On June 14, 2019, Governor Cuomo signed into law the Housing Stability and Tenant Protection Act of 2019 (S.B. 6458) (“HSTPA”), which reinforces and fundamentally changes the landlord tenant law surrounding rental properties – especially rent stabilized apartments – throughout New York State, making it very difficult to either remove apartments from regulation or to significantly increase income from individual units. Many property owners are concerned that HSTPA will lower the value of properties and discourage investment and development of rent regulated residential buildings. Such decline in property values, however, may also provide a significant positive effect for the valuation of estates and clients seeking to make lifetime gifts of New York rental properties in the near future.
Downward Pressure on Property Values
In passing the new rent control legislation, the New York State legislature permanently reestablished rent regulations throughout New York just days before they were slated to sunset on June 15, 2019. The new law places new restrictions on deregulation and changes in rents of over one million preexisting rent stabilized housing units and extends protections to additional units that may be brought into the rent regulation system through favorable tax arrangements or through local government initiatives. The law’s major provisions:
- Extend regulations from previously covered cities and counties (such as New York City and Westchester, Nassau and Rockland Counties) to any other municipality that declares a housing emergency
- Remove the ability of landlords to deregulate apartments based upon a tenant’s income – or upon the rent meeting a certain threshold
- Eliminate the “vacancy bonus,” which often allowed landlords to raise rents beyond the threshold for deregulation
- Cap rent increases based on renovations to individual apartments and major capital improvements1
- Increase risk exposure of owners to defaulting and miscreant tenants in a variety of ways, including:
- Limiting application and background check fees to $20
- Specifying that only a single month’s rent may be retained as a security deposit and that such deposits must be returned within 14 days of the end of a lease
- Delineating how eviction proceedings may be brought and expanding the time tenants have to respond to such proceedings
Each of these factors will likely lead to a reduction in value of all rental properties in New York, but especially rent-regulated properties in New York City and the surrounding areas. Long tenancies with tightly-capped rent increases, inability to remove units from regulation and limited ability to rapidly recover capital investments are expected to simultaneously increase the cost of owning and managing rental properties while depressing the prices for rental properties. In fact, some publications have already noted an immediate decline in the sale prices of some multifamily rental properties.2
An Overlooked Opportunity for Gifting
While many investors and owners have lamented the reduction in the value of rental properties in New York, such devaluation offers property owners and the estates of deceased property owners an opportunity to make discounted gifts and death transfers of their investments. Generally, when making a gift or a transfer from a taxable estate after death, the donor or the personal representative of an estate must provide the IRS with a valuation of the real property made by an appraiser or valuation expert.
Appraisers valuing rental real property for estate and gift tax purposes must focus upon the fair market value of the property either at the time of the decedent’s death or at the time of the gift in order to determine the proper value for tax purposes. Typically, appraisals of rental property – whether they are focused expressly upon the rental income generated by property, the cost of replacement or a comparison with similar properties in the area – are strongly influenced by an analysis of the rental income which the owners are able to command from their tenants. The new rent laws, which have already caused a decline in the fair market value of rental properties and which are likely to cause incomes on rent regulated properties to decline and to make the costs of managing rental property more expensive, will certainly reduce the value of rental properties for estate and gift tax purposes. Such a reduction of value provides an important opportunity for taxpayers and estates to transfer their rental properties to their beneficiaries and heirs while using less of their estate and gift tax exemption amount (currently $11.4 million for federal estate and gift taxes).
What’s It Really Worth: Alternate Valuation for Estates
The Internal Revenue Code provides some relief for estates when the value of the decedent’s assets has declined within six months after the decedent’s date of death. The personal representative of the estate has the option of choosing to value the property at the decedent’s date of death or six months later. However, in order for alternate valuation to elected, the total value of the assets in the deceased person’s estate, as well as the estate tax due on the alternate valuation date, must be less than their value on the decedent’s date of death. Thus, the decline in the values of rental real property due to the enactment of HSTPA may provide some basis for electing an alternate valuation discount if the estate contains large amounts of New York rental property affected by the new laws.
While the new landlord tenant laws will contribute to the decline in the profitability and valuation of rental properties in New York, this decline in valuation may provide an important opportunity for donors and estates to reduce the values of donors’ and estates’ gift and estate tax liabilities. In determining whether the reduction in value for your rental property may be utilized for making gifts or reducing the value of an estate, it is essential to consult with a trusts and estates attorney or a tax planning professional. For answers to questions or concerns regarding your assets, the trusts and estates attorneys @Holm & O'Hara LLP would welcome the opportunity to discuss your goals and concerns.
1 The law caps rent increases for improvements to individual apartments by a much lesser percentage of the cost of labor and materials (i.e., 1/160th or 1/180th depending upon the size of the building), and the landlord is limited to $15,000 in the aggregate on no more than three apartments in a fifteen-year period. HSTPA also restricts increases in rent for major capital improvements to the owners’ buildings to 2% and prohibits such rent increases for capital improvements in rental buildings whose regulated apartments comprise 35% or less of the building’s total units.
2 Kathleen Howley, WSJ: Rent control law sends New York building values tumbling, June 25, 2019 (available at https://www.housingwire.com/articles/49413-wsj-rent-control-law-sends-new-york-building-values-tumbling/).