How NYC's New Rent Laws Affect Landlords' Taxes

NEW YORK CITY—New York rewrote the residential rental rulebook in June 2019 to restrict rent increases. These new landlord-unfriendly laws will slow income growth without providing property tax breaks. Meanwhile, property taxes will keep increasing, albeit more slowly, and eventually normalize at 30% of gross income for many apartment buildings.

HSTPA will reduce landlords’ income. The Housing Stability and Tenant Protection Act of 2019 (HSTPA) (see related GlobeSt article) prohibits pre-paid rent and application fees, limits background check fees, and minimizes late fees. For rent stabilized apartments, HSTPA minimizes Major Capital Improvement (MCI) and Individual Apartment Improvement (IAI) allowances, bans Vacancy and Longevity Bonuses, paralyzes Preferential Rents, and prohibits High Rent Vacancy & High Income Deregulation. HSTPA also made it more expensive for landlords to operate by making landlords liable for more overcharges and damages, restricting recovery of attorneys’ fees, subjecting them to new penalties, and adding hurdles to evict problem tenants. Landlords are mainly stuck with Rent Guidelines Board increases, which have recently been 1-2% per year.

HSTPA will suppress market valuations. Due to tighter restrictions on rents, landlords’ gross incomes will decelerate. Income increases of 2% could be the norm. Base operating expenses won’t decrease because it still costs a minimum just to run a building. Expenses may increase. Landlords may spend more on repairs than capital work. For example, fixing a stove or patching a roof is more practical than replacing it when MCIs and IAIs are hamstrung. Additionally, landlords may have higher administration expenses to comply with the more burdensome compliance requirements. Finally, we expect cap rates to increase as buildings trade on lower multiples of rent roll. These factors will slow tax assessments.

Three-year delay. The NYC Department of Finance (DOF) assesses apartment buildings by dividing estimated pre-tax net operating income (PTNOI) by a cap rate. PTNOI is DOF’s estimated gross income less estimated pre-tax expenses. DOF obtains its estimates from landlords’ Real Property Income & Expense (RPIE) filings, but there is a two-year time lag. Assessments for the next two years won’t reflect HSTPA yet. PTNOIs will decelerate and fully manifest in 2020 RPIEs. Therefore, 2022/23 will be the first tax year that best reflects HSTPA.

Transitional Assessments phasing-in. Apartments buildings with more than 10 units have Transitional Assessments which phase-in prior equalization increases by 20% per year over five years. So even if market value growth slows to 2% per year, Transitionals will continue to phase-in the prior years’ 5-10% annual increases. Transitional growth will slow over five years as it fully phases-in the new market values that reflect HSTPA’s restricted rents. Once the assessments have stabilized around tax year 2026/27, property taxes will be approximately 30% of gross income potential. This ratio could be 35% for higher rent and 25% for lower rent buildings.

Under-assessed capped subclasses. For 4-10 unit buildings in “capped” subclasses, DOF will maximize the assessment increases at 8%/year or 30% over five years. As HSPTA slows rent increases below 6%, assessments will eventually stabilize in 5-10 years or longer. Stabilized “capped” buildings in Manhattan could have taxes over 35% of gross income.

Co-ops & Condos. HSTPA could unintentionally benefit cooperative and condominium apartments. State law requires DOF assess co-op and condo buildings as if they were rentals. Comparable rentals’ decelerating PTNOIs will percolate to co-op and condo assessments which should see parallel increases of 2% per year.

Homes & Commercial buildings could increase. The City budgets 4-6% annual property tax revenue increases. When assessment growth slows to 2%, the City Council could make up the shortfall by increasing tax rates. The City could shift the tax burden to one- to three-family homes and office, hotel, retail, and commercial buildings.

Property tax protests. Taxpayers can protest assessments between January 15 and March 1. The representative should explain to the city how HSTPA has made the property less valuable by diminishing PTNOI and increasing cap rates. Properties requiring refinancing should obtain property tax projections to estimate the potential liability.

Benjamin M. Williams is a Member of Rosenberg & Estis, P.C. and leads the law firm’s real estate tax certiorari group. The views expressed in this article are the author’s and not those of ALM Media’s Real Estate Group.