Shaping the NYC Skyline

David: Hello, everyone, and welcome to the first edition of Shaping the New York City Skyline. I'm your host, David Shamshovich, and I'm here with the always wonderful Brenda Slakowski.

Brenda: Thanks, David.

David: I've always wanted to say that. I feel, I always wanted to feel like I was on a radio show where no one is listening.

Brenda: We are kind of on a radio show where no one's listening.

David: Well, that's true, but hopefully somebody at some point will be listening. We're here, obviously, not just to joke around, but to talk about a very serious issue. One that we actually, all of us face. You live in New York City, right Brenda?

Brenda: I do. I am on the Upper East Side and rent is sky high.

David: Now, one of the things that we see all the time here, and one of the biggest controversies I think in the city is increase in rent for rent stabilized tenants and for market rate tenants too right? The city is a diverse population. People really talk about affordable housing, but this city also has to be kind to the people that are perhaps not low income, perhaps moderate income, middle income necessarily can't fall into that affordable housing category.

Brenda: Yeah, I mean, as much as everyone's pushing for deeper affordability on everything, you still have to think about the cost that the developer has in running the building, maintaining those operating expenses and making sure that they're providing a habitable and Honestly, nice living space for the tenants that are there.

David: And I don't know how you, I just honestly don't know how you do that without money. Now, a lot of people in this city, and particularly in the state senate, they believe that developers are simply greedy people who want to make as much money as possible. They're the business, so they certainly want to make a profit, but that's sort of part of our capitalistic society.

There should be some regulations. But there's got to be some compromise.

Brenda: Right. And even if you were looking to be a benevolent developer who's trying to give away affordable housing, you still have operating costs that you need to make money in order to pay those operating costs.

David: Yeah. I mean, you need to operate the building.

And even more importantly, maybe not more importantly, but just as important, you need to be able to get financing for that building. And the only way a lender is going to finance something is if they see that you're making net income. And that can be difficult if you're being pressed to provide more than, say, 25 percent affordable housing.

It's an issue. And I think, and I've been saying this for a long time now, I think the answer is somewhere in the middle. The guest that we're going to be bringing on, who's going to be talking about some of this, his name is Alvin Schein.

Brenda: We're a little biased, I'll tell you, considering he's our boss.

David: He's had a career that's spanned 30, 40 years at this point.

He's done condo co op work.

Brenda: He was at the forefront of the inclusionary field when it first came out.

David: Basically a founding father, I would say. He would be on the Mount Rushmore of inclusionary housing, right?

Brenda: Yeah.

Him and the HPD Commissioner.

David: Him and the HPD Commissioner. The current one, or? Just all of them from-

Brenda: I would,

I would go historical.

Basically.

David: He knows a lot about the ins and outs, the politics, the developers, the money aspects, and we're gonna be talking to him about the affordable housing crisis that New York is facing. A crisis that we know is not going away anytime soon. If ever, the best we can do is keep our head above water.

So that we're still breathing, which is good enough at this point.

Brenda: I

David: think it'll be really interesting to hear his historical perspective and how he thinks it's gonna be able to move forward in the future.

Looking at the past, seeing how affordable housing and housing in general has evolved.

Brenda: Yeah.

David: Alvin, he's been through it all, the ups and downs of real estate and different eras.

A mentor of mine, the leader and captain of Seiden & Schein, Mr. Alvin Schein.

Brenda: Yeah, I'll tell you, I would not be here today if it wasn't for Alvin Schein.

David: Yeah. I mean, I don't want to equate it to the Mafia, but we are both made men and women because of Alvin. So thank you very much for taking the time here.

Alvin: Thank you for that effusive introduction. Not much of it is true, but let's pretend that it is.

David: I believe it's all true.

Brenda: Definitely.

David: But Alvin, before we sort of dive in, I, you know, I know a little bit about your background, but I'd love to understand how you got started in the practice of law and what you've been doing and how did you get to where you are now?

Alvin: Uh, I graduated law school in 1976, which was Very bad time for the country and bad time for especially the state of the city that I believe about that time Gerald Ford had said Drop dead, New York. New York was close to bankruptcy under the A. Beame administration Ed Koch was running for mayor about that time. So I had gone to law school in Buffalo, but I wanted to come back to New York City to work. I did come back And it was very hard to find a job.

There were just- And I did want to work in real estate. I felt I had a talent in that area. And I looked in the law journal every day. This was obviously pre internet. There was no place to look. Then I found, I responded to an ad. And this was for a Law office in a storefront in Bay Ridge, Brooklyn, and I don't know if you've seen in some parts of town You see an actual lawyer in the storefront between a bakery and a drugstore, you know, you have a law office.

David: Wow.

Alvin: And so I went to the interview and I met with the attorneys name was Harry Campbell. He had two other young associates working there and he was looking for a third associate because he was very busy. So we spoke for a while and he liked me and it

David: What kind of law did Harry Campbell practice?

Alvin: So, he practiced law that neighborhood people would need, which was mostly real estate and trust in estates. So I, while I was there, I worked in both areas. I learned about wills and estate administration and things like that, and did a lot of house closings. That's what you get in a neighborhood. One day, someone came in with a file and said that they wanted to sell their co op apartment.

So, Harry said, okay, you can handle this. I had no idea what a co op apartment was. I'd never heard of it. It was not discussed in law school. And I looked at the file. It was a stock certificate and a proprietary lease. All new to me. But, I'm a quick read and I figured it out pretty quickly and proceeded to represent the client on the sale of a co op apartment.

It did a lot of one family home sales and purchases, which was really good training. I learned a lot about basic real estate principles, how to clear title, things like that. But I was, I knew this was not for me. I aspired to do more complicated work and to, I really wanted to get to Manhattan. So, after about six months there, I started looking in the law journal again, and there was, one job, like one line, real estate associate, one to three years experience.

So I responded to the end. I met with two partners who were there. And what I was told is that at that time there was a moratorium on co op and condo conversion under state law. There was a law called Goodman Deary Law. which absolutely prevented any co op conversions. It happened that the law was about to expire, and the partners of the firm, feeling that this was a business opportunity, wanted to hire me to start working, doing co op work, because they felt we would be getting a lot of business because of the expiration of the law.

Shortly after I was hired, they got their first file. They knew what was going to happen, and they had a client who wanted to do a co op conversion. So, I, with zero experience, and one of the partners who had sort of done this years before, as a little bit of a backstop, learned 90 percent on my own, how to prepare an offering plan, how to file it, how to deal with the Attorney General's office.

Started working on it.

David: How did conversions work at that time?

Alvin: It's a big impetus to do co-op conversions. This was just before the big co-op conversion that happened in the 1980s. We're talking still about 19 78, 79 when I was getting involved in this. You had a lot of apartment houses that were all rent stabilized, fairly low rents, and what was happening is that, at least the clients of the firm, the buildings had a J51 benefits, which are similar to 421A benefits.

The benefits were starting to burn off, but in those days there was no mechanism for deregulation of the apartments at the end of the benefit period, which means that the owner would be paying full taxes. And still have low rent stabilized rents, which for the owners was not a happy proposition because for many of them they would wind up potentially even losing money holding the building.

So the only way out was a co op conversion. That was really the impetus for the co op conversion boom upon the expiration of the Goodman Deary law. An owner of a building would hire us, prepare a conversion plan. Once the plan was accepted for filing by the attorney general, presented to the tenants.

Usually there's a tenant discount, and as long as you could sell at least 15 percent of the units to anybody, it didn't have to be to tenants, you were able to effectuate the conversion. Most tenants, or at least a lot of tenants, understood there was a great underlying value in the apartment. And as long as they got a decent discount, most of these buildings had a lot of tenant support.

for tenants to buy the apartments, and tenants, they became owners, some flipped right away, made some money, some stayed on for a few years, and sold later as the values rose. The story of people moving from the west side of New York who had bought apartments during the co op craze and then bought brownstones in Park Slope and Brooklyn Heights is well known.

Also, people made money flipping apartments and bought homes in New Jersey. That helped the, the rising home values of New Jersey as well. It really sparked a whole upward surge of people actually having money who didn't have much money before, then making the money in co op conversions.

David: Where was this happening?

Was it primarily in Brooklyn or all five boroughs?

Alvin: Primarily, it started on the Upper West Side. That was the place where you had a lot of old buildings that had been renovated under J51.

David: Can you just explain a little bit about J51 just in case people listening don't fully get it?

Alvin: So, a lot of people kind of have an understanding of what 421A is, that you get an exemption of increased taxes when you renovate a property.

J51 was a little different in that it applied to conversion of older buildings or renovation of older buildings, at least at that time. And it actually provided two benefits. One benefit was an abatement of the existing taxes and then an exemption as to increased taxes. So for the owner, for a period of years, he could wind up paying very low, or sometimes even no taxes.

At the same time, the apartments had to go under rent stabilization. And there was a formula as to what the initial rents could be, so they were generally on the low side. And again, the increases from year to year were not great. The exemption, I believe, lasted 14 years, and the abatement was variable depending on the amount of the abatement.

Which, there was a formula of abatement that you got based on the amount of money that you put into the building. So, usually it was like a minimum of 8 years, and it could go on beyond the 14 year period, so they didn't always overlap.

David: Is there a reason that they were doing co op and not condo conversions?

Alvin: Well, it's a good question. Condominiums did not exist in the state of New York until 1964. The Condominium Act was adopted then, and it took some time to get traction. Everybody in New York State was used to co ops. Although, the vast majority of the co ops were in New York City, with some in the suburbs.

Usually, condos were limited to new buildings, to new construction. Older buildings were almost always co op conversions, just based on kind of habit and what people were used to. There were old co ops in the city, and when you did a conversion, it seemed that That should be the way to go. I can't say that was the best way to do it, but that was the way people understood it to be done and that was the accepted way.

Some people like the idea of co ops better than condos because in a co op the board has a lot more control than in a condo. And there was this thing where it seemed to be preferable to have a board that could screen incoming buyers, that if someone was not going to be a good neighbor, they could be rejected.

In a condo it's much more difficult to do that. So mostly it was co op at the time.

Brenda: So being so heavily involved in the condo co op area, how did you migrate your way towards inclusionary and affordable housing?

Alvin: I didn't get into affordable housing until much later when I became a partner at Seiden & Schein.

At that time, shortly after we started the firm here, I became reacquainted with Saul Arker of the Arker companies, who I'd known previously because we actually had done a new condo project for him in Brooklyn. So he knew who I was, but then we did that project and we didn't do any more work after that for a couple of years.

But then when we came here, we got reacquainted and saw who had previously done market rate housing, started to get into affordable housing. One business idea he had was that he wanted to do what was called 421A negotiable certificates. Now nobody really knows much about it, but in those days it really preceded inclusionary housing certificates.

And the concept was that you could build an offsite affordable building that would generate negotiable certificates for a building, say in Manhattan. That could get 421A many benefits. So what he would do is Build, say, a project in the Bronx with city financings or private financing, depends on what the particular deal was, or you'd build it in Harlem, and under the program, he would get certificates, the sale of which would help pay for the project.

That was the idea. The city was very much in favor of this because by selling the certificates in the private market, it would reduce the amount of city or state subsidy, and you had affordable housing. It was a really good program. It worked very well.

Brenda: That program is gone now?

Alvin: That program is gone. It's been dead for a number of years.

That's the risk we have in our practice area, that we work on programs that work really great, and for political reasons, the city You can pull the plug on them.

Brenda: The laws are definitely constantly changing.

Alvin: They're constantly changing.

Brenda: As you kind of work through the space for a significant amount of time, what's really stuck out to you?

Alvin: Practice was a little different in those days. We had fewer clients, but did more work with any, with particular clients. We would do the work from beginning to end. It wasn't just that we did a little slice of the work. We'd do the land acquisition, sometimes we'd do the financing. Often there were ground leases, and I did all of that.

It wasn't just the affordable. How's it going?

Brenda: One stop shop.

Alvin: Right. Everything. That's the way, that's what I was used to doing. In the old days, quote, the olden days, more often than not, we would do the entire job from beginning to end. So as we were doing the certificate sales, Sol became aware of Another program that we could take advantage of which was inclusionary housing and it really was not in consciousness because it wasn't much of a program in those days.

Inclusionary housing was initially only R10 zoning. For those who don't understand what R10 zoning is, it's relates to an area that is zoned R10, which means that you can build 10 times land area. But if you have inclusionary rights, you can add another two times land area to make the building bigger.

Which meant that the entire jurisdiction of what we were talking about was basically in Manhattan between 14th Street and 96th Street. It was a very small geographic area.

David: What was the reasoning for them initiating the program?

Alvin: The reason was to enable affordable housing either on site or off site. You could do it off site or on site.

This was, again, with the 421 A certificate program, it was a way to build affordable housing with private money. The key was private money. The government was not going to fund the construction of either on site or off site inclusionary housing. In exchange, you get a zoning bill. That was the whole idea.

It was a great idea, but it was very limited. It was only, again, in R 10 areas. Because it was in R 10 areas, you're essentially talking about high rent areas. The avenues between 14th Street and 96th Street. So, all of it at the time was off site, meaning you had to build your affordable housing in the community district or within a half mile of where the project is. Politics changed, and in the Blumberg administration, we had a big sea change of inclusionary housing with the development of inclusionary housing designated areas. The first of which were in Greenpoint, Williamsburg. That was really the first test case. It all changed. You could do off site, but the bulk of it really became on site.

Although we, of course, as you know, we did off site as well. And also you, in those days, you could use 421A for condo work, which you can't anymore. This worked out great for us, because suddenly there was an opportunity for developers to use inclusionary housing, but there were not many people practicing in that area.

I was one of the very few practitioners at the time. So, we got a big jumpstart on it. And we got hired for some major projects in Greenpoint Williamsburg. Uh, major condo projects that benefited from both inclusionary air rights and 421A. So we did, we did those aspects of it and we also did condo plans which is helpful because I had a lot of experience in the condo world as well.

It was directed. To have more affordable housing, again, mostly in a mixed income environment, with as little government assistance as possible. That was the key issue, as opposed to doing 100 percent affordable buildings that are heavily subsidized by the city, state, or federal government. This is a different type of affordable housing.

It's mostly stimulated by private developers without government help. That's our area. That's what mostly we've been doing as opposed to government funded jobs, which are different. As you know, the city then took it to another step in the de Blasio administration with mandatory inclusionary housing.

David: I'm sure there are people who don't understand mandatory inclusion.

Maybe you can just give a brief. Explanation of what it is

Alvin: mandatory inclusionary housing is different than the previous voluntary inclusionary housing in that it's what it sounds like It's no longer voluntary. It's mandatory if you wanted to build residential Multiple dwelling in what's called an mih zone or mandatory inclusionary housing zone.

You had to provide affordable housing. It's not optional There's no zoning bonus for what you do Because the area's already been up zoned for additional floor area, and the only way you can build a residential is to provide the mandatory inclusionary housing. Again, developers were going into these areas, they were up zoned, and they were available for development as multiple dwellings, and we had a real head start in the practice area of, uh, voluntary, so we immediately got a lot more business in mandatory inclusionary housing, and now that's a major part of our practice.

And developers are getting used to the idea of providing affordable housing within market rate housing.

Brenda: Has the HPD process gotten more complicated over the years?

David: Just to chime in, HPD, which is Department of Housing Preservation and Development, is the agency that administers the Inclusionary Housing Program as well as the 421A program that expired.

Alvin: Right. In the earlier years, the Voluntary Inclusionary Program was not quite as regimented as it is now. The process, to me, seemed easier and went faster. I think the level of review was less than the level of review now, and the volume was less. I would say the biggest problem they have now is all the additional filings, because people have to.

It's not even optional. You have to. I know they have far more inclusionary filings now than ever before, and Not more staff to deal with it, so that That is a problem. And it is more regimented. It's certainly more difficult now to get an inclusionary plan approved at HPD than it used to be. It takes a lot more time.

David: Right now we're in a housing crisis, an affordable housing crisis, which we always seem to be in. So we're essentially just basically trying to keep up with housing in general. And as you very well know, 421A has expired. There's no plan, as far as I know, at least solidified, to extend the deadline to complete construction in order to ensure that Certain developments are able to meet those deadlines to obtain 421A benefits.

And yet the city is still requiring mandatory, inclusionary housing. If you want to build a residential and inclusionary housing, obviously, if you want the zoning bonus, you have to do affordable on site generally, or you can purchase certificates to the extent available. These are huge, huge obstacles. And the city has just been keeping it's head above water, and we're about to drown. What are you seeing in terms of the obstacles, such as the ones that I've mentioned, to the building of housing, and the difficulties that developers are having?

Alvin: I find it very distressing, what is going on with the state legislature right now. I think it's a complete failure of will.

It's a political situation, which is very unfortunate. What they're failing to recognize is that before mandatory inclusionary was Adopted. The city commissioned an independent third party's economic study to make sure that mandatory inclusionary would work. They were very concerned that there would be a lawsuit that mandatory inclusionary is unconstitutional.

And it would be if they create a situation where that would constitute a taking of somebody's property, meaning You're taking your property without just compensation. They're very concerned about that. A study was promulgated, and the study said very clearly that MIH works if you have an exemption like 421A.

And they showed numbers that it doesn't work without 421A. This was all documented before MIH became law. And that was the, the understanding is the city then adopted MIH, which is now in the zoning resolution. You can't just ignore it. Even if they wanted to ignore it, they can't. They would have to revoke it, which would be an entire process.

But one of the essential elements of making it work is not here, and no one at the state legislature seems to want to recognize that. You know, we hear from Both the city council and the state legislature, not only are they not terribly concerned about a new exemption program or extending 421A, but they're talking about adding additional affordability on, that it's not affordable enough.

To me, it's completely a misguided approach, just succumbing to politics without any economic analysis. What we're talking about is numbers. Either the numbers work or they don't work. Last year, Governor Hochul proposed a replacement of 421A called 485W, which I'll say at the outset, I think was a very good plan.

Wouldn't work for everybody, but essentially what the plan would have provided is that the affordable units under 421A would match one of the affordability options under MIH, which is 25 percent of the units being at an average of 60 percent area median income, which is very affordable. One of the biggest complaints from people outside the industry about the 421A law that expired is that affordable apartments could be as high as 130 percent AMI, which really drew a lot of attack, and quite frankly, 130 percent AMI is a very high rent, especially in areas that are not high rent areas.

And I think that, that really left a bad taste for a lot of people, gave them a lot of ammunition that the program was a giveaway. And looking back, they probably should not have had 130 percent AMI as affordable rent, or as a possible affordable rent. In the context of the inclusionary housing, the rents aren't going to reach 130 percent for most of the apartments anyway, because the way it works is you have to go with whatever the lowest rent is for the particular program, or the lower AMI is for a particular program.

In mandatory inclusionary housing, in most cases it's either 60 percent of AMI, or 80 percent AMI, both of which are affordable. It would be appropriate for a new 421A program to model itself in that area, that either 60 percent or 80 percent AMI, and I think developers could live with that.

David: That's how the prior program had worked as well, right?

It was 60 percent AMI.

Alvin: The prior 421A program was at 60 percent AMI.

Brenda: Do you see an avenue for developers to be providing the affordable housing that they're required to without any sort of tax exemption?

Alvin: I would say it's impossible. The numbers just do not work. And we know what's happened since the program expired last year.

Housing Starts have Pretty much falling off the table. And if the numbers don't work, it's not going to happen. Even if a developer wants to take a chance and go ahead, the developer is not going to get bank financing for a job that doesn't pencil out. I wish the state legislators would understand this, but apparently if they do understand it, they're choosing to ignore it.

David: We need the legislature to step up and be reasonable. We're not asking for a windfall, but to be reasonable. There are obviously lots of things that the governor and their mayor have been trying to present, not a new 421A program, because I think that's too big of a battle for them, but they're trying to create less red tape in order to streamline the building of housing and affordable housing. The mayors presented things like conversions of office space, legalizing basement apartments. But I want to understand what your thoughts are on things that they have presented, and what do you think could be an additional solution, assuming that there is no new program this, this term?

Alvin: I think things you talked about are great proposals.

They're not going to substitute for new construction, which will provide the bulk of new market rate and affordable housing. We need both. We need a market rate and affordable. I read recently that in the past 10 years, the city population has increased by something like 800, 000 people, and only something like 60, 000 new housing units were created.

We're falling further and further behind in terms of providing housing of all types. The proposal to legalize basements, I think, is a great proposal. It should be done. First of all, it would help solve the problem of many thousands of already illegal basement apartments that are in the city. It's important to legalize them to make sure that they're safe.

And once they're legalized, those who own them can rent them in the market without doing so in the shadows. It would open up a lot of housing opportunity. As long as the apartments are clean, they're safe, they have proper kitchens and baths, have proper windows. There's absolutely no reason why they should not be legalized.

I don't understand the objections to that. It would help everyone. And by the way, it would also help increase property values for those who own one and two family homes to have another legal dwelling unit. It's a win win situation for everyone. Conversion of office buildings. Well, we've been through this before.

In the last crash, we had a lot of empty office buildings downtown. And the state legislature came up with this tax abatement program called 421G, which was very successful. And a lot of office buildings, most of which were kind of outdated, were converted to residential use. And again, it was facilitated with a tax exemption.

You might ask, why is the tax exemption so important? Why can't you just pay the taxes? The reason is that the city wants things both ways. When you renovate a property, taxes go up. If you build a new property, the taxes go up. It's not that they go up a little, they go up. A huge amount. Aside from exemptions, New York has the highest real estate tax in the country, which in Manhattan can be 30 percent of gross rent, which essentially means the city government is your partner on the deal, a 30 percent partner.

Better than a 30 percent partner because it's not 30 percent of net, it's 30 percent of gross. That's pretty much the way it falls out. It's simply, you can't build unless you're getting a tax exemption. For office conversions, this really worked with 421G. 421G expired. Now we're in another difficult post COVID situation where you have old office buildings that are near vacant, almost vacant.

Industrial buildings are near vacant. The best plan going forward is to convert them to residential. We need new apartment. Nobody's going to question that. How do you effectuate new apartments? The only way to do it with these old buildings is have a tax exemption in place. Some of them will be legal off the bat, some of them are not legal.

Meaning they don't comply with zoning, or they can't comply with building code rules. Those codes need to be amended to make it work. Right now, we're not seeing anything happening. Apparently there will not be an exemption for office conversions. At least, it's not on the table right now. There is a possibility that once the budget is resolved in Albany, that between now and June something will happen.

But it apparently is not in the conversation right now. It would be very unfortunate if, on top of no 421A, that there's no exemption or abatement program for office conversions. Which would be a great thing, and I think if we had office conversions, more office conversions to residential. And homeowners with basement apartments are able to legalize them or able to create new basement apartments.

It would be a big help in terms of providing additional housing in the city. You need a lot of tools to create housing. There's not one tool that's good for everything. But you need a toolbox that has a lot of tools in it. That's the kind of way Look at it. We need more tools to create both market rate housing and affordable housing, and there's a great need for both market rate housing and affordable housing.

As we all know, the market rents in New York are astronomical, higher than ever before, and there's only one reason for that. There's not enough housing. Supply and demand. The higher the Demand is higher, the rents get pushed up to the point as high as they could go.

Brenda: Well, new rent laws in 2019, did you see a significant change in the market when those came out?

Alvin: I understand the motivation for the 2019 rent laws. There was a lot of concern in the tenant population, that they were being priced out of the market, they might have to move, people might lose their apartments. But the 2019 rent laws went very far in many different aspects that I think are not beneficial, and are just hurting the housing market in general.

Brenda: How so? Can you give an example?

Alvin: Well, the first thing that happened was that the co op and condo conversion law would change to require you had at least 51 percent tenant consent to the conversion, which is basically impossible. I mean, they might as well said 99 percent of this is the same thing. You cannot effectuate a plan in which 51 percent of the tenants will agree to buy upfront.

It's just not going to happen. And it's proved itself out since 2019. There have not been any conversions period, except for those that were approved prior to 2019 or were in process. I think it's bad for real estate in general and it's also too bad for tenants who could have had an opportunity to buy apartments at a discount and don't have that anymore.

David: There was also a huge impact that the rent laws had on the landlord's ability to raise rent following a vacancy, following improvements. And I know internally we're working on several projects where the landlords are facing Significant financial difficulty because they can't maintain the property, maintain the units, do alterations and repairs, and also pay full property taxes when they can only increase their rents somewhat.

Alvin: Under old law, rent stabilized apartments, when they became vacant, the landlord was entitled to get what's called a vacancy allowance, which could then be added to the legal rent. For the most part, The vacancy allowance was in the area of about 20 percent over the prior rent. If that pushed the rent above market, then the landlord could kind of bank that increase and then apply it in the future if the rent or the market rent got to that point where it could be done.

And now this was very generous. What happened is that upon repeated vacancies, these Vacancy allowances could be banked by the landlord so that the landlord could pretty much always get market rent on a renewal, or even beyond market rent on a renewal, just kind of bank them. But instead of reducing it, they just got totally eliminated, which went the other way.

The problem with that is that when an apartment is vacated, it almost always needs some level of work. But there is nothing really left in the rent laws that gives the landlord any kind of incentive to fix up the apartment other than a reduced MCI, or Major Capital Improvement, formula, which is absurdly low and is not even permanent.

But just the fact of re renting an apartment that's been occupied for a few years, it's not eligible for an MCI. Just the cost of carrying a vacant apartment, paying a broker to lease it up again. and do simple improvements, like paint it and replace some appliances, costs a fair amount of money, none of which can be recouped anymore.

You just recoup it, hopefully, out of rent profit. But, if you're only allowed to get a very small increase, and in fact, under the de Blasio administration, some of the annual rent increases that were permitted were absurdly low, and in several years there were actually nothing, like zero increase for a couple of years, the landlords of those apartments start to fall further and further behind.

Let's assume rents are more or less static, operating costs are not static. You have to pay more for labor. Labor costs go up every year. Heating costs have gone up every year. Electricity goes up every year. And real estate taxes seem to be going up. Even though rents can be static, because of the way real estate taxes come in, you can actually be having increased real estate taxes because of a perceived increase in value of the property.

Create a few things. First of all, the market value of occupied rent stabilized buildings has decreased. The public may not care about that, but that is a fact. And The condition of the apartments just may not be as good, not really kept as well, because landlords have less incentive to put money into the apartments.

Overall, it's just not a great thing for some of the changes that were done in the rent laws. There are other things that can be minor annoyances, like limiting security deposit. Well, landlords can live with one month. I guess that's not going to change anything. To me, the two major things were the loss of the vacancy allowance and the inability to convert the building to co op or condo.

I think those were two huge changes that are damaging to the real estate industry.

David: And if you're rent stabilized, you'll never be able to deregulate.

Alvin: Yes. Under the old law, there was what was called a high deregulation threshold, which meant that once the rent got past a certain level on vacancy, the next tenant would be rent stabilized.

And that is gone. Once an apartment is stabilized, it will never come out of rent stabilization. I'm not sure if that's ever going to change.

David: Does this give landlords of rent stabilized buildings an incentive if someone vacates to simply just leave that unit open?

Alvin: If the rent is very low, that may be the case, because they can be stuck with a lifelong tenant at very low rents, because the rents aren't going to go up very much.

If the rent is reasonable, they will rent it, but they're not incentivized to improve the apartment. You know, it's great. I think from a market point of view, landlords were incentivized to really keep the apartments looking good with new appliances and looking really up to date. If you're not going to get a return on the investment, I would say that you can have a trend to have more weary looking apartment.

Brenda: So something that wasn't included in the 2019 rent laws, but seems to be a hot topic of conversation is the concept of good cause eviction. I was wondering if you could just talk about that and kind of give us your thoughts.

Alvin: The concept of good cause eviction is that all tenants, no matter in what type of dwelling they are, includes sub tenants of co op owners, tenants of condo owners, and tenants in multiple dwellings.

It would protect all tenants in that every tenant would be entitled to a renewal lease at a rent not to exceed a stated amount as long as they want to stay there. Good cause means that the only reason that a tenant could be evicted or not get a renewal lease is that they had defaulted in paying rent or were otherwise in default of their lease.

So the concept is that as long as the tenant pays their rent and doesn't default, they could get a renewal lease for as long as they want to live there at a controlled rent. Problem number one with that is scope. We're not just talking about apartment houses, we're talking about everything. That is if somebody owns a co op apartment.

and they rent it out to somebody, now they have a rent regulated tenant. Which, if that happens, that will end co op subletting. No co op board would even permit it, and no owner in their right mind would do it, because it's possible they can never recover possession of the apartment. So, from that aspect, the law does not make any sense.

If there is going to be a law, it really should only apply to multiple dwellings, not single apartments or homes. Just that makes no sense at all. The other part is that you are in a really short statute superseding rent stabilization. Rent stabilization is a very complex statute. It has a lot of things going on in it in terms of exceptions to rent stabilization.

things that landlord could do in certain circumstances. The Rent Stabilization Code is detailed because an off the bat good cause eviction law with zero protections or outs for landlords will be challenged immediately, and in my view is probably unconstitutional. You just can't do that by fee. I'm sure it would be difficult off the bat.

Chance lower courts in the state would uphold it, but the appellate courts, in my view, would probably strike it down as unconstitutional. There is no relief for a landlord in a difficult situation under good cause eviction, where there are escape valves for landlords in rent stabilization, even though they're rarely utilized, there are escape valve and there are provisions for higher rent due to major capital improvements, which could be trumped by good cause eviction.

If there was a good cause eviction law, I. I think you probably would see the end of development, at least private development, in New York City. Either developers would not see any upside in doing it, and banks would be too worried about not being paid off. It would also affect refinancing of existing multiple dwellings.

Again, I think the lending market will shrink, and it will be difficult for apartment owners to refinance their mortgages. For listeners who are not aware of this, commercial loans typically have a 10 year term, which means they have to be refinanced every 10 years. So it's not like you'd have a loan on the project until it has been paid off.

You have to go back into the market every 10 years to get a new loan and with restrictions on good cause eviction. I would say there's no doubt that the number of lenders that will be in the market will be reduced, and those that remain will want higher interest rates. It may be the banks will drop out altogether and the only lending might be from debt funds.

Brenda: Sounds like, I mean, evictions are already very difficult to effectuate at this point. If you implemented good cause eviction, it sounds like it would just make everything come to a standstill.

David: A multifamily apocalypse to follow, the retail apocalypse.

Brenda: Yeah. I'll also say it doesn't seem like they're thinking about the economics of it all.

Alvin: They are not. There's no economic analysis being done. It's all political.

Brenda: Which is the big issue here.

Alvin: Yes, again, if one wanted to have a hope of having constitutional statute, one would do an economic analysis to prove that it's going to work, and to the extent that it's not going to work, to have escape valves so that it can be constitutional.

Brenda: Right.

Alvin: So, while there is actually a chance that this might get adopted

David: But what percentage are you giving it?

Just out of curiosity.

Alvin: Uh, we're not in Las Vegas, but

David: We won't hold you to it.

Alvin: Yeah, I would, I would give it a 25 30 percent chance.

David: Hopefully, it is a lot of lease.

Alvin: There's a lot of pressure in the legislature, and what I understand will happen is that the programs we're talking about are being held hostage to good cause eviction.

There's those in the party who will only consider 421A extender, which we didn't really get into, which is another issue, or 421A replacement if it's tied to good cause eviction. That may be the trade off. Those on the other side of the party might say, forget it, we won't do anything, in which case nothing will happen.

But good cause eviction is being used as a negotiating tool for other legislation, which is needed. That's unfortunate.

David: I agree, that's very unfortunate, and you mentioned the 421A extension, which I think is more probable any new program would pass. Maybe you could also talk about how important that is in order to make sure that developments that are underway, that are currently in rezoning or in MIH areas for them to be able to have the necessary time to complete.

So that they can meet that deadline and then obtain the benefits.

Alvin: The issue with 429A now is that in order for a project to actually be eligible for 421A benefits, it has to be completed not later than June 30th of 2026. Completed means that you have to have a TCO. Temporary Certificate of Occupancy or Permanent Certificate of Occupancy for all of the residential units in the building.

If you don't make that date, you will not get 421A benefits, even though you were expecting to get. We're only talking about projects that had vested, meaning they had started their foundation work by the vesting date. Now, those that haven't done that, extension's not going to help them. You have to have already vested.

But there are a lot of things that could happen for many projects that would prevent completion. By 2026, especially for projects that are in the inclusionary housing process, because many of those projects could get tied up in the, what's called the completion process at HPD, which may prevent them from getting a TCO for all of the units in there.

development. So it's not just physical completion, it's administrative completion that could hold things up. We try to advise our clients to minimize the impact of that. I won't go into our trade secrets, but our clients are probably better positioned than many others to bypass the holdup of the HPD inclusionary completion process so that they will not have as a holdup to getting a TCO, but many projects will.

Other projects in Gowanus are in a really difficult situation in that there's still pending proceedings to stop the rezoning or roll back the rezoning. Unlikely to be successful, but there is a group that is seeking a restraining order while their appeal is pending to reverse the zoning. If that restraining order comes into play, then all projects in construction in Gowanus could be put on hold.

There's no exception in the statute if your project's put on hold due to a litigation over zoning. There are a lot of reasons why it would be appropriate for the state legislature to extend the completion deadline for 421A. The governor wants it, the mayor wants it, but so far the legislature has not voted on it.

It hasn't come to the floor. And again, it might become a bargaining chip. For a good cause of eviction.

David: With the expiration of the prior 421A program, which also had a deadline to complete, what happened there? How did that work?

Alvin: It wasn't as much of an issue then as it is now. There was a lot less inclusionary housing that could hold things up.

There was no threat of litigation. There were fewer extraneous issues that might hold things up. So, that just wasn't a problem. But it's a problem now.

Brenda: Do you think the lending markets and the collapse of SBB or other banks out there could play into this?

Alvin: Well, the lending market's already thin. A lot of our clients projects are being funded by debt funds, not by banks.

Probably more debt funds now than banks.

Brenda: Right, which is creating another HPD delay.

Alvin: Creates another delay and also makes it tougher and more expensive for clients to finance the project. Debt funds typically get an interest rate that's higher than banks. So it just makes the job more expensive.

David: Are they willing to roll the dice if a project may or may not make the completion deadline while we still are in the air about whether or not that deadline will be extended?

How are they analyzing that situation?

Alvin: Debt funds that are lending are looking at the situation very closely. And some of them are asking for personal guarantees if the project is not completed on time or other penalties. It just makes it more difficult for the developer. By June of this year, we will be at the end of new lending on pending 421A projects, because you'll have a three year window left.

Three years is about what you need to complete a building under the best of circumstances. So if there is no extender and there's no new 421A statute, any project that might have vested but is not in construction by this June will be gone. There simply won't be any more new starts, any new lending on new construction in the city.

That'll pretty much put an end to it. You know, there's some very important things in play in Albany and hopefully at least something will have traction for now.

Brenda: Sounds like a very volatile market that's also coming to a standstill.

David: Everybody always thinks this is the worst time. Because it's happening now.

You've been there from the beginning. From the beginnings of IH 421A. Handled this for 30 plus years. Is this the worst time? Has there been a time that was worse than this for housing? And how do we get out of this if we do get out of it?

Alvin: So I would not say it's the worst time. I think the worst time was during the Gerald Ford years.

You know, when the city was City was burning, as they say. There was no concern about investing in the city. Everyone thought the city was just gonna go down the tubes. I would say that was the worst time. Nobody's saying the city's going down the tubes. We still have thousands of people coming into New York every year, wanting to live here.

It's still the financial center of the world. New York is necessary. Not the worst time, but we're in a bad time. I think we will get out of it. We always do, we just don't know how long it's going to take.

David: If you were in a state legislature, how would you try to convince your colleagues to go this route?

To be, to be stable, to be balanced?

Alvin: I'm not sure that the state legislators who are in control are really interested in getting beyond rhetoric. And getting beyond rhetoric, both right and left, is what's necessary right now. Uh, what I would try to do is sit them down. Let's look at the numbers. Let's look at what it costs to develop and operate a property.

And let me show you what, how the numbers play. And if you're willing to look at the numbers, you'll see that you really need to do something about a new 421A program. An extender for existing 421A and a new program for office conversion. I think if you see the numbers, if they see the numbers, they'd be more willing to do something about it.

David: Clearly, the numbers don't match and they're still harping on the fact that they need more affordability. We don't care where the money comes from.

Alvin: Right. There is a school of thought. Legislators, both city and state. That we should only encourage government finance development that is developed by not for profit.

I think this is kind of a misguided view for the basic reason that there's just not enough government money around to provide even a small fraction of the amount of housing that's needed. It's just a very small way of thinking. And again, without understanding the real numbers as to what is actually available in terms of government money.

David: I've been reading some news articles that believe that this is a larger plan for the legislature to essentially take over real estate, to make it public, to socialize it. Do you have any sense that their ultimate plan is to make housing public?

Alvin: There are some legislators with that point of view. There is someone on the city council who has proposed A city law that would require all private sales of real estate to have built into them an offer of right of first refusal to a not for profit buyer.

Which is kind of what you're talking about. And the city council person who is proposing this is an acknowledged socialist. So there's no secret about what the plan is. I don't think that this proposal would actually be enacted. I think it would be immediately challenged as being unconstitutional. I think it is unconstitutional.

There's no way it could hold up in any court, but it reflects the view of some people in the city as to where things should go. I don't think there are enough legislators of that mind to make it happen. I don't think, I don't think that there is a widespread conspiracy, as you say, to socialize real estate.

Although there are a few people who are of that opinion. Hopefully there will not be enough people to make it happen.

David: That's that's the hope and that's the and that's the dream. Right. Um, Alvin Schein. Thank you so much for for joining us You've you've been an excellent guest And who knows, maybe we'll have you on in the future.

Alvin: Love to do it. Thanks with thanks, and

Brenda: thanks for coming in. We really appreciate it.

Alvin: You're quite welcome.

Brenda: Well, everyone, that's our show. Thanks so much for listening

David: and of course, don't forget to subscribe. Also, don't forget to leave comments. Cause we love to hear from our audience, right, Brenda?

Brenda: Yeah. Feel free to reach out at [email protected] or visit our website at seidenschein.com. We really look forward to hearing from you.

David: You can also reach out to David and Brenda at [email protected] and [email protected]

Brenda: Those are lengthy last names. You can just find us on our website.

David: That's right.