Last year saw the passing of historic rent reforms for NYC that have had a dramatic impact on the real estate industry. Another turn yesterday when the Department of State determined that renters can no longer be charged broker fees. Instead, the cost now falls on landlords who engage a listing broker to represent their interests. A move that has caught everyone by surprise, with tenant activists applauding the move, while landlords and brokers bemoan the ruling. Here we break down what these changes will mean for tenants, landlords, and brokers.
Table of Contents
Goodbye to Broker Rental Fees
The devil, as they say, is in the details. Since the passing of the new rent reforms last June, regulators have been debating how to interpret and implement the new laws. In one section of the changes, security deposits were capped at one month’s rent. While another limited tenant application fee to $20. However, the wording of the law made it unclear whether this $20 cap also applied to broker fees. Industry insiders have been stressing over this particular point for months, and this week they got their answer. The DOS ruling – made last Friday and came into effect on Wednesday night. Clarifying that the cap would apply to broker fees, effectively banning them in the process.
Before now, tenants were expected to pay a broker’s fee of as much as 15% of the annual lease. For a $2,750 a month rental, that would have been a one-time fee of $4,950. It would have been regardless of whether a tenant had found a listing online. When the landlord had hired a broker to market the apartment, the cost of doing so fell on the tenant. NYC was one of only a few cities in the US that charged a fee to rent an apartment.
The fact that the DOS ruling has been implemented immediately with no warning or grace period has left agents across the city in shock at the implications. Some have already voiced concern that the lawmakers have made the ruling for political reasons; without any understanding of the wide-reaching consequences, it may have. Mostly a death sentence for the brokerage community; may even leave tenants and the housing market worse off than they were before.
What this Means for Tenants
Understandably, tenant activists are ecstatic over the ruling, feeling that it levels the playing field in favor of renters. Newcomers to New York have long been mystified and frustrated by having to pay a broker’s fee; on top of their security deposit and any application fees like credit and background check. However, it should be pointed out that renters who choose to hire a broker to help them find an apartment will still pay a fee.
But the changes may not be all they seem at first glance. Landlords may instead pass on the costs of a broker’s fee in the form of higher rent. Instead of paying the fee upfront, they’ll have to pay it monthly. For the city’s 900,000 unregulated apartments, this could be a problem, as they don’t have the same rent increase protections that rent-regulated apartments do. We’ll likely see rent increases in the coming months for market-rate apartments as landlords try to make up the shortfall — the exact opposite of what the DOS ruling is trying to achieve.
Even regulated apartments won’t be spared from the ripple effects that this ruling is likely to have. If owners of regulated apartments feel that the costs of renting don’t make sense from a business standpoint, then other options like warehousing start to look more attractive. This could result in the already competitive rental market getting even more competitive as the available rental stock dries up.
Almost every broker in #NYC is commission based. There are about 25,000 brokers that make their living by collecting commissions. This would totally annihilate the business as a great majority of them make rental commissions vs. sale commissions. @fox5ny https://t.co/dPQKDK7j28— Barbara Corcoran (@BarbaraCorcoran) February 14, 2020
What this means for Landlords
The end to broker fees has dealt another blow to NYC landlords who are already reeling from the changes last June. Those reforms also saw an end to the practice of vacancy bonus, which allowed landlords to increase rent by 20% whenever a regulated apartment was left empty. They also lost the ability to jack up prices until they could be deregulated.
Landlords are already in revolt against the DOS ruling, saying that it will only result in them increasing rental prices to cover the cost of hiring a broker. Such a move, though, won’t be possible for the city’s one million rent-regulated units. How much rent can rise on these is determined by the Rent Guidelines Board. Unless the ruling is reversed, landlords of regulated apartments will either have to take a loss to their income or forgo hiring a broker. Most landlords in the city prefer not to deal with tenants directly or market their apartments, instead of turning it over to brokers. With the cost of broker fees now falling on landlords, we’ll likely see many landlords going their own way.
Another option for landlords would be to consider selling rather than renting. A proposition is likely to make sense for owners of large portfolios of rent-regulated apartments. Whatever the good intentions of this ruling, it may just leave renters with a smaller and more competitive market to deal with.
“If the law’s intention was to create affordable housing this is a big fail and a policy enacted with likely political self-purpose rather than real-life consideration for renters or landlords. Perhaps with good intentions, but have shown very poor thinking, execution, and real-life testing” – Gea Elika
What this Means for Brokers
The ruling has been an enormous blow to real estate brokers, many of which rely on broker rental fees at the start of their careers. There are more than 25,000 licensed real estate brokers in the city, and these changes could see a lot of them lose their jobs. Any real estate agent acting on behalf of a landlord that accepts a broker fee paid by a tenant could now be subject to discipline. Any agents that represent a tenant will not be affected by the ruling.
Already there is strong pushback from the real estate industry against the DOS ruling. The Real Estate Board of New York has said they are in conversation with state officials, “exploring legal action” to reverse the verdict. They’ve also called on members to email the DOS and voice their opposition on social media. Whether this will make any difference or not remains to be seen; we can be confident that the broker community will do everything in their power to reverse the DOS ruling.
Updates and Facts on Broker Commissions
February 10th, 2020
As a result of a lawsuit initiated by REBNY, NYSAR and a number of our members, a Temporary Restraining Order was granted today. This order temporarily removes the prohibition against landlord’s agents collecting commissions from tenants (Question #5 on the Department of State Guidance Memo). – according to REBNY’s email circulated from earlier today at 3:22 pm.
What You Should Know:
- Landlord’s agents can collect a commission from a tenant until further notice.
- REBNY returns to court on March 13 to further litigate the Department of State’s interpretation of the Housing Stability and Tenant Protection Act of 2019.
- Agents across New York State can do business in the same way they did prior to last week’s DOS memo without fear of discipline by the DOS.
Please check for our communication with updates on how you can be helpful in this process. We thank you for your patience and support during this time. If you have any questions, please contact email@example.com.
February 6th, 2020
An email circulated to real estate brokers by REBNY on Thursday afternoon, included the facts below and the ability to file a petition.
What is Permitted
- A landlord’s agent can still collect a brokerage commission from a landlord.
- A tenant’s agent can collect a brokerage commission from a tenant.
- The agent is also able to collect an application fee exceeding $20 when representing a tenant, as noted by The Department of State’s previous Guidance.
What is Not Permitted
- The current DOS Guidance states that a landlord’s agent cannot collect a brokerage commission from the tenant.
- The DOS suggests that this Guidance takes effect immediately.
- To this end, a real estate broker that is the agent of the landlord (pursuant to this Guidance) should not collect a brokerage fee from the tenant until further clarity is provided.
REBNY & NYSAR Take Legal Action Against Broker Commissions Guidance
REBNY is filing a lawsuit in Albany on Monday, February 10th. Additional plaintiffs include the New York State Association of Realtors and numerous residential brokerage firms.
Key Argument Points:
- The Department of State usurped its role and engaged in improper rulemaking by announcing a regulation under the guise of “Guidance,” instead of following the necessary procedures required by law.
- The Department of State’s decision to announce this new rule without warning has caused widespread confusion and havoc in the renting process. This decision was unnecessary and irresponsible. It has been devastating to brokers and landlords alike.
- The ultimate effect of the Department of State’s “Guidance” will likely be passed on to the tenant in the form of higher rents.
Actions Agents can take
The Department of State should hear directly from agents whose livelihoods will be severely impacted by this troubling Guidance of the law. Please sign your name and let your voice be heard! Agents who wish to petition can do so: Sign the Petition
Can there be a Reversal?
Such a reversal wouldn’t be unheard of. Late last year, DOS regulators walked back guidance that would have required LLC’s involved in a condominium transaction to disclose the identities of the buyers. A move that would have upended entirely the high-end condo market where purchases through LLC’s are widespread. Another walk-back happened last February when a bill was proposed would have capped rental broker commission at one month’s rent. After heavy pushback from the real estate industry, the law was amended to clarify that the rule would only affect landlords’ agents. Almost a year later, the bill still remains in committee. We could see a similar walk-back here if enough opposition builds; regulators can be convinced that this ruling is not in the best interests of either tenants, landlords, or brokers. Only time will tell.