United States: Section 421-a And New York City's New Rent Law

Kenneth Lowenstein is a Partner in Holland & Knight's New York office.

A number of questions have arisen concerning the impact of the recently adopted Housing Stability and Tenant Protection Act of 2019 (HSTPA) on the Section 421-a Tax Exemption Program. HSTPA (Chapter 36 of the Laws of 2019) made significant changes to the Rent Stabilization Law and to landlord/tenant law in general, but those changes are beyond the scope of this Holland & Knight alert. It is recommended that you consult with an attorney who practices in the landlord/tenant field for more information on those changes.

The 421-a Tax Exemption Program exempts new residential buildings from most of New York City's Real Property Tax. As a result of major statutory changes made in 2017, there are now two versions of the program – one for buildings on which construction commenced prior to Dec. 31, 2015 (the Old 421-a Program), and one for buildings starting after that date (the Affordable New York Housing Program).¹

Old 421-a Program

Under the Old 421-a Program, all units are subject to the Rent Stabilization Law. Generally speaking, the Old 421-a Program required that a minimum of 20 percent of the units were restricted to occupancy by low or moderate income households or that the building was receiving substantial governmental assistance. For these affordable units, the statute has required since 2007 that the affordable units remained subject to the Rent Stabilization Law for 35 years after completion of construction, and that tenants in occupancy at the expiration of the 35-year period continue to be under Rent Stabilization and have the right to remain in occupancy until they choose to vacate the unit. When the affordable tenant vacates, the unit is no longer subject to regulation.

With respect to the market rate units, the Old 421-a Program provided that during the exemption period (10 to 25 years), the market rate units were governed by the Rent Stabilization Law. However, such units were deregulated upon the first lease renewal after the expiration of the benefit period provided that a required notice was provided in the leases.

HSTPA does not contain any language directly relating to the Old 421-a Program nor does it contain any provision generally deregulating units. Under these circumstances, our view is that the HSTPA did not change these preexisting provisions. Accordingly, market rate units can continue to be deregulated on the first lease renewal after the exemption period has expired, provided that the required notice was provided.

Affordable New York Housing Program

Among the many changes made by the 2017 statute enacting the Affordable New York Housing Program are new provisions relating to the applicability of the Rent Stabilization Law to market rate units in buildings receiving the tax exemption.² Market rate units are still subject to the Rent Stabilization Law unless the rent for the unit exceeded the so-called "high rent" decontrol limit in the Rent Stabilization Law. In 2019, for example, the "high rent" decontrol limit was $2,775 per month, meaning that a unit with a lease over that amount was not subject to Rent Stabilization even during the exemption period.

The HSTPA as originally enacted repealed in their entirety the provisions of the Rent Stabilization Law relating to "high rent" decontrol. Since there was no longer a "high rent" decontrol limit, a significant question was created whether market rate units in the Affordable New York Housing Program could be still deregulated. When this question was brought to their attention, legislators involved in the drafting of the HSTPA stated that they did not intend to change the preexisting law as it related to the Affordable New York Housing Program and enacted a "fix" to HSTPA. The "fix" (Chapter 39 of the Laws of 2019) provides that units in the Affordable New York Housing Program are subject to the deregulation provisions of the Rent Stabilization Law as it existed prior to the enactment of HSTPA.³

With the enactment of the "fix," it is expected that the treatment of market rate units in buildings receiving exemption under the Affordable New York Housing Program is not changed by HSTPA. In other words, if the rent for a market rate unit exceeds the "high rent" decontrol limit, the unit is not subject to the Rent Stabilization Law. Furthermore, it is anticipated that the "high rent" decontrol limit will continue to be adjusted annually based on the increase for a one-year lease approved by the Rent Guidelines Board, but that that has yet to be confirmed by the New York State Division of Housing and Community Renewal, which administers the Rent Stabilization Law.

Extended Benefits Program

The 2017 statute also established a new exemption program for buildings that were receiving the 20-year or 25-year exemption under the Old 421-a Program. This new program provided an additional 10-year or 15-year exemption in return for additional affordable units. All affordable units were under the Rent Stabilization Law for the additional exemption period and, thereafter, as under the Old 421-a Program, the tenant in occupancy at the expiration of the exemption has the right to remain until it chooses to vacate the unit and the unit remains in Rent Stabilization until such vacancy. When the affordable tenant vacates, the unit is no longer subject to regulation.

In contrast, the statute is silent with respect to the applicability of Rent Stabilization to the market rate units. Since, as discussed above for the Old 421-a Program, market rate units leave Rent Stabilization when the exemption period ends and a required notice has been provided, it is expected that the market rate units under the Extended Benefits Program are not subject to the Rent Stabilization Law. Furthermore, nothing in HSTPA is projected to change this conclusion.

Summary

Holland & Knight's interpretation is that HSTPA has not changed the circumstances and rules governing when affordable or market rate units are deregulated under the various Section 421-a Programs. For questions or more information about the impact of HSTPA on the Section 421-a Program, please contact the author. 

Footnotes

1 Under certain circumstances, a building which commenced construction prior to Dec. 31, 2015, can elect to qualify under the Affordable New York Housing Program.

2 The only change for affordable units is that for buildings receiving a 35-year "enhanced benefit," the affordable units are required to remain in Rent Stabilization for 40 years.

3  The "fix" does not apply to buildings under the Old 421-a Program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.