February 19, 2019
Realtor.com quoted me in ‘Help! My Luxury Rental Was Turned Into a College Dorm’. It opens,
Finally! After years of scraping by in cramped apartments in sketchy neighborhoods, you’ve made it—into a luxury rental with a doorman, concierge service, gym, bike room, and other posh amenities. It seems perfect.
Then you meet your neighbors, sunning themselves on the roof deck. Topless.
Sound like the opening to a Skinemax flick? On the contrary, it’s a reality for residents at The Azure, a new high-end apartment building in Brooklyn, NY.
“There were girls sunbathing topless up there,” one tenant with a child told the New York Post. “My wife was, like, ‘WTF?!’ There are a lot of families [here].”
You see, The Azure was facing significant vacancies, so the management company decided to rent out 30% of its units to King’s College, a liberal arts school in lower Manhattan. The result? Families who paid top dollar to live in a building with a business center, cold storage space for grocery deliveries, and other luxe features suddenly found themselves in what felt like a college dorm. A “dormdominium”! And you know what that probably means: late-night parties with eau de weed wafting through the halls and, um, some awkward bump-ins during rooftop barbecues with bikini-clad (or unclad) residents. And noise. Lots of noise.
“We bought into the luxury experience of the nice rooftop,” another tenant lamented. “We didn’t expect it to be packed with 18-year-olds.”
When luxury apartments turn into dorms: Why it happens
This rude awakening for well-heeled renters isn’t as unusual as you might think. It’s just what many luxury developers may find themselves doing now that the high-end rental market is softening, leaving empty apartments that must be filled to make ends meet.
“Building owners stuck with vacant properties will try to rent them to whoever they can within reason,” says Aaron Shmulewitz, a real estate attorney with Belkin Burden Wenig & Goldman in New York City. “When the economy goes bad, building owners have to scramble.”
Part of the problem is that a few years ago, the housing market was going so strong, developers got bullish on building—only to find themselves in a more sluggish market once their structures were complete.
“Opening a residential building is a many, many-year process,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “You have to acquire the site, you have to get financing, perhaps you have to get zoning approvals, you have to get your plans approved … then you have to build it and then you have to market it. You’re talking about years of work.”
Many of these builders were likely banking on the possibility that rental demand would just keep going up and up—but they bet wrong.
“We have a large amount of supply that came into the market within a fairly short period of time,” says Edward Mermelstein, a real estate attorney with One and Only Holdings in New York City. “At the same time, the demand has waned substantially.”
How do college kids afford a luxury rental, anyway?
While luxury rentals in any other city might be hurting right about now, New York is well-positioned to solve this problem, thanks to its high student population and limited dorm space.
“Renting to college students in Manhattan or Brooklyn has always been a trend, as there’s a total of almost 250,000 active students on this small island,” says Michael Jeneralczuk, a real estate agent with REAL New York. “With that said, luxury apartments are usually outside of student budgets.”
While a luxury rental might be outside of any individual student’s budget, a larger group of students can make it work. According to the Post, the King’s College students are paying a combined $6,000 per month for a two-bedroom apartment housing four people, which comes to $1,500 per person. This is more affordable than trying to rent alone; even a studio apartment at The Azure starts at $2,399 per month, according to the building’s website.
Meanwhile, the nonstudent rate for a two-bedroom apartment at The Azure starts at $3,391 per month. So by renting to King’s College students, the building is also making almost twice as much per apartment. So, at least for these two parties, it’s a win-win.
“It’s an opportunity to fill vacant apartments and collect rent,” says Becki Danchik, a real estate agent with Warburg Realty in New York City.
Given that the luxury rental market is slowing down nationwide, does this mean renters across the country might expect college-aged neighbors soon, too?
According to Reiss, it depends on development levels. In Los Angeles, construction has stalled, so apartments are filling up. Seattle, on the other hand, is facing similar issues as New York City.
“Seattle has had a construction boom, which means there are a lot of empty apartments,” says Reiss. “You face a similar situation where landlords are going to look to find some way to rent those out and make their money back.”
February 14, 2019
The Hill published a column of mine, The Next Two Years of Federal Housing Policy Could Be Positive under Mark Calabria. it opens,
The Trump administration has been a nightmare for housing advocates. Housing and Urban Development Secretary Carson has stopped enforcing fair housing laws, with assists from Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting. Those two have been working to scale back fair lending enforcement and the Community Reinvestment Act.
Consumer Financial Protection Bureau Acting Director Mulvaney has gutted consumer protection in the mortgage market. I am more hopeful though when it comes to housing finance reform. The administration has nominated Mark Calabria to be the next director of the Federal Housing Finance Agency; the FHFA is Fannie Mae and Freddie Mac’s regulator.
There have been three types of leaders on Trump’s team that have been working on housing issues. First are those who seek to explicitly undermine the work of the agency they lead, like Mulvaney. Leaders like Mulvaney are generally proponents of a radical conservative ideology that has been way out of step with American political norms until the Tea Party movement swept through Congress. Second are those who pay some lip service to the agency’s mission, but work to undermine it, like Carson. And third are those who are clearly industry favorites, like Mnuchin and Otting. They primarily seek to address concerns of the industry they regulate at the expense of their agency’s broader public mission.
Calabria represents a fourth type of leader, one who is more likely to implement a more traditional Republican agenda for the housing sector. For the last couple of years, he has been serving as Vice President Pence’s chief economist.
January 25, 2019
Students in my Community Development Clinic and I have a column in the New York Law Journal, Small Business Jobs Survival Act May Have Opposite Effect. It reads,
The New York City Council is considering a bill, the Small Business Jobs Survival Act, that it claims will protect small businesses even though the Act contains no protections tailored to them. Instead, the Act would implement a new lease renewal arbitration system that treats all commercial tenancies the same, allowing businesses as large as Amazon to benefit.
The Act would create a bureaucratic process that works contrary to its stated goals. The Act is meant to “create a fair negotiating environment, which would result in more reasonable and fair lease terms to help small businesses survive and encourage job retention and growth.” The Act actually creates a system under which big businesses will benefit the most. Furthermore, the process is overly complex for mom and pop businesses owners who are not familiar with the legal system. To avoid exacerbating the advantages that big businesses currently enjoy in the rental market, the City should consider policy alternatives that are tailored to the needs of small businesses.
Although the Act is supposed to protect small businesses, it does not define what a small business is. By not distinguishing between big and small tenants, the Act gives businesses of all sizes the same rights to negotiate a lease renewal. For large businesses like Amazon with an in-house legal department, the new system is business as usual. Amazon does not need to worry about additional costs to negotiate a lease renewal. For mom and pop business owners, the system starts to feel like a tax simply to stay in business because they will need to increase their costs relative to big businesses.
The Act’s arbitration provision sets forth about a dozen factors that an arbitrator must consider when setting the rent. Those factors can then be supplemented by “all other relevant factors.” Such a complex and vague standard will lead to inconsistent and unpredictable results. Two arbitrators determining rents for similar businesses located near each other are likely to arrive at different rents for these businesses because of the broad set of criteria they can consider. Additionally, an arbitrator’s decision would be final and non-reviewable.
The City’s property tax system offers a cautionary tale. The system is complex, many of its decisions are unreviewable, and its results are arbitrary and unfair. One consequence has been that property owners in wealthier neighborhoods often pay lower property taxes than those in less affluent neighborhoods, a state of affairs leading to a high-profile lawsuit and a Mayoral push to reconsider the entire system.
In addition to a costly process, the proposed lease renewal system is not easily navigable for mom and pop business owners. These mom and pop shops would face a new world of legal processes not familiar to them and that have nothing to do with their businesses. The Act almost requires that small commercial tenants hire lawyers to guide them through a system that might begin to feel like the soul-crushing New York City Housing Court, where tenants and landlords spend countless hours and often obtain results as perplexing as the problems that brought them there in the first place. Unrepresented tenants, in particular, face steep odds against the confusing and impersonal system. They are often unaware of their rights and how the system works, leading to temporary relief that does not do much more than postpone the date of their eviction. If the Act is enacted, small business tenants who either can’t or don’t hire lawyers would face as many, if not more, obstacles than they do in the current system.
Given that the Act in its current form does not serve its intended goals, the City should consider policy alternatives like formula business restrictions, which may be a more effective way of targeting and protecting small businesses. The formula business restriction serves to prevent retail and fast food chains from operating in particular neighborhoods in order to protect their social fabric. These restrictions aim to protect the unique character of city neighborhoods that have yet to feel the full effects of gentrification and mall-ification. These restrictions will incentivize leasing to new small businesses while protecting existing ones that are at risk of losing their space to commercial chains.
Companies like Amazon should not be the principal beneficiaries of a “Small Business Jobs Survival Act.” Rather, the City should focus on targeted approaches like formula business restrictions that assist new and existing small businesses more directly.
David Reiss is a Professor at Brooklyn Law School, the director of the Community Development Clinic and the research director of the Center for Urban Business Entrepreneurship. Areeb Been Khan, Robert Levy and Juliana Malandro are legal interns in the Brooklyn Law School Community Development Clinic. They were recently invited to testify at a New York City Council hearing regarding the Small Business Jobs Survival Act.