New Rental Laws Has Landlords Scrambling For Answers with Eric Michael of Nova Property Management

P2P 96 | New Rental Laws

 

You think of Manhattan as the business center of the country, maybe even the world. However, changes in the rental laws have negatively affected landlords now and will impact them for years to come. In this episode, Eric Michael of Nova Property Management brings to light the political background of these rental law changes. The reforms made may have good intentions from a tenant’s perspective but, as Eric explains, they are going to move property owners to either serve a smaller segment of tenants, deprioritize property maintenance, or lose the business altogether. This episode is a step closer to finding the answers for puzzled landlords.

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New Rental Laws Has Landlords Scrambling For Answers with Eric Michael of Nova Property Management

How The New Rental Laws Affect New York City Landlords

Finally, I had a property manager. I’ve been trying to get one for the longest and I have Eric Michael from Nova Property Management. Eric, how are you?

I’m good. How are you?

I’m good. Thank you so much for taking time out of your busy schedule. Eric, tell us a little bit about yourself.

I’m a property manager. I own Nova Property Management, which is a boutique firm in New York that manages throughout New York City. We focus on smaller properties, 50 units and under generally is what we focus on. We have a very hands-on approach. We offer full-service management to our clients and to owners of rental properties. We also offer a lot of strategic services. A lot of what property managers do is react. You react to problems that take place in buildings or you react to new laws that are passed. One of the things that we like to do that a lot of other managers don’t do is we like to be proactive about things. What that means quickly is that physically we’re proactive with our buildings in doing things like routine inspections, getting to know the buildings and how each individual building operates.

We get to know when things begin to go bad and fix them before they become emergencies. It includes doing things like for example, an annual boiler service contract. Most people won’t see this as a way to avoid emergencies and it’s not intuitive to many people, but if you have, for example, an annual boiler service contract, they come out a couple of times a year. They service the boiler. The thing that most often goes wrong with boilers is the igniter will go bad. The igniter is a $125 item, but if it goes bad, then you’re without heat for whatever amount of time it takes for someone to come and replace that. They last about two years. If you replace them once a year, they generally don’t go bad. You don’t get a phone call in the middle of the winter on a Saturday at 2:00 AM with someone saying, “It’s the coldest night of the year and we don’t have any heat.”

We try to be proactive that way. We’re also proactive in designing a strategy for property owners to help them maximize their income and avoid taxes legally. We know many state tax laws and we’re able to help and advise clients on what they may want to do. We hook them up with, in this case, state planners to structure their estate in a way that will help them to minimize what they’re going to pay in estate taxes. We are constantly looking for ways for our property owners to either save money by paying the government less or make money by increasing rents.

That definitely sounds like a full-time job. Eric, the buildings that you manage, are they mostly A, B or C buildings? Are there criteria for you that you will manage?

Property manager or not, be proactive about things. Click To Tweet

Most of them would be Class-A buildings. They are primarily residential in nature. This is us. Other property managers will have different portfolios, but our portfolio is essentially residential rentals, residential condos and a few mixed-use like an apartment building with a storefront. It’s all Class-A units, primarily residential in nature.

There are a bunch of subjects that we were going to touch on because with the new rental guidelines, Eric’s going to talk about that. It’s amazing what’s been happening here in New York City. Eric, when you meet with a potential landlord and they have a building, do you guide them on how much the rent should be for each unit? Is that a process that you’re involved in or the owners should know that coming in? How do you work together on that?

Most times when I begin managing a building, you inherit a lot of things that come with the building and you also inherit the current rents that their tenants are paying. Sometimes you inherit a building where all the tenants are on leases and perhaps that particular owner did a good job and used a broker that was able to properly advise them on what their rents should have been. In other times, that’s not the case. I’m managing a building right now that is, for lack of a better term, falling apart. I took over the building a couple of months ago and I was retained because the owners live outside the country. They have an attorney in Brooklyn and that attorney was looking for someone to help troubleshoot problems in the building.

One of the problems is that it’s not a rent-stabilized building, so they’re not limited in any way. The rents that they’re getting are probably about half of what they could be getting. The tenants don’t have written leases. They’re month to month. That said, the apartments are in very bad condition, but we’re working on a plan to get them renovated and then get those tenants out and bring new ones in. We’re going to work with the owner and with real estate agents who know the local market and figure out for them what the best rent for them to charge is.

That said, let me tell you, there’s a difference in managing a building and looking at a building from a broker’s point of view. A broker might look at something and say, “You can get X dollars per month,” but if the unit is sitting vacant for three months, in order to get that, the owner is out three month’s rent. Given various circumstances, it might be advisable to lower the rent in order to rent it more quickly so that you don’t lose any time. Sometimes it’s a seasonal thing. It’s more difficult to rent in the winter than it is in the summer. Rental values tend to be lower in the winter. It also could depend on the neighborhood. Some neighborhoods are more difficult to rent it and if you lower the price so that you’re below market, you might avoid vacancies, which can be bad. It depends a lot on various factors. We assist the owner in figuring out those factors.

That’s important especially if you get someone that’s coming in with 30, 40, 50 units and then your expertise as a property manager, knowing the neighborhood and knowing how the market trends are, especially if you have foreign buyers, having a company like yours, someone with experience definitely helps. Eric, I think it was June 14th when the new law passed about these rent-stabilized apartments. You can’t raise the rent. How does that affect these new up and coming landlords and the old landlords? I’m hearing different types of stories, especially the landlords are saying that if they make any type of improvements, now they can’t raise the rent and they might lose money. If they do any improvements, are they just going to improve with C-type of quality service like cabinets, refrigerators? How do you see it as playing out in the next couple of years or months? This is amazing that this has happened here in New York City. I’ll be honest with you, I am a little surprised that this passed.

It was on June 14th. Let me back up a little and give some relevant history to this. It used to be the case that every four years, the rent laws would expire. You might see sometimes dealing with the federal budget that the debt ceiling needs to be increased because the federal government has borrowed as much as it can and it needs to raise the limit. It’s something like that where the rent laws would expire every four years. If the rent laws were allowed to expire without them being renewed, then in theory it’s never happened. It’s just theory. In theory, you would have no applicable laws. One might argue that an apartment that was rent-stabilized and you’re only allowed to increase the rent a certain amount if your apartment is vacant when the rent laws would expire. One might argue that you have no limits. You can rent it for whatever you want because there are no current laws. It’s all theoretical because that has never happened. It’s every four years the law would expire and it forced politicians to sit down at the negotiating table and figure out what the new laws should be.

I would say at least since 1992, the three government entities that are relevant here are the State Senate, the State Assembly and the governor. Because the Senate and the Assembly will pass a law and the governor will sign it. Since around ‘92 to the present, no one party has had control of all three of those, which forced the two parties to come together and negotiate. No one side got everything that they wanted. Typically, the Democrats are on the side of the tenants and the Democrats would have a wish list of making the most extreme rent laws possible. Typically, the Republicans are on the side of the landlords and they wanted more relaxed rent laws. They would come together and you’d get some compromises.

P2P 96 | New Rental Laws

New Rental Laws: New York landlords are now capped only at $15,000 renovation cost for which entitles them to increase rent for a mere $83.00.

 

While most things went the way of the tenants, there were a lot of things that landlords did get. For example, they got vacancy increases. I’m going to touch on that because briefly because that’s one of the things that disappeared. A vacancy increase was when a rent-stabilized tenant would move out and you now rent to a new tenant. Because you had a vacancy, the law would allow you to take, if it’s a two-year lease that you signed, a 20% increase in the legal rent. That’s a big increase given that in more recent years, the renewal increases have been between 1% and 3% and a couple of years actually had a rent freeze on the one-year renewals. You got this big bonus for a vacancy. That’s one of the things that actually went the landlord’s way in the compromise. There were a few other things. The rent law has expired on June 14.

Back in last Election Day, I believe ten State Senate seats changed hands from Republican to Democrat. Prior to that, the State Assembly was Democrat, the governor was Democrat and the State Senate was Republican. The State Senate went onto the Democrat side by a big margin. It wasn’t one or two votes. It was a switch of ten. Now you had all three of those entities in control of the Democrats. What they did is they took their wish list out and everything that they’ve ever wanted for decades and had a compromise on, they decided, “We want this.” They also looked at the rent laws and they picked things that they described as loopholes and they decided to plug up the loopholes. I’ll tell you what I mean by that, but first you need to look at it from their perspective.

It has long been the view of the Democrats in Albany that there should not be a reduction in the number of rent-stabilized units in the state. Those who know what they’re doing know how to destabilize apartments. They looked at how landlords were destabilizing apartments and they eliminated your ability to do that. For example, previously the best way to destabilize an apartment is when an apartment became vacant. Landlords would renovate the apartment. For buildings under I believe it was 35 units, you would take one-fortieth of the renovation cost and increase the rent that much.

To use easy numbers, if you got a vacant apartment and if you renovated it for a total cost of $40,000, you were able to raise the rent $1,000 a month. The result of that was that a lot of landlords were finding ways to vacate apartments. They could vacate them because it wasn’t a tenant’s primary residence. Maybe they had an illegal sublet. Maybe there was another evictable offense. I got out a lot of tenants over the past ten years or so because of various violations and the owners that I work with would do these renovations and destabilize the apartments. That was considered a loophole by those who want to preserve the number of rent-stabilized apartments in the state. What they did was they said, “You don’t divide it by 40. You’re going to divide it by 168. You’re capped at $15,000 total renovation cost.”

Previously you could put in an unlimited amount of money into the apartment. It had to be reasonable. You couldn’t say, “I’m putting $100,000 in to get a new kitchen.” That’s unreasonable. It had to be a reasonable cost. With the cost of renovation in New York, you could renovate an entire apartment for $75,000 without batting an eye and it’s all reasonable. You can put new hardwood floors, replace plumbing, new electric and new cabinetry. All of this adds up. Whereas before, if you put $80,000, you could raise the rent $2,000 a month. Now they limited it so that only the first $15,000 in renovation costs in any fifteen-year period could qualify you to raise rents. If you take that $15,000 and divide it by 168, you get something like $83 and change a month that you can increase the rent.

What’s the result of this? There are many results. Number one, landlords are not going to put $15,000 into an apartment in order to raise their rent $83. It’s not worth it. You might put in $40,000 and increase the rent $1,000. You’re not putting in $15,000 to raise the rent $83. It’s going to take you 168 months to recoup your money, so you’re not going to do it because you have better ways to spend that $15,000. The result of this is going to be apartment conditions are going to deteriorate. Landlords are only going to repair what the law requires them to repair. If there’s a hole in the floor, you’ve got to fix that. If there’s a crack in the window, you’ve got to fix that. If it’s generally run down, they’re not going to renovate. Even when apartments become vacant, they’re not going to renovate it. They’ll clean it up and paint it and they’re good to go. You’re not going to be able to raise the rent.

In other words, there’s pretty much no incentive for an owner to do anything other than maybe paint, obviously if we’ve got some plumbing issues like a backed-up toilet or tub, you fix that and get a plumber. Other than that, you’re not going to fix the cabinets or the refrigerator. The tenant ends up losing out as much as what the owner obviously loses out more. Now you had the tenant that’s going to come into the apartment is like, “This is not even done.” To me, Eric, as a property manager then, if a landlord instructs you or you say, “This needs repairs,” the owner could say, “We’ll give it a C-paint code,” or something like that. Is that what you might see in the future?

The political climate in Manhattan right now is anti-business and anti-property owner. Click To Tweet

Yes, the repairs are going to become less thorough and cheaper in quality. One of the other results is going to be that contractors are going to be getting fewer jobs. I do not doubt that many contractors will go out of business. Others will slow down. They’re probably going to have to lay off some of their workers. This is going to impact a lot of people.

There’s this chain reaction.

You’ve got to think like those who are on the side of the tenants. If you think as they do and you make the assumptions that they make, you see where they’re coming from. Actually, I was using an analogy with someone. Let’s say I wanted to rent my car to someone. I can rent my car to someone for the weekend. The money that I get is essentially all processed. If you own a building and you’re renting an apartment, you have a lot of costs associated with running that building. First of all, you’ve got real estate taxes. You’ve got water-sewer bills, you’ve got utility expenses and you might have a mortgage that you’re paying. You have the repairs you have to make periodically. If you’re a first-time purchaser in New York right now, you’re lucky if in year one you’re making 5% return. You’re probably making a lot less.

Most tenants and tenant advocacy groups don’t realize that 90% plus of the rent goes towards paying some an expense or it goes back into improving the building. Let’s say you have an apartment that’s $2,000 a month. A lot of tenants think, “My landlord is profiting $2,000.” That’s not true. That $2,000 goes to a lot of different places. Once you realize that that’s the thinking of the tenants and the tenant advocacy groups, it’s not surprising that they’ve done what they have done. They think that keeping rents low will prevent landlords from making enormous profits, but they’re still making huge profits. It’s not the case.

A lot of landlords are just getting by. I belong to a number of landlord organizations and I go to monthly meetings for them and I’m there with small property owners. I hear the stories all the time, the hardship that they have. It’s not easy owning property in New York, especially if it’s rent-stabilized property. The bottom line is that these rent-stabilized laws, the new laws that came out on June 14th essentially closed every “loophole” and made it impossible for you to raise rents significantly. You’re never going to be able to destabilize an apartment short of perhaps demolishing a building and restart it.

I was going to talk about that. If a new owner or developer comes in, is their best bet to start all over, buy a piece of land and then have a 40, 50-unit building and then have market rent? Is that the way to go for these some of these landlords and developers?

It is one way to do it. The rent stabilization laws affect buildings essentially that were built between 1947 and 1974. Newer buildings are not subject to these rules. There’s a large amount of housing stock that was built between 1947 and 1974. The ones that were built before ‘47 might have been carried into the rent stabilization because they were previously rent-controlled. There’s a big segment of the housing stock in New York. Every year they come out with charts showing the percentage of buildings that are rent-stabilized and free-marketed in other categories like subject to Loft Laws or 4-21a tax-exempt laws. I would say it’s probably about 40%, 45% of the apartments in New York are rent-stabilized. That’s a rough number. It’s a lot of apartments and all of those property owners, they’re not going to be able to raise their rents to keep up with their rising expenses. They’re not going to be able to destabilize. There are very few ways. Demolishing could be one way, changing layouts of apartments could be another way, but it’s an expensive way.

P2P 96 | New Rental Laws

New Rental Laws: With the new rental laws, landlords can only take a maximum of one month’s advance rent. Hence, they can only accommodate tenants with good credit.

 

If you have one giant apartment that has a three-bedroom apartment and it becomes vacant, you can’t split it up into two apartments and add another kitchen, maybe make two one-bedroom apartments. You’ve got to change the certificate of occupancy because you have to add an apartment. You’d have to get an architect to come in and draw up plans, approved by the DOB. It’s very expensive. You can do that and technically those are brand-new apartments, even though they were created from a previously rent-stabilized apartment. They are now new apartments and you can, in theory, get what they call first rent, which is you put it out on the market and whatever you can get that becomes the new legal. That’s one way that some people are looking at, but it’s a very expensive way. Any way you look at it right now, it’s very expensive. Until people can fully analyze these and come up with, I’m not going to say use the word loophole, but ways, things that the law has overlooked, you can use to your advantage. That’s essentially what happens.

Sometimes laws will have things that are overlooked and someone realizes, “We can do this,” but no one has found anything of significance because they’ve made it very difficult. They plugged up a lot of holes. That was the portion of the new law that has affected rent-stabilized properties. Once the election in November resulted in this huge shift in the state senate, everyone’s figured, “It’s got to be a bad renewal of the law.” By the way, I haven’t touched on what is perhaps the worst part of the law. They got rid of what they call the Sunset Provision. The Sunset Provision is the portion of the law that causes it to expire every four years. Now, the law is permanent.

Eric, what if we get a new party in, Republican, Independent or whatever?

You’re going to need all three. You’re going to need the State Senate, State Assembly and the Governor. What they’ve effectively done is they’ve said, “Let’s put all these very onerous things against landlords. Let’s also make sure that four years from now, if the Senate goes back Republican or if the governor changes hands to Republican, let’s make sure that we don’t have to trade away in any of these things in a conference.” They made it permanent. This is the rent law for a long time. There’s a constitutional challenge taking place where some of the landlord organizations are challenging the constitutionality of these laws. It’s unlikely that it will win but barring that, the only way that these laws will be undone is if there is a huge political shift and it’s not going to happen any time soon. It’s going to take a long time. One might say, “What happens when these laws result in terrible things and it results in contractors going out of business and apartment conditions deteriorating? Won’t the lawmakers realize that this law was a disaster?”

My answer is no. They’re going to blame landlords. That’s what they do. They’re going to say, “The landlords have decided not to renovate your apartment. It’s the landlord’s fault. They’ve got plenty of money.” That’s going to be the story that’s going to come out. It’s not going to be self-reflection. It’s not going to be like, “Maybe we went too far.” The thing that our opponents were predicting what happened has happened, but we think it’s their fault. They’re not going to be self-reflective about it. I think it’s got to be like this for ten-plus years. I don’t see this changing anytime soon.

In your opinion, Eric, are we seeing that New York is becoming a non-business friendly city? It seems like you come up with these laws to prevent landlords from making money less than I understand. Maybe some tenants get bought out or whatever may have you. Do you see New York becoming more non-business friendly? That’s what I’m reading. That’s what I’m hearing from other investors that they’re looking to park their money outside New York. I’m hearing Florida, I’m hearing Pennsylvania, even Jersey. I’m hearing investors looking outside of New York. What’s your feeling on that?

It’s unfortunate because you think of Manhattan and you think that’s the business center of the country, maybe even the world. The political climate here right now is anti-business and anti-property. There’s a lot of reasons why that’s the case, but that’s maybe a topic for another time.

Property owners and colleges can become allies to make changes because the existing rental law is affecting New York City in bad ways. Click To Tweet

I know we’ve got to keep moving but, Eric, we definitely got to do a part two. I want to touch on a couple of more things like upfront rents. Before, let’s say if the rent was $3,000, you might collect up to $12,000 deposit, two months’ rent, three months’ or whatever it is. How is that now I’m hearing that you only could do one month? How is that going to affect the landlord?

Let me explain what the change is. This is a change that affects free-market apartments. Prior to this, you could always only charge one month of security for a rent-stabilized apartment. That has remained the case. What this does is it changes the management of free-market apartments. Everyone expected the law to change with respect to rent-stabilized apartments. What no one was foreseeing was changes in the rules that affect free-market apartments. There were many of them. The biggest ones in my opinion, although there are many big ones, is the security deposit issue. Previously, let’s say you’re advertising apartment for rent and you get an applicant that wants the apartment.

If they had bad or no credit, you were able to do one of a few things. You can either tell them, “Sorry, I’m not going to rent to you,” or you could tell them, “You need to get a guarantor.” You could tell them, “I need to hold many months’ rent in security.” In fact, I have signed many leases where tenants pay the entire year upfront. That’s often the case. I’ll tell you when that happens. Typically, they are foreigners that come in that don’t have established credit and maybe even that are coming here on a job-related thing and their job pays their rent upfront or students. Students have no credit history. The interesting thing about them is that if they don’t get a private apartment, their alternative is student housing.

In student housing, typically they’re paying a semester upfront with their tuition bills. They are used to paying that upfront. For them to be told, “I need to collect a year upfront,” they’re okay with it. They don’t think they’re going to be moving. They’re in school. They know they’re going to be in that school for a year or at least a year, if not more, so they’re willing to pay it if it means that they get an apartment. You can’t do that anymore. Right now, the law has changed. Let me back up. These laws are always written in a very vague way and this is one of those examples.

The new law says that you can only collect one-month security or advanced rent. We don’t know what that means. Does it mean you can collect either a month’s security or one-month advance rent or can you collect both? We don’t know because the way it was written was vague. At best you can collect one-month security and maybe last month’s rent. The result of that, if you now think about it, you’re looking at it from the point of view of the tenant groups. They’re thinking, “These tenants are getting gouged by having to pay four month’s rent security.

If you rent a $2,000 a month apartment, at least sign that you got to pay first month’s rent and four months security, so you’re paying $10,000. Maybe you’re paying a broker’s fee of another $2,000. That’s $12,000. The tenant groups are like, “Who’s got $12,000 to pay this?” They think they’re doing the tenants a favor. In reality, let me tell you what’s going to happen. I have one client that owns a number of buildings by a college in Brooklyn and he has a lot of students. He’s got a couple of four-bedroom apartments in these buildings and he gets students that rent from him and many times they pay a year upfront. What’s going to happen now is he’s going to wind up telling these students, “If you don’t have a guarantor, if your parents are not willing to sign as guarantors, I can’t rent to you.”

Now there are these nice apartments five blocks from their school, they’re not going to be able to live there because they don’t have the credit and the owner doesn’t want to take the risk. The result of this is going to be that, whereas before tenants with low and no credit could get apartments by paying extra in security, now they’re not going to get those apartments and the owner may be willing to hold out a little bit longer to get a tenant with better credit. If you’ve got a tenant that stops paying rent, you may potentially have a year.

That’s another thing and I’ll quickly say this because I know that we’ve got a limited scope here. Some of the other rules about free-market apartments affect evictions and notices that you need to give and how much time tenants may be allowed to stay in an apartment and whether or not the payment of rent is mandatory during that time. You may have tenants right now that stay in an apartment a year rent-free during an eviction process. The judge now has the discretion to do that. Previously the judge had to at some point order that the tenant to begin paying rent and if they don’t, they could be immediately evicted.

P2P 96 | New Rental Laws

New Rental Laws: Previously, a tenant who doesn’t pay rent can be evicted immediately. Now, landlords are mandated to give a number of notices that allow some time for tenants to stay in the unit.

 

Knowing that there is that potential disaster of if I have a tenant that can’t pay rent, I might be stuck with not collecting anything for a year. The prudent thing to do is not to rent to people who are credit risks. Many of those people are going to find it more and more difficult to rent apartments. A little side note and I haven’t found the answer to this yet, but I have been searching for the way in which colleges are able to do this. I don’t know if you lived in student housing, but people who live in student housing, they typically will pay a semester upfront. It’s technically rent, but it comes in their tuition bill. You are a tenant of the school.

I don’t know right now and I’m looking into this as to whether there are separate rules that govern colleges or if they are now not going to be able to collect. I guess the good answer would be that they’re not able to collect this upfront because then they will become allies of landlords to lobby a change. That’s one of the reasons why I want to look into it, to see if there’s a potential way that property owners and colleges can become allies in an effort to make some changes to this because it’s affecting every property owner in New York in many bad ways. I think the results, after a short period of time, is going to be very disastrous for the property owners, the tenants, the housing market in general and other ancillary businesses like contractors and building supply retail and wholesale places. Their business is going to decline.

Eric, if somebody wants to get in contact with you, what’s the best bet?

The name of the business is Nova Property Management. Our website is www.NovaMgt.com. Do you want me to give my office line?

Sure.

My office number is very easy to remember. It is (718) 768-8888. I love the number. My dad had a real estate office there. He got that number as a specialty number a long time ago. He kept it and I took it over. It is a great number. It’s a great business line. That’s how people can get in touch with me. Our email address is on our website. They can call me up. If anyone’s looking for a management or even help in navigating through this, I can either help get them to the answer or point them in the right direction of attorneys who are working on analyzing stuff.

Eric, thank you so much for taking time out of your busy schedule and we’ll definitely talk soon.

Thank you very much. Thanks for having me.

That was Eric Michael of Nova Property Management. Eric, thank you so much for being on the show. I appreciate it. You could find Eric at (718) 768-8888 or you can reach out to him at Eric@NovaMgt.com. Eric, thank you so much. If you go to a PeerToPeerRealEstate.com or P2PRE.com, check our Resources page. Also, if you were at iTunes, look for us at Peer to Peer Real Estate Podcast, please subscribe, leave a review, give us a rating. We appreciate it. Before we go, I have one more thing. Do not give up on your dreams. I always talk about this. Live the life that you want to lead. If there’s a dream you’re pursuing, go for it. If you want to become an entrepreneur, go for it. Don’t let anyone talk you out of it. It’s your life. Live it the way you want to live it. I appreciate you.

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About Eric Michael

P2P 96 | New Rental LawsProperty Manager and Consultant with over 12 years experience managing and advising residential rental, condominium, cooperative, and mixed-use buildings in the New York City Area. Experience includes not only performing traditional, full-service management for all property needs, but providing tailor-made cost-savings and income-maximization strategies to increase both current income and overall property value. Strategies include advising property owners how to take advantage of various tax rules to minimize tax liability as well as developing long-term plans to increase rent over time by utilizing rent regulation
laws to convert rent-stabilized apartments to free-market apartments. My original background is in the law and I transitioned into Property management to service family-owned properties and also to build a legacy business entity for my family.

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