal with them on a daily basis. There are owners out there who are in it for the long term, and they know that there are ups and downs, and they are certainly discouraged as to what’s going on now, but

7:48 they are invested in New York. And then you have buyers who had always wanted to get into New York but couldn’t afford to do so, and they’re seeing this as an opportunity now, especially since interest rates hopefully will be coming down a bit. So we we have definitely seen renewed interest since the Fed has announced interest rates

8:11 coming down in December almost immediate.

8:14 Speaker 1 Let’s talk about good cause inviction. What’s your thoughts and what is it?

8:20 Speaker 2 So? Good cause of fiction would apply to all units that are not subject to rent regulation currently, so any free market unit uh and and the drafts of the bills that have been floated out there over the past several years would not exempt, for example, a condominium unit that you own and that you’re renting out so all

8:46 so any free market residential units would be covered, presumably at least under the drafts that that are out there. Now. It’s there. It hasn’t passed here in New York’s state statewide yet. There are some jurisdictions upstate, smaller jurisdictions that have passed it. There are jurisdictions outside of New York that have passed it. New York has very heavy stringent

9:14 rent laws to begin with. I’m hoping that the the existing laws that are there will forestall or prevent the signing of good cause of diction, but ultimately it may happen. What about.

9:36 Speaker 2 The mayor’s mayors the new program. It’s so mayor floated out there this potential new program which they’re seeking comments on now, and it’s his attempt to to bridge the gap and bring back some form of tax incentive for owners to build, just like we said with HSTPA. We said the same thing when it came to Fort twenty

10:05 one A. If you don’t allow Fort twenty one A to be renewed or something to take its place, you’re going to see no buildings being built. It is right now. You see build developments that have been planned for years where they had their footings in the ground. They made it into the four twenty one A program just in time.

10:24 But you’re not going to see many ground up new housing until they pass something like this last point.

10:31 Speaker 1 What’s happened. What’s your thoughts on the conversion of office buildings through residential.

10:38 Speaker 2 I think that for people who don’t understand real estate and don’t understand what the process would be to convert the space, because there is a need for affordable housing here, no one is questioning that the problem is with going from commercial to residential, there are so many different systems that have to be installed to make the to make

11:03 the building legal for residential use. Aside from changes and zoning, let’s put all that aside. I’m just talking the physical structure that economically it doesn’t make sense for most most buildings, and I think that’s why you see that that hasn’t caught on as quickly as as you know those who have floated it out there would hope.

11:26 Speaker 1 Okay, I’d like to thank you so much for being here, and now I understand why everybody needs a good administrative lawyer who understands the legislation. See you next week.

11:36 Speaker 2 Thank you, thank you,