Council Members Denounce HPD Efforts Against Predatory Equity

Image Credit: Council Member Dan Garodnick

City Council Members seek to strengthen tenant protections from predatory equity landlords. On October 31, 2016, City Council’s Committee on Housing and Buildings held a five-hour public hearing on a complement of five bills, two of which related to predatory equity.

Since the mid-2000s and largely due to the housing bubble, predatory equity has become a metastasis on the New York City housing market. The predatory equity get-rich-scheme works as thus: private investment money is used to purchase a portfolio of affordable housing with the goal of immediate and substantial returns by replacing rent stabilized tenants with market value renters. The expulsion of the rent stabilized tenants is done through means both legal, by abusing technical loopholes in State law, and illegal, by dangerous living conditions and intimidation. The proposed legislation also sought to mandate HPD to create a list of favored contractors to address prevailing wage violations.

The hearing preceded a lawsuit filed by New York State Attorney General Eric Schneiderman against Marolda Properties, Inc. on November 2, 2016. The suit alleged that Marolda Properties improperly sought to evict rent-regulated tenants by serving notices and bringing proceedings in housing court falsely alleging that the tenants no longer occupied the premises as their primary residence. The suit also alleged that Marolda Properties refused to renew tenants’ legally-required leases, overcharged and failed to account for rent paid by tenants, did not conduct necessary and proper repairs and renovations, and engaged in other harassing, deceptive and retaliatory behavior. “No tenant should be subjected to unsafe conditions, harassment, illegal eviction and other violations of the housing and rent laws,” said Schneiderman. “Unfortunately, some landlords believe they can get away with using these tactics to coerce tenants out of their apartments so they can raise the rent.”

According to a report from Stabilizing NYC, tactics used by landlords to eject rent stabilized tenants from their homes can vary widely by neighborhood. One common tactic is the buyout where landlords offer to pay tenants to move out of their rent stabilized apartments. This method, however, often allows landlords to use harassment and intimidation to force tenants to accept the buyouts. A newer tactic uses construction on the building to interfere with tenant’s lives making them uncomfortable or creating hazardous living conditions. These untenable conditions can be allowed to exist because of loopholes in the Department of Buildings’ inspection and violation processes. Additionally, State law permits a six percent per year raise in rent for building-wide improvements made by the landlord, and an additional increase for repairs to individual apartments which may lead to the immediate displacement of the tenant.

Predatory equity practices can be identified by a building’s Debt Service Coverage Ratio (DSCR). The DSCR is a measure of an entity’s cash flow available to pay debt obligations. Generally it is found by dividing the net operating income by the total debt and expenses. A ratio above 1 means that there is a positive cash flow with the higher the number meaning the healthier the building should be. A ratio equal to one means the income covers the debt obligations but there is no profit, and a ratio less than one means there is not sufficient income to pay current debt obligations. Investors will secure bank loans—which could not be paid by rent current rent stabilized income based largely on speculative rent potential and often end with a DSCR of less than 1, with the expectation that the number will change as rent stabilized tenants are replaced by market value tenants.

Proposed Legislation

Introduction 1210-2016, sponsored by Council Member Ritchie Torres, would require the Department of Housing Preservation and Development to create and maintain a watch list of multiple dwelling owners who have engaged in practices associated with predatory equity. The bill would set criteria for inclusion on this watch list and would require HPD to publish the list on its website. Additionally, the bill would require the Department of Finance to assist HPD in determining certain financial information about covered multiple dwellings.

Introduction 1211-2016, sponsored by Council Member Torres, would create a rebuttable presumption that where a multiple dwelling has a debt service ratio of less than 1.05, harassing acts or omissions committed by the owner of such multiple dwelling caused or were intended to cause the tenant to vacate the dwelling.

October 31, 2016 Hearing

At the October 31st meeting, Vito Mustaciuolo, Deputy Commissioner for Enforcement and Neighborhood Services at the Department of Housing Preservation and Development, spoke on HPD’s efforts to proactively address predatory equity issues throughout the City. Mustaciuolo testified that HPD was highly concerned with tenant harassment and predatory equity practices, but that not all owners who enter into overly optimistic loans intend to or do end up harassing tenants or engage in other bad behavior. HPD does not have the ability to predict which investments would be accompanied by harassment.

Mustaciuolo added that trying to track such private investments where HPD was not a party would be extremely difficult and costly. The Department of Finance is bound by law to keep income and expense statements confidential, and loan repayment terms are often only found in a building’s note which is not a publicly recorded document, complicating the City’s ability to make the DSR calculation mandated by Intro. 1211. The database mandated by Intro. 1210 would require massive resources that HPD could more effectively use elsewhere as the DSR does not definitively identify predatory equity practices.

Regarding Introduction 0967-2015, Mustaciuolo explained that there were already established procedures and personnel that perform the proposed new position in the legislation—the bill would add confusing and duplicative requirements.

“The agency has had ten years for developing a standard for identifying predatory equity and as far as I know you have not,” Council Member Torres said admonishing HPD.

In response to Torres’ question regarding the reference to DOF confidentiality restraints, Carl Laske, from the Office of Legal Affairs at the DOF, answered that the confidentiality restraints are within the City’s Administrative Code. To which, Council Member Torres replied is within the purview of the City Council to amend.

The public hearing was closed. A date for the vote was not set.

CC: Committee on Housing and Buildings Public Hearing on Intros. 0967-2015; 1210-2016; and, 1211-2016 (Oct. 31, 2016).

By: Jonathon Sizemore (Jonathon is the CityLaw Fellow and a New York Law School Graduate, Class of 2016).