By Sharon V. Skolnik, Esq., Stempel Bennett Claman & Hochberg | Updated September 10, 2019
Governor Andrew Cuomo signed the Housing Stability and Tenant Protection Act of 20191 into law on June 14, 2019, which was amended on June 20, 2019, by a Chapter Amendment, to make certain technical corrections and was signed by the Governor on June 25, 20192 (collectively, the “HSTPA”). The HSTPA includes historic and extensive changes to rent laws in the State of New York. Some of the changes include new rules that impact rent stabilization, Affordable New York (421a), deregulation of units prior to HSTPA, co-op/condominium conversions, mobile and manufactured homes, changes that affect the ability of a landlord to raise rents to cover expenses or improvements, as well as other legal changes affecting the landlord/tenant relationship. The HSTPA was enacted to strengthen affordable housing and tenant protections and to make the rent regulations permanent.3
One of the changes instituted by the HSTPA affects the practice of landlords offering tenants preferential rents.4 A preferential rent is a rent that is lower than the legal regulated rent that can be charged by a landlord.5 Legal regulated rent is the maximum amount that a landlord can legally collect for a rental unit. For affordable housing rental developments and market-rate rental developments with affordable housing rental units constructed pursuant to Affordable New York (421a), the legal regulated rents for the affordable housing units are set by a state or local governmental agency6 based on unit size and a percentage of area median income.7 Area median income for all cities in the United States is defined, annually, by the United States Department of Housing and Urban Development (“HUD”).8 For units receiving federal subsidies under project based housing assistance payment contracts (“HAP Contracts”), the legal regulated rents are set by a state or local governmental agency based on a percentage of fair market rents (“FMRs”). FMRs are calculated and estimated by HUD, annually, for metropolitan areas defined by the Office of Management and Budget.9 Project-based Section 8 vouchers (“PBVs”) are administered by a state or local housing agency, which has the ability to allocate PBVs to a specifically designated unit in a project if the owner agrees to construct affordable rental units, rehabilitate affordable rental units or if the owner agrees to set aside a portion of the units as affordable rental units in an existing development and enters into a HAP Contract for those affordable rental units.10 HUD does not provide additional funding for PBVs.11 Both PBVs and tenant based Section 8 vouchers are funded from the same federal budget appropriation and federal regulations limit the amount of project based housing assistance subsidies to 20 percent of the amount of the Section 8 voucher program budget allocated to the state or local housing authority.12 Consequently, the allocation of PBVs to affordable housing rental projects by a state or local housing authority is very limited.
Prior to the enactment of HSTPA, landlords had the option to charge a tenant a preferential rent. Under the prior law and rules, a landlord could decide to terminate the preferential rent and charge the higher legal regulated rent when the tenant renewed the lease or when the tenant permanently vacated the unit, provided that the original written lease (the lease in which the preferential rent was first charged and all subsequent renewal leases thereafter) indicated the amount of the legal regulated rent and contained a clause stating how long the preferential rent would continue (i.e. for the term of the lease or the entire term of the tenancy).13 If the original lease contained this language, then the landlord had the option to raise the rent to the legal regulated rent at either: (i) the end of the lease term in a renewal lease; or (ii) upon the permanent vacancy of the unit by the tenant. The timing of the option to terminate the preferential rent depended on the preferential lease language included in the original lease.
The HSTPA changed the circumstances under which a landlord can elect to increase a preferential rent to a legal regulated rent on lease renewal by limiting that right to projects that receive federal project based rental assistance subsidies.14
Under the HSTPA the right of a landlord to increase the preferential rent to the legal regulated rent at lease renewal is restricted to units in buildings with rents set pursuant to:
“a regulatory agreement with a local government agency and which building[s] receive federal project based rental assistance administered by the United States department of housing and urban development or a state or local section eight administering agency, where the rent set by the federal, state or local governmental agency is less than the legal regulated rent for the housing accommodation.”15
After the enactment of HSTPA, landlords who offer a preferential rent must sacrifice the option to collect the legally regulated rent until vacancy, unless the unit is in a building: (i) that is subject to a regulatory agreement (i.e. an affordable unit); (ii) that has at least one unit in the building receiving federal project based rental assistance subsidies; and (iii) where the initial rent for the unit set forth in the regulatory agreement is less than the legal regulated rent for the unit.16
The likely result of this statutory change is that most of the owners of affordable rental units will no longer offer preferential rents unless the project receives federal project based rental assistance subsidies, since for projects without an allocation of PBVs, a preferential rent offered to a tenant can no longer be terminated and increased to the legal regulated rent upon lease renewal. Effectively, for buildings without PBVs, if a landlord enters into a lease with a lower preferential rent, the preferential rent will become the de facto legal regulated rent, with future rent increases limited solely to the applicable Rent Guidelines Board increases and any other increases authorized by law until vacancy.17
These statutory changes could have far-reaching impacts on one hundred percent (100%) affordable housing rental projects that do not receive federal project based rental assistance subsidies. Like all subsidies, federal project based rental assistance subsidies are limited. Due to their scarcity, the vast majority of affordable housing rental projects will not receive this subsidy. As a result of the new preferential rent regulations, owners of affordable rental units without PBVs are deprived of the use of an important marketing and stabilization tool. The ability to offer preferential rents enables owners to offer a reduced rent in order to quickly rent-up and stabilize a building where market conditions in a neighborhood make it difficult to locate qualified tenants at the full legal regulated rent. Without this tool, the rent-up process for buildings in those areas will take longer. This could negatively impact affordable housing rental projects by increasing financing and other costs. If a landlord opts to offer a preferential rent to accelerate the rent-up process, the inability of the owner to collect the full legal regulated rents until vacancy will likely upend future cash flow projections relied upon by the landlords and their lenders. Additionally, reduced future rental income could prevent the adequate funding of future reserves for these types of projects, which would have a direct impact on the future maintenance and operation of the building. Any of these impacts would make it even more difficult for a one hundred percent (100%) affordable housing rental project to be self-sustaining going forward. These potentially destabilizing effects appear to be an unintended consequence of the HSTPA.
On a brighter note, the Chapter Amendment added a provision that clarified the right of landlords to elect to increase a preferential rent to the legal regulated rent upon vacancy.18 This will allow an owner of an affordable housing rental building without an allocation of PBVs who entered into leases with a preferential rent both prior to and on or after June 14, 2019 to elect to charge the previously established legal regulated rent (as adjusted by the applicable Rent Guidelines Board rent increases and other increases authorized by law) upon the vacancy of such a unit.
Sharon V. Skolnik is a partner in the Real Estate Transaction Department at Stempel Bennett Claman Hochberg, P.C. where she concentrates her practice in real estate financing, development, acquisitions and sales of commercial and residential real estate, as well as cooperative and condominium law and real estate tax abatements. Ms. Skolnik represents institutional lenders in residential, multifamily and commercial financing transactions. Additionally, she represents developers and not-for-profit organizations in connection with the development and financing of affordable housing.
1 Housing Stability and Tenant Protection Act of 2019 A.8281/S.6458 (C.36 of the Laws of 2019).
2 Chapter Amendment A.8433/S.6615 – Part Q (C.39 of the Laws of 2019)
3 June 14, 2019 Press Release by Andrea Stewart-Cousins, New York State Senate Temporary President and Majority Leader, https://www.nysenate.gov/newsroom/press-releases/andrea-stewart-cousins/senate-majority-passes-strongest-tenant-protections
4 Housing Stability and Tenant Protection Act of 2019 A.8281/S.6458 – Part E (C.36 of the Laws of 2019).
5 See Division of Housing and Community Renewal Office of Rent Administration Fact Sheet #40 (October 2017) https://hcr.ny.gov/system/files/documents/2018/09/orafac40.pdf
6 For example, depending on the location of and the financing of the project, rents may be set by the United States Department of Housing
and Urban Development, New York City Housing Development Corporation, New York City Department of Housing Preservation and Development,
New York State Division of Housing and Community Renewal, New York State Housing Finance Agency, etc.
7 See 2019 New York City Area Affordable Monthly Rents, https://www1.nyc.gov/site/hpd/renters/area-median-income.page
8 U.S. Department of Housing and Urban Development, Office of Policy Development and Research, FY2019 Median Family Income Documentation System, Median Family Income Calculation Methodology (April 24, 2019), https://www.huduser.gov/portal/datasets/il/il2019/2019MedCalc.odn
9 Multidisciplinary Research Team, U.S. Department of Housing and Urban Development, Office of Policy Development and Research, Deriving Local Trend Factors for Fair Market Rent Estimation (March 19, 2019)(prepared by 2M Research), https://www.huduser.gov/portal/sites/default/files/pdf/MDRT-LocalTrendFactor.pdf
10 See PBV Regulations (24 CRF Part 983). See also, PIH Notice 2017-21 Implementation Guidance: Housing Opportunity Through Modernization Act of 2016 (HOTMA) – Housing Choice Voucher (HCV) and Project-Based Voucher (PBV) Provisions.
11 See PBV Regulations (24 CRF Part 983.5(b)(2)).
12 See PBV Regulations (24 CRF Part 983.6(a)).
13 Emergency Tenant Protection Act of 1974 (C.576 of the Laws of 1974), as amended by Section 11 of Part A (C.20 of the Laws of 2015). See also, Division of Housing and Community Renewal Office of Rent Administration Fact Sheet #40 (October 2017) https://hcr.ny.gov/system/files/documents/2018/09/orafac40.pdf
14 Housing Stability and Tenant Protection Act of 2019 A.8281/S.6458 – Part E (C.36 of the Laws of 2019).
15 Chapter Amendment A.8433/S.6615 – Part Q §11 (C.39 of the Laws of 2019).
16 Chapter Amendment A.8433/S.6615 – Part Q (C.39 of the Laws of 2019).
17 Housing Stability and Tenant Protection Act of 2019 A.8281/S.6458 – Part E §2 (C.36 of the Laws of 2019).
18 Chapter Amendment A.8433/S.6615 – Part Q §11 (C.39 of the Laws of 2019).