By Josh Lipton & Andrew Levine, co-founders, Invictus Property Advisors
New York City legislators are at it again and their goals though noble may be misguided and one can’t help but think of the unintended consequences that are likely to ensue. Specifically, in late September 2018, the City established a three-year Certification of No Harassment (CNH) pilot program which requires owners of more than 1,000 buildings identified by the City (and considered to be particularly vulnerable to tenant harassment) to obtain a CNH prior to acquiring construction permits for work involving demolition or major alterations. The requirement to obtain a CNH has been around since the 1970s but utilized in a much more limited way than the newly enacted pilot program. Historically, only assets located in certain special districts and single-room occupancy (SRO) properties characterized by tiny units with shared bathrooms and kitchens required a CNH. The new law goes much further and is aimed at “stopping tenant harassment in its tracks…[and protecting] affordability across the city,” according to Mayor de Blasio.
The program requires a CNH prior to obtaining a permit for the following type of work:
(i) full or partial demolition of the building;
(ii) change of use or occupancy for all or part of a dwelling unit or any residential portion of the building; (
iii) any alteration which would add or remove kitchens or bathrooms, increase or decrease the number of dwelling units, change the layout, configuration, or location of any portion of a dwelling unit; and
(iv) removal of a central heating system and replacement with an individually metered heating system.
Once a building owner applies for a CNH, building tenants, community groups, the community board, and elected officials will be notified and the Department of Housing Preservation and Development (HPD) will collect comments from current and former tenants and conduct an investigation to determine whether there is evidence of harassment within the previous five years. If HPD denies a CNH due to a finding of harassment, the owner will be prohibited from receiving the relevant permit(s) for five years, or, in the alternative, the owner may designate a certain percentage of the asset for low-income housing (25% of the total residential floor area of the existing structure or, in the case of demolition, the greater of 25 percent of the previous building and 20 percent of the new building). A director at the tenant advocacy group known as the Association for Neighborhood & Housing Development applauded the punitive nature of the program as something that “will now simply turn tenant harassment into a bad business move.”
It is no secret to anyone familiar with New York City commercial real estate that landlords and rent regulated tenants are locked in an ongoing cat and mouse game and the stakes are high. Owners in neighborhoods where rents are on the rise are seeking to vacate tenants paying low rents, and tenants, for their part, are looking to ensure their housing remains affordable in perpetuity and to live without the fear of being harassed (i.e., shutting off hot water and/or heat, refusing to make necessary repairs). It is a modern day “David and Goliath” dynamic but the CNH pilot program is not the appropriate “sling and stone” in this case.
Despite near universal endorsement from tenant advocacy groups and city officials, there is cause for concern. The new law “could create a chilling effect for owners trying to make a good-faith effort to renovate properties,” according to managing member of the law firm Rosenberg & Estis, Luise Barrack, who was quoted in a Bisnow article from March 2018. Having sold many SRO properties, this author is familiar with the lengthy time frame required for HPD to conduct investigations prior to determining whether to issue a CNH. The process often takes more than six months and to expect a faster turnaround under the new law would be wishful thinking. Furthermore, with HPD outcomes far from certain the stakes for landlords may be too high to even try. Imagine negotiating a fair and equitable buyout with a tenant only to have HPD rule unfavorably on the CNH? Ownership would be in the unenviable position of choosing between not upgrading (or making the necessary repairs of) the unit or building for five years and allocating a substantial percentage of the asset for affordable housing without a subsidy from the city. One can’t help but wonder whether this is the right outcome for retirees who may have had the good fortune of living in an apartment that benefited from the rent stabilization rules and is now well positioned to negotiate a favorable buyout?
To add insult to injury, the new law has a five (5) year lookback period on tenant harassment, which is two years longer than the previous three (3) years SRO owners are accustomed to. If you have owned a property for less than five (5) years, you might hesitate before applying for a CNH as to avoid taking on the risk of the previous owner’s behavior towards her tenants.
Moreover, tenant harassment isn’t always obvious and easily identifiable. Intentionally shutting off hot water or bullying tenants to leave their apartments are unambiguous scenarios and reasonable folks universally agree that this abhorrent behavior is unacceptable and bad actors should be punished for engaging in it. In fact, unscrupulous landlords are often caught and held accountable even serving jail time in certain instances. But tenant harassment claims often extend to any situation where a tenant feels uncomfortable or where they believe that their quality of life has been adversely impacted in an attempt to get them to vacate. According to Barrack, the “perception of what conduct constitutes harassment varies from person to person” and that “it is unfortunate that landlords are blamed under the ‘catch-all’ of harassment simply because a building is old and requires maintenance or is undergoing repairs, but those interruptions of services make up all of the tenant harassment claims I see.” Most landlords will tell you off the record that there is a thriving “professional tenant” phenomenon taking place where savvy tenants take advantage of the perception of the abusive landlord to mitigate or withhold paying rent. These same tenants are likely to use the pilot program as another weapon in their arsenal.
It isn’t at all clear that this law will do what it is set out to do: stop tenant harassment in its tracks. What it will do is prevent landlords from undertaking much needed repairs to challenged and dilapidated buildings that need it the most. A more streamlined approach aimed at catching and punishing the unscrupulous landlords would be the preferred approach. There is no place in New York City for tenant harassment but, in the words of Milton Friedman, “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” The jury is still out on the CNH pilot program but don’t expect the results to be good.