NYC Pilot Program and Speculation Watch Lists: Two Lists That Owner’s Don’t Want to See Their Buildings On

In the midst of New York City Housing Authority coming under scrutiny for lack of services and horrific conditions in New York City owned residential buildings, the city has passed two new laws creating public lists targeting owners of private residential buildings. While these two new laws are under the guise of identifying “at risk” buildings to ensure quality living conditions and penalize owners for harassment, after reviewing the laws one would have to wonder what the real intent is.

Local Law 1 of 2018 (the “Pilot Program”) creates a public list (the Pilot Program List”) identifying certain buildings which will now require the issuance of a “Certificate of No Harassment” (“CONH”) by the Commissioner of New York City Department of Housing Preservation and Development (“HPD”) as a prerequisite to the issuance of permits by the New York City Department of Buildings (“DOB”) for what the law defines as “Covered Work”. On October 12, 2018 the Pilot Program List was issued initially containing just under 1100 properties that are subject to the Pilot Program. Local Law 7 creates a “Speculation Watch List” which is by and large the “Worst Landlords List” published annually by the NYC Public Advocate. Needless to say, appearance on either of these lists is not something that an owner would be happy about. However, owners should be aware of the potential effects of having their building on either list and what, if anything can be done about it.

The Pilot Program

The issuance of the Pilot Program List (the “Pilot List”) has left owners of buildings subject to the Pilot Program with many unanswered questions. While the Pilot Program is extremely convoluted owners should determine the applicability of the Pilot Program to their building and evaluate what, if anything can be done about it.

A building may be included on the Pilot List based on the following criteria: (1) within the last five (5) years prior to July 24, 2018 the building has been subject to a full vacate order, or (2) where the building was an active participant in HPD’s Alternative Enforcement Program for more than four months since February 2016, or (3) where a final determination of harassment at the building has been made by either the State Division of Housing and Community Renewal (“DHCR”) or a court, or (4) the building is located in one of the special community districts or a re-zoned district identified in the law and having a requisite “score” on HPD’s Building Qualification Index (the “BQI).  Unfortunately, the Building Qualification Index (“BQI”) has caused great confusion as the scores are not public and the method for HPD’s calculation of the score is still a mystery. Notably, owner turnover is a significant factor in determining a BQI score. The more owner turnover the greater the chance that the building’s BQI meets the requirements for inclusion on the Pilot List. HPD is required to add new buildings to the List that are identified as meeting 1-3 of the above criteria within thirty (30) days after such building is identified.

Inclusion of a building on the Pilot List requires the owner to apply for and obtain a CONH from HPD as a prerequisite for obtaining DOB permits for “covered categories of work.” There are some exemptions, and under limited circumstances an owner may be entitled to a Waiver. The penalties for a denial of a CONH based upon a finding of harassment are drastic. If after a hearing there is a determination that harassment has occurred during the 5-year inquiry period (dating back 5 years from the date the application for CONH was filed), then the application will be denied and the owner will either be prohibited from refiling for the CONH for five (5) years from the date of denial (during which time no permit may be issued for Covered Work). Alternatively, if an owner does not want to wait five (5) years to re-file for the CONH they have the option to take the “Cure”. The “Cure” requires that the owner enter into a Regulatory and Affordable Housing Agreement with HPD and the creation of affordable housing in perpetuity in the same community district equal to either 25% of the existing residential floor area of the building to be altered or 20% of the total floor area of a new building to be built.

Consequentially, the inclusion of a building on the Pilot List has potential ramifications which could affect the development, financing, sale and value of the building. Thus, purchasers would be well advised to perform a thorough due diligence prior to contract. An owner or managing agent with a building on the Pilot List should determine the reason for the building being on the list and verify that its placement on the Pilot List is correct. Any error found in placing a building on Pilot List could be used to challenge the placement.

When planning a renovation or alteration of a building on the Pilot List, owners would be wise to consult with their architects and contractors to determine whether the work intended is “Covered Work”, and if it is, whether there any alternatives that would not trigger the requirement for the CONH. Prior to filing for a CONH, owners should take the time to evaluate the likelihood of success and the potential for a denial and subsequent ramifications.

When owners are able to improve and maintain their residential buildings, it is a win for all sides in that money is spent on the local economy and creates jobs, housing is improved for the tenants, and the tax base is increased for the City and tax payers. Unfortunately, many see the Pilot Program as a deterrent to owners to improve their residential buildings. Moreover, there is no exemption from the Pilot Program for a new owner who purchases after November 28, 2017 with the good faith intent to improve the property; sure sounds like a deterrent.

The “Speculation Watch List”

The Speculation Watch List” is established by HPD and contains the addresses of certain recently-sold rent regulated multiple dwellings for a given fiscal quarter which have been identified by the City as purportedly at risk of tenant harassment. Notably, Local Law 7 contains only two (2) definitions; “Capitalization Rate” and “Qualified Transaction”, both having nothing to do with the condition of the building. The Capitalization Rate is essentially the net operating income as calculated by the Department of Finance, divided by the most recent sale price of the property in an arms-length sale.

The Speculation Watch List Rules (“Rules”) provide some further detail as to criteria for inclusion on the list. The Rules provide for inclusion on the Speculation Watch List for a given fiscal quarter if the building has a majority of rent regulated units if the Capitalization Rate falls below the median capitalization rate for the borough in which the property is located. The Rules promulgated by HPD contain the term “Borough Capitalization Rate.”

Notably, HPD may also consider (but is not required nor limited to) establishing the amount or ratio per dwelling unit of open hazardous and immediately hazardous violations, paid or unpaid emergency repair charges and the number of units in the building. Thus, a Capitalization Rate below the Borough Capitalization Rate alone is enough to place a building on the Speculation Watch List.

The Speculation Watch List, together with each buildings’ capitalization rates, are be posted on-line on the Department of Finance website, and buildings on that list could be subject to heightened enforcement actions by HPD. Notably, some owners have reported building inspections from multi-agency inspectors resulting in an increase in violations.

Local Law 7 exempts buildings that enter into a regulatory agreement with HPD to provide “affordable housing” from inclusion on this Watch List.

The ambiguous and speculative language of these two laws leaves them ripe for challenge. However, litigation will take time. In the interim many owners will undoubtedly be re-re-evaluating their business plans and thinking twice before improving their buildings beyond mere maintenance; which is unfortunate for tenants, local businesses, and tax payers.

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