There has been a lot discussion about the effects of COVID-19 on real estate in New York City. This client alert will address the obligations of commercial tenants and landlords as well as the requirements of residential landlords.
How to allocate risk in the face of COVID-19?
Commercial tenants are asking for abatements or deferrals to their rent in the face of declining economic conditions. It is clear that there is a heightened risk in commercial leasing transactions in the short term. Not surprisingly, tenants are asking for rent abatements for leases in the event that they are not open due to a pandemic as highlighted in this Wall Street Journal article. However, such a rent abatement is simply a transfer of risk from the tenant to the landlord and one that a landlord can reasonably reject. Unfortunately, this is an uninsurable risk at the moment. There is pending federal legislation for the Pandemic Risk Insurance Act (PRIA) which would create a reinsurance program backed by the federal government, akin to the Terrorism Risk Insurance Act implemented after September 11th. However, such a program is unlikely to be enacted and we can expect high premiums if the legislation is ultimately passed. In this regard, it is only possible to allocate risk of another shutdown through negotiation and with one party (either landlord or tenant) assuming the risk.
Reducing your commercial real estate footprint
Managing risk is important for any business. As remote work has increased and business structure continues to evolve, we have updated our list of considerations for sublandlords and subtenants amid COVID-19. These considerations include: reducing the risk of a default under the overlease, necessary reconfiguration of the premises, reduction in services, and incorporating increased operating expenses for a landlord. Our full article is available at: https://www.coopersmithandcoopersmith.com/2020/05/11/sublease-considerations-sublandlords-subtenants-covid-19/
On that other certainty: Taxes.
July looms large for property owners of all sizes. Tenants have been lobbying for a rent holiday. Meanwhile there has been minimal discussion of relief for property owners in the form of tax abatements and deferrals, and that which has been proposed has failed to appease landlords. Experienced property owners know that New York City property taxes have two components: assessed value and tax rate. The assessed value for properties was issued in January and is available from the New York City Department of Finance Website: https://www1.nyc.gov/site/finance/taxes/property-bills-and-payments.page. The property tax rate will be determined in November.
The assessed value of Class 1 properties (residential properties up to 3 units) cannot increase by more than 6% of the previous year’s assessed value and cannot rise by more than 20% within any five-year period. The assessed value of Class 2 properties (most co-ops and condos) cannot increase by more than 8% of the previous year’s assessed value and cannot rise by more than 30% within any five-year period. Commercial properties are not subject to a cap, however any increase in the change in assessed value is applied each year for five years.
In light of New York City’s recent spending, what can we forecast for property taxes? The Mayor’s budget, released last month (page 5 of this pdf: https://www1.nyc.gov/assets/omb/downloads/pdf/erc4-20.pdf) projects a 4% increase in property tax revenue to $30,834,259,000 from $29,672,032,000, which should be a baseline for projections for property owners and commercial tenants alike, and we would advise that an additional cushion be budgeted for.
Residential leasing
During this period of remote work, many people have vacated New York City in favor of less densely populated areas. Governor Cuomo’s extension of the eviction moratorium eliminated the fee for late payments (capped at $50.00/month) for the period of time between March 20, 2020 and August 20, 2020. In addition, a Landlord may enter into an agreement with a tenant to apply the existing security deposit towards rent and allow for the repayment of the security deposit in equal installments over 12 months.
However, anyone who is considering renting their residential property in the coming months must be aware of the Housing Stability and Tenant Protection Act enacted last summer. This law created several requirements that if the owner does not comply with, will not allow them to:
- Force the tenant to vacate on time
- Prove damages (subsequently forcing the owner to pay for repairs out of pocket)
- Increase rent in the future by a desired amount
- Avoid penalties for failing to timely return the security deposit
In this regard, we have developed proprietary software called “RezCue” to assist all residential landlords with the law. Since owners are not necessarily aware of all the requirements (which include a notice before the end of the term/ rent increase notice, a walk through before the end of the term, and itemized deductions of the security deposit), we send automated emails and text messages (“cues”) informing the owner of everything they need to do and the deadlines for doing so. This service is included in all leases we prepare.
For more information about residential leasing and our RezCue software, please send us an email or call us at (212) 625-8505