Missed Opportunities And Unintended Consequences: How Real Estate Laws And Policies Are Sinking

It’s been pretty clear that we have an affordability crisis and inventory shortage right now, and it has been the case for quite some time. Surely, the city and state governments are doing something about it, right? That isn’t quite the case, as this conversation will tell you. In this episode of REal Talk with Jamie, host Jamie Heiberger Harrison brings in Gary Malin, COO of The Corcoran Group, and Neil Garfinkel, Managing Partner at AGMB LLP, to talk about how the implementation of recent changes in real estate laws are preventing the industry from doing its share to solve the housing crisis. Policies and regulations, like the 2019 rent laws, may not be achieving the intended goals and can lead to unintended consequences. Meanwhile, developers face challenges due to high costs, regulatory hurdles, and a lack of incentives. Tune in and learn what outlook is for the market, where the opportunities lie, and how everyone can pitch in to be part of the solution.

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Missed Opportunities And Unintended Consequences: How Real Estate Laws And Policies Are Sinking Us Deeper With Gary Malin And Neil Garfinkel

I feel like we have so many topics that we need to cover. We're not even going to have enough time. Gary, take your pick. Which is the one that's out there now?

Not a surprise what happened with the Supreme Court not taking the 2019 rent law case and seeing how that was going to play itself out. Most people had hoped that would happen on the ownership side to find some reasonable middle ground to get things moving in a different direction. As far as sweeping ramifications for people, it's not going to help the lack of inventory that exists out there in the market and the lack of affordability.

The city continues to find ways to make it impossible for people to develop and build, whether it's because they won't be approved for 21A or rezoning or basement apartments. It's like they won't. It's like the city of no. Yet then they want to impose all these restrictions in the community at large when the reason why there's no development falls squarely with them. It's an interesting time that everyone agrees. There's an affordability issue and an inventory issue, but for whatever reason, the State/City doesn't seem to want to do anything to have anything other than rhetoric as it's concerning because people want to help and want to build but there's no incentive to it.

We have the taxes and local law 97, which is going to hit everybody. All of a sudden, they expect the owners to comply with that.

They're constantly looking for ways to impede business versus embrace business. You need a different leadership group to get them to understand you don't always have to get everything you want for things to be where they need to be. The tax base could shrink. Commercial property values are decreasing tremendously. The city is going to have a fiscal crisis unless they figure out a way to be pro-business, and it just doesn't seem like that's the agenda.

I was saying to somebody, “I wouldn't be surprised if we end up in the late ‘80s and early ‘90s situation with loans coming due and receiverships being put into place. All of a sudden, there can be a ton of buildings for sale cheap in the Bronx.

It comes down to the unintended consequences. As opposed to sitting down and talking with the community at large and getting everyone at a table to figure out effective smart solutions that help everyone. Everyone wants to drive such a hard bargain that the only thing that they'll wake up and realize is when the economics no longer make sense when services need to be cut., and when all the other things that are important to run this city can't be dealt with.

At that point, maybe they'll come to their realization that driving this hard of a bargain isn't healthy for the city. Everyone needs to walk away a little bit unhappy in order for things to move in a positive direction, but that certainly doesn't seem at all reasonable. It's a frustrating time to be in our industry, with everyone trying to blame the community at large for the issues that are far greater than the community at large.

Real Estate Laws: It's a frustrating time to be in our industry with everyone trying to blame the community at large for the issues that are far greater than the community at large.

We get the double whammy now. I don't know the exact details of it, but it sounds like again it is going to be hurting the industry. When I say the industry, I'm talking brokerage industry in terms of the changes that are now going to come about. I believe they're telling sellers that they don't have to pay the buyer's broker. Can you tell us about it, Gary?

I’m going to turn that over to Neil.

It goes back to the June 2019 HSTPA. The Department of State issued an opinion that said that they believe that the HSTPA prevented a tenant broker or rather a landlord broker from collecting a commission from the tenant. To level set, there is no limitation on the collection of commissions in New York State. There is no requirement on who pays the commission. The Department of State took this position that the landlord's broker could not collect from the tenant.

What happened was that Rebny and the New York State Association of Realtors sued the Department of State and they won. The judge agreed with the HSTPA. There was no interpretation. The problem that we have though is that concept has been floating around, both at the city and the state level. There is currently a potential bill pending at the city level and the state level which would codify what the interpretation of the Department of State was.

It's definitely not a fun time to be in our lovely industry right now.

It's problematic on so many different levels. Not the least of which is whether they think that by limiting what a broker can collect, it is going to change the economics and make housing any more affordable. The truth of the matter is all that these things do is money is fungible. It will shift from one party to another. Maybe these are unintended consequences. I don't see how they ultimately work. I'm concerned about the idea that it's not going to do what it's supposed to accomplish. I'm concerned that they start talking about limiting commissions on rentals. Why wouldn't they start talking about limiting commissions on purchases and sales? Why would they start not limiting what we can charge?

They do that, Neil. I hope the bar is going to start a lot more than we're at.

There are many different concerns and I go back to what Gary said, so many things that we see may be well intended but the results don't turn out the way that they expected. That's on a macro level. You talked about it on a very macro level. That's our city economy and housing market, then you brought it down to a commission which is a huge issue.

I'll bring it down to a very micro level which would be this recent requirement that landlords attached to their leases a flood disclosure. The intention is a good intention. The idea is to let a tenant know if they're moving into a property that the property is in a flood zone. That's the intention. It's a good intention. People were moving into properties. They didn't know about this. Their property is flooded. They lose their personal belongings. They don't have insurance.

It's a great idea except that now try to go figure out if a property is in a flood zone. They point you to FEMA and the FEMA map, then guess what? Go to FEMA and see if you can figure out so easily whether you're property is in a flood zone. Not only that but there are two different types of flood zones. We're saying to the real estate brokers, remember that's why the biggest constituency, "Don't fill out the form. Let the landlord fill out the formal or let the landlord talk to their attorney about filling out the form," because I tried to go to FEMA map and it's not so easy to do. It's well-intended consequences, but it feels like things aren't thought out, and that makes things and certainly creates struggles for us, particularly for people trying to do their jobs.

If you think about it, when you talk about affordability, the broker is the least expensive concept in the concept of affordability. Brokers don't set land prices. That's number one.

Brokers don't set all the rules, regulations, fees, costs, and expenses that come along with people building buildings. They're not the ones, the cost of the labor. If it's union labor, there's a cost to that. In all the supplies, trades, insurance, and the municipality's insurance, there are all these costs and expenses that developers incur to bring their properties to market.

They also incur risk, which no one in the city cares about, and taxes and everything else along with it. This concept of how limiting or signing the broker to pay this or that, the tenant to pay versus that. Ultimately speaking, that's not what makes housing expensive. The city doesn't address the real root of the problems that exists. They look for a scapegoat. The brokerage community becomes that scapegoat because it's easy for them to point the finger at the broker. It makes it very frustrating for people who are trying to do a good job, work hard, make a living, and do the best that they can.

When half the market, people could go without using a broker. That's the pure definition of a fair open market when you don't need to utilize someone's services, but you elect to because that person provides the value. It's a free market. It's negotiable. The city should stay out of it and as Neil is saying, go to legal fees, accounts, and fees. Who knows because they don't act in reality in terms of like how it works. They're looking for votes and raising their own public profiles.

There are certain things that can get them in the news, and there are other things that can't, versus real, true, and hard discussions on how to work together to come up with effective solutions. Everyone at revenue and everyone in the brokerage community would welcome intelligent conversation instead of being dictated to when we've already seen when they do things without consulting, the unintended consequences are enormous.

In 2019 rent laws, prices did not come down. They've only gone up. There's a lack of inventory. That's directly related to what they did and as opposed to saying, "Maybe we made a mistake. Maybe we didn't understand things. Let's go back and figure it out with the community at large." They have no intentions of ever opening it because as far as they're concerned, it works. All facts tell them it didn't work. It's frustrating when there are good solutions that could come from compromise that we don't seem to be able to get to. That concerns me just about where the city is headed.

Everything is optics. Some things may be well-intentioned, but it ultimately goes back to the optics without having real decision-makers and real feet on the street that are affected by these actions. That's not taken into account, and quite frankly, we have to clean up the mess after. That's what's even more frustrating.

We're left holding the bag.

The problems haven't even begun because the migrants keep coming in and they're in our buildings and parks. What's going to happen when the 60 days are up and they move them from one location to another? I don't even get that sum either. That was the newest rule. They get 60 days per location.

It’s something along those lines. That's certainly a whole other issue that this city needs to contend with. The difficulty that they're trying to find housing and help these people have some safety, it's a difficult situation because they aren't the options that people think that there are in this city. The city also doesn't financially have the resources to accommodate all of this. There are so many things that are not being thought about to work together.

I understand. That's a problem. It's a humanitarian issue. We're helping these people trying to help them find a home, find shelter, and get their kids educated. There are so many things, but the system doesn't have the capacity to handle this much in such a short period of time. I don't know the solution. It's well above me. I don't know how they're going to accomplish this, but it is certainly a problem.

I'm all for safe haven. We're not talking about it. We're just talking about a physical infrastructure that cannot pull any more people. We talk about housing prices that exist before we start talking about that issue. From my perspective, the moral imperative is not the question. We physically don't have the infrastructure to handle this. We have a housing issue and an employment issue. Where are we going to put you?

The schools are too crowded already.

Schools previously would have people outside in the playground at certain times of the day so they wouldn't be overcrowded. This is why it's an issue. It's not an issue because people don't want to help. People want to help but it's like Neil said, it's a capacity problem. I don't know how you solve it when there is no more land being created. There is, at the moment, no more housing being created. There are no more schools at the moment that can accommodate it.

There's such pressure on the system and so much that everyone is dealing with.

Don't get me wrong, I appreciate that everyone has a million things on their plate, whether it's on the private or public side of the world. There has to be more effective communication so that everybody can communicate. That is offering something of substance to the conversation. It's not a one-sided conversation about any one of these issues. There's a multitude of ways to work. It's just whether people want to get together and do that.

They're doing it across the board. Now, let's talk a little bit about 421a. I believe that Hatchel said there's going to be some form of J51. I know it came out, so I'm not certain as to what the details of it are, but I know that there is nothing like the old 421a than the reform 421a. I don't know anybody that's participating in this new one. Do you know anything about it, Neil?

I don't participate in that policy side, but I can tell you and I agree with you. There is no program out there now that is incentivizing builders to build and create more units. The economics don't work and until we figure that out, I don't see that happening. Everything is more expensive. You've got to incentivize developers to develop and we're certainly not doing that now.

The people that block these rules all they focus on is the tax benefits that someone gets from building, versus all the other good that comes from it. It's difficult because they're not understanding. You're not in that world. You don't know all the costs, the stocks, and the structure. I get that and I appreciate that, but developers want to develop. That's in their blood. That's what they want to do.

They're also very smart business people. They're private companies, but the government wants them to act like public builders and they should take a loss. Unfortunately, given the economics of the way the world works, that's not something they're going to do. If nobody is taking advantage of this and you see so little permits being pulled for jobs, it has to tell you that it works the same way for every developer.

Builders are private companies but the government wants them to act like public builders and take a loss.

There are tons of other people doing it and certain others were, then that would be one thing. When everyone is on the same side, like under current circumstances, even though I want to build, I can't. You would think that people would go back to the drawing board and try to figure out a solution. Everyone focuses on the wrong benefit, let's call it, of the tax benefit. You wouldn't need the tax benefit of all the other things that I said earlier.

It didn't exist financially, but they do. Developers have to figure out a solution. It makes it affordable for them to make money themselves. At the same time, serves the broader public in finding affordable housing. It has to be a true partnership to help both sides of the equation. Without those incentives, you're clearly seeing by the lack of buildings that it's not viable today.

Did you guys see, there was an article in the paper not that long ago? You probably know about this anyway, which is how the private ownership and management of the public housing, how far superior it was when it was taken over private as opposed to the city management. The amount of money that the City lost in their own buildings just by not giving up that management and letting management manage privately the way that they know how to do it. That alone. You have all this disgusting rundown city housing. They can turn it over to private hands, but they won't.

Once again, it comes back to what's your goal? What's your agenda? What do you want to accomplish? What's been done to date isn't working and isn't achieving the goals that everyone wants to achieve, then you need to go back to the drawing board. It seems, at least at the moment, the city council in particular in many issues don't want to have those conversations. Underneath it all, everyone wants to solve the problems of the city because everyone loves the city.

You're all invested in the city in one way, shape, or form, and we want to do the right thing. If the policies don't allow people to do the right thing, it makes it very difficult because it's a very circular conversation that ends up going nowhere. “We want you to do this. We can't do this without that. We're not giving you that, so we're not doing that.” Months and months go by, then maybe something is brought up but it's a lot of what-ifs. The cooler heads should prevail. I think about the long-term viability of the city.

The way you do that is to get out of your own comfort zone and people need to bend a little bit. Hopefully, we're going to get there sooner rather than later. I know from the Rebny side of the world, Neil and me, and a lot of other people in this community put a lot of time in to try to work with the city politicians to push things forward. Hopefully, sooner or later, something is going to click and get things moving in the right direction because everyone wants to see it go there. It's just there's got to be a reason to make it happen.

Neil, do you want to finish us off on that note? I know you also have been working tirelessly with Rebny to try and make changes here.

We all have to be optimistic. It's a reality-based conversation. We do have to be optimistic that our elected officials will do the right thing. I'm a cheerleader. I work hard to do that. We'll continue to do it. That's the bottom line. Do you want to finish off with the property condition disclosure? Do we have time?

Yes, please.

I want to remind everyone that there's a change in the law to the delivery of the property conditions disclosure form. New York State has had for many years a requirement that a seller in a residential transaction complete something called the property condition disclosure form. It's for 1 to 4-family properties. Not coops or condos. The problem was that the law contained a provision that said, “If the seller didn't give the property condition disclosure form, they could give a $500 credit to the purchaser.” In geographical areas like Upstate New York, it was common practice for the seller to complete the form. Downstate, the seller virtually never completed the form.

I've never seen it done.

Once or twice. Governor Hochul signed a law that says, “The $500 credit is no longer going to be available as an option. Therefore, sellers are going to have to complete this form." Putting our broker community on notice. Quite frankly, sellers' attorneys and buyers' attorneys are noticed too that there is going to be a fundamental shift in terms of disclosure sooner rather than later. Everyone should be aware of it. Particularly the brokers.

The law always says that the buyer’s broker and the sales broker have an obligation to inform the parties of the existence of the form. Now, we're going to have a lot of sellers asking a lot of questions about how to complete this. It's like 7 pages and 90 questions. I recommend that attorneys and agents go and read the form because you are going to be getting a lot of questions about this.

Neil, let me ask you a question because I'm not familiar with the form in the sense that no one ever used it, so I never spent time looking at it. It sounds quite exhaustive if you're telling me that it's 90 questions. How many sellers are going to truly have access to give the right information and data that they're asking for? I can understand the broader reason behind it, but if you make it so overly complicated that you or other smart people in the industry do this for a living can't figure it out. Has there been discussion about how to streamline this process with this state or city or the answer is they don't care?

No, they don't care, but most of the answers are yes, no, or unknown. I’m sure there going to be a lot of unknowns. It doesn't require them to get up on the roof and do an inspection. If it says, “Do you know of any leaks on your roof?” Yes, no, or unknown. You may check off the unknown. I'm curious to see. It's been done Upstate for a long time. I've never heard much about it. We'll see, but everyone should familiarize themselves with it because it's going to be a change in the way that we conduct residential closings.

A lot of people are going to check on the known because they don't want to have any liability in fact.

As attorneys, we probably will need to because we are a buyer-beware State and we're going to put in something to the effect of, “That was completed to the best of our knowledge,” but you're not going to have any liability.

No recourse.

Wouldn't you know when is that going into effect?

I want to say March, but I can check on that. We did a question a week ago, so I want to say March.

We’ll give New Yorkers another reason to sue people.

Let’s hope not.

This is good. I will be looking forward to packing and jigging this up and getting this back to you. I'm happy that we're able to get together again. Hopefully, we'll do it again.

We appreciate it as always.

Thanks for having us.

It's good to see you both.

You, too.

Important Links

• Department of State

• Rebny

• New York State Association of Realtors

• FEMA