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Ditching New York Tenant Broker Fees

With relatively minor exceptions, the real estate brokerage industry works pretty much the same way across the United States: Sellers and landlords hire agents to find customers, and when one agent brings a client to another, they split the commission.

Except in New York City, that is. In the city, where perennially scarce rental housing dominates the market, tenants get stuck with the brokerage bill. But that situation may soon change.

Under an unexpectedly aggressive interpretation of an already aggressive tenant-protection law, New York’s Department of State recently declared that brokers are forbidden from collecting their fees from tenants. The ruling was a clarification of a law that took effect last year. If a broker or agent is involved in renting a property, the landlord must pay the fee under the department’s interpretation. (The exception is the relatively rare case in which a prospective tenant hires a broker to help in an apartment search.) The law technically applies statewide, but it is really an issue almost entirely within the city’s five boroughs. Elsewhere, landlords either pay the fee themselves or, more frequently than in the city, they list and rent their units directly without involving an agent at all.

In a statement, the Department of State said, “The updated guidance continues to interpret the laws according to their plain meaning and consistent with the way they were intended to be applied—which is to provide the strongest possible set of protections to tenants.”

Reactions to the announcement were exactly what you might expect. Tenant advocates were jubilant. Landlords warned of economic Armageddon. The state’s real estate trade groups rushed to court, and on Monday a judge in Albany temporarily barred the Department of State from enforcing its new interpretation. Further court action was scheduled for March 13.

From a distance – and I advise anyone who asks to keep a healthy distance from the city’s residential rental market – this looks like another big clump of straw piled onto the beast that carries the city’s overburdened housing stock. The camel may collapse under the stress, but nobody is shooting it between the eyes. Still, you likely end up with a dead camel either way. The main difference is timing.

New York City’s housing market has officially been in crisis since shortly after World War II. Reacting to the political strength of tenants in the crowded city, the state has passed one law after another to benefit them at landlords’ expense. There has been a long evolution of rent control, rent “stabilization,” property tax abatements in exchange for rent restrictions, and a special housing court that makes eviction for nonpayment of rent or other reasons a lengthy, cumbersome and expensive process.

The city also developed strict rules to prevent discrimination based on race, sex, marital status, gender, receipt of public assistance, religion, citizenship status, lawful occupation or presence of children under age 18. Some of these rules are also present in federal and state law; others are specific to the city. As I remember well from my own childhood in the Bronx, the city has a long and unpleasant history of informal but effective housing discrimination, especially along racial and ethnic lines. As a class, landlords brought many of these strictures upon themselves.

But that does not change the fact that creating and maintaining housing, particularly decent housing, requires capital – and more of it in New York than in most other places. There is a strong case that the city’s biggest slumlord today is its own public housing authority. New York needs private investment in housing if it is to properly house all the people who want to live there.

Suppose you are a landlord who wants to do a decent job and simply make a fair return on the required investment. Given the difficulty in getting rid of a bad tenant, your success hinges on finding good ones. By a good tenant, I mean someone who pays the rent on time and does not do significant damage to the property or distress other tenants. This is not too much to ask.

Working through brokers and agents, and making prospective tenants pay their fees, does a couple of useful things for landlords. It boosts profit margins that are otherwise often restricted by rent regulation. It also professionalizes the process and makes it less likely that a landlord will be accused (rightly or otherwise) of engaging in illegal discrimination. The system does burden tenants, especially younger and poorer ones. But on the whole it has tended to balance the load, considering the obligations New York places on landlords.

If the courts uphold the state’s new interpretation, landlords with unregulated properties may continue to hire brokers and bake the extra cost into higher monthly rent amounts. But landlords of rent-regulated units lack this option. They can absorb the cost of the fee, list their properties directly without using a broker or give up on listing them at all.

The law signed by Gov. Andrew Cuomo was intended in large part to help people get into homes by reducing the upfront costs. Besides freeing prospective tenants from brokerage fees, the law stipulates that landlords can no longer collect more than one month’s rent in security deposit or charge application fees greater than $20 (including credit or background checks). They also can no longer discriminate against prospective tenants who have a prior history of ending up in the city’s housing court, which is where evictions get handled. This means an undesirable deadbeat tenant’s track record can no longer legally count as a strike in the rental market. Advocates say this is a fair trade in return for protecting the tenants who merely go to court to enforce their legal rights.

The upshot of all this is that it will tend to drive capital out of, rather than into, a housing market that desperately needs expansion and updating. Big property owners have every reason to look toward some other form of development than rental real estate, and especially rentals aimed at the middle and lower market segments. Small property owners – the working- and middle-class people who rent out units in their two- and three-family homes – will have greater reason to take those units off the market altogether rather than deal with the hassles and hazards of being landlords. Maybe they will allow grown children or other relatives to live with them, providing a sort of legacy advantage in a housing market that is supposed to be promoting equal opportunity. Or maybe they will just use the extra space for in-home businesses (not always legal) or storage.

Perhaps the worst part about the new broker rule is that it is an officially nonbinding bureaucratic interpretation, yet still a hazard for regulated brokers who defy it and for the landlords who hire them. It was not debated explicitly when the law was passed in Albany, nor highlighted when Cuomo signed it. New York has an opaque legislative process to begin with. But this is below even the Empire State’s usual low standards of government transparency.

There are lots of places in the United States that need more housing. There are few that make providing it as unattractive as New York City. Is the state trying to solve a genuine problem, or is it running an experiment to see how much a gasping camel can take?

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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