Highlights
- The New York City Council is presently considering Intro 902, a law that would amend the New York City Administrative Code to give certain nonprofit entities and tenant groups a right of first offer to purchase multifamily rental buildings and an opportunity to submit a Right of First Refusal to purchase residential buildings when offered for sale.
- The bill requires building owners to notify the Department of Housing Preservation and Development and a list of nonprofit entities prior to listing the buildings for sale. The nonprofit entities would have the opportunity to submit the first offer and match any competing offers for the property.
- Intro 902, which has sponsorship of more than half of the City Council, could have dire consequences that would further reduce the reason for anyone to own or develop multifamily housing in New York City, as well as significantly reduce the $4 billion in real property taxes that the city and state receive.
The New York City Council (City Council) is presently considering Intro 902, a proposed local law that has the sponsorship of more than half of the City Council. Intro 902 will amend the New York City Administrative Code to give certain nonprofit entities and tenant groups a right of first offer to purchase multifamily rental buildings and an opportunity to submit a Right of First Refusal to purchase residential buildings when offered for sale. Intro 902 requires building owners to notify the Department of Housing Preservation and Development (HPD) and a list of nonprofit entities prior to listing the buildings for sale. The nonprofit entities would have the opportunity to submit the first offer and match any competing offers for the property.
Background
Intro 902, which might seem to be a harmless addition to a city that has numerous other obligations on real estate owners, could have dire consequences that would further reduce the reason for anyone to own or develop multifamily housing in New York City, significantly reduce the $4 billion in real property taxes that the city and state receive (along with mortgage recording taxes), make multifamily buildings unfinanceable and accomplish nothing in terms of creating needed housing. Intro 902 effectively could dramatically decrease sales of multifamily buildings in New York City.
Not only is this law not expected to create more housing, it would not benefit tenants who live in these buildings. Holland & Knight is familiar with efforts to persuade tenants to buy their buildings and experienced at attempting to arrange Tenant Sponsored Offering Plans to enable tenants to buy apartment buildings from landlords and convert them to cooperatives and condominiums – a rarely achieved feat even when landlords cooperate with the tenants. Representations include Mitchell-Lama affordable housing tenants and Mitchell-Lama cooperatives attempting to privatize their buildings until the state legislature effectively eliminated the ability to do so by raising the threshold for approval for privatization from two-thirds of tenants to 80 percent, seemingly as a result of the legislature's displeasure with private home ownership of apartments. On paper, Intro 902 may appear to some to be a great idea, but the following are the reasons it could merely further erode the residential real estate market and chase more landlords and developers from New York.
Tenant Interference in the Sales Process. If a landlord advises tenants that the building is going to be sold and the tenants have the right to make a first offer or match the price offered by a potential purchaser, several of the tenants could file complaints with every relevant city and state agency to have the building inspected to slow or kill the sale, further eroding the value of the building. Holland & Knight has witnessed city agencies acknowledging that they are called to buildings by tenants to inspect without a reason – requests to which they are obligated to respond. Alternatively, tenants have stopped paying their rent based on imaginary claims to prevent the landlord from selling. Some New York City tenants have proven quite adept at gaming the system.
Tenant Harassment of the Owners. Intro 902 requires that the Notice to the Tenants include the name and address of each owner. This could result in tenants picketing the offices and homes of the owners, their investors and their lenders, further decreasing the desire to invest in multifamily housing. It is unfortunate, but many tenants have been convinced that their landlord, rather than an unworkable system, is the enemy. However, no one benefits if the investor pool dries up.
Challenges to the Operating Expenses. The tenants could claim to their representatives on the City Council and in the state legislature that the building's operating expenses are inflated and not accurate, even though they and their elected officials have no idea what it actually costs to own and operate real estate in New York City. Since 2019, no one has been getting rich owning multifamily housing.
Delays. No buyer of an apartment building likely would agree to purchase the building if they are required to wait for months while the tenants or a nonprofit group decide what it wants to do, then attempt to obtain the financing to purchase the building. Moreover, knowing that unhappy tenants were unable to buy the building will mean that the buyer will have to be prepared to walk into a contentious environment after the closing.
Buildings Will Deteriorate. The tenants and nonprofit owners likely will not be able to agree on what will happen after the building is acquired. Someone will have to manage it, collect the rent and pay the operating expenses, but some tenants have regularly damaged their apartments and withheld the rent with a made-up excuse to prevent landlords from being able to collect it. The tenants also may not be willing to fund the capital improvements and legislative and regulatory mandates that are required by the city and state agencies, which will place a financial strain on the nonprofits and destabilize neighborhoods.
A Potential Disaster for Elected Officials. The City Council and state legislature will not be able to continuously complicate building operations and increase costs because the nonprofits and tenants will not be as malleable as the commercial landlords. It is unlikely that the City Council would have been able to push through Local Law 97, with its prohibitively expensive deadlines and currently unachievable goals, if someone other than landlords and co-op and condo boards had to pay it. Instead of letters from landlords, which the elected officials can ignore, they will be hounded by their constituents being required to pay higher rent. If the landlords are gone, there will be no one to scapegoat.
Statutory Ambiguity. What limitations will there be on the HPD's ability to enact any regulations that it wants to enact in fulfilling the vague mission of the statute? Intro 902 allows HPD to enact whatever regulations it wants without guidelines or relevance. Regardless of the City Council's current belief that it is helping tenants, it actually could be hurting them because operating multifamily buildings is neither simple nor inexpensive.
Endless Investigations of Landlords. How many investigations will result from complaints to the district attorney and the New York attorney general that the Notice of Bona Fide Offer to Purchase was not bona fide or was somehow a fraudulent notice? That alone would prevent any investor from wanting to get involved in this market. Every transaction could result in a litigation by the tenants, and many will result in administrative agencies investigating whether the sale complied with every possible regulation. Intro 902 seems likely to result in a windfall for litigators, especially class action lawyers and bankruptcy landlords, and create a morass for tenants.
Choking Off the Housing Supply. Although the City Council does not seem to care about the law of supply and demand, if the demand for buildings continues to dry up because the City Council has made ownership unprofitable, there is little likelihood that anyone will want to increase the supply of housing.
Not Seeing the Full Picture. Elected officials are likely unable to understand all of the difficulties associated with apartment building ownership, such as the need to deal with the limited rent as a result of city and state regulations, inability to evict nonpaying tenants and squatters, constant need for repairs, and onerous laws and regulations. Will the ownership of apartments bankrupt the nonprofits that own the buildings?
Who Picks the Winner? If each qualified entity has an opportunity to submit an offer to purchase, who will determine the purchaser of the building? Intro 902 leaves it to the owner, but that will not stop complaints to a multitude of officials and more litigation, with other bidders potentially claiming they were cheated.
Complexity of Real Estate Transactions. Real estate transactions are not simple and are frequently structured in convoluted but legal ways to deal with the Internal Revenue Code and other laws, rules and regulations, as well as the whim of political parties. Will a tenant group or a nonprofit be willing to structure a transaction to satisfy the sellers? If not, the price for the property will have to be increased to equal the price paid by someone who would be willing to cooperate with, for example, a tax-deferred exchange. The fact is, every property and set of facts are different, every participant has different goals and objectives, and the law is constantly changing. If real estate ownership were easy, more people would be doing it profitably, but more money has been lost owning real estate than on any other investment.
Financeability. Virtually all transactions are either financed or require the consent of a preexisting mortgage because of the Due on Sale provisions in the mortgages. How will the nonprofits or the tenants satisfy the lender's requirements, and what nonprofit will sign a guaranty or agree to a recourse carveout? Intro 902 interferes with the process but will not benefit anyone.
No Deal May Ever Close. Intro 902 allows the HPD Commissioner to "extend any time limit upon application for good cause." Will there ever be a reason that an HPD commissioner will deem it to not be a good cause? Delay may not hurt the buyer, but real estate is an illiquid investment, and Intro 902 will only further reduce that liquidity, which is really not in anyone's best interest.
Deadlines. What about transactions that have to close within a very tight time period (i.e., must close before year end or before a mortgage matures or because it has to satisfy the deadlines imposed on 1031 exchanges)? Throughout the year, but routinely in the fourth quarter, major transactions need to be closed in very short periods of time. In December 2024, a client engaged Holland & Knight in purchasing a multifamily building before the end of the year because the seller had a deadline on another investment. In less than four weeks, we performed the due diligence, obtained a loan commitment, closed the financing and closed the transaction. There was no time to deal with notices to HPD, wait for nonprofits to decide what to do and, most important, risk administrative remedies and litigation. New York City and the state received substantial taxes from the December 2024 closing. With Intro 902, there would have been no sale.
Fines and Injunctive Relief. The bill calls for a civil penalty of $30,000, but it is unclear whether that is per day or per room in the building or another measuring standard. How much litigation will occur before that is straightened out? The bill also gives a qualified entity the ability to obtain an injunction. Will any request for injunctions not be granted? Even the threat of an injunction will stop transactions from moving forward.
Conclusion
One would think that with the residential real estate market in turmoil and with virtually no housing being built, that the City Council and state legislature would leave the real estate industry alone and give it an opportunity to recover. However, it seems to be not enough that many New York City real estate developers are now working in Florida, Texas, Georgia, North Carolina and South Carolina and many other locations. Even California has become more supportive of real estate than New York. This is not just an assumption, but is based on conversations with three different smaller New York City developers who are planning multifamily buildings in Florida. It is a shame to see developers leaving in droves. With the cost of taxes and regulations, as well as some tenant advocates and lawyers who are gaming the system, they likely won't be back.
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