Surprise for New York brokers: No more fees from renters

New York

IN New York City's intensely competitive rental market, tenants usually deal with middlemen known as brokers, who have near-absolute control over apartment listings, viewing appointments and leases.

In return, brokers collect fees that can be as much as 15 per cent of the annual lease, typically paid in one lump sum by tenants before they can move in.

But, late on Tuesday, New York state effectively eliminated them.

In an unexpected addendum to last year's rent laws, state housing regulators said renters can no longer be charged broker fees, potentially upending the market and delivering the latest blow to an industry already reeling from new regulations and sweeping tenant protections.

New York is one of the few cities in the country with a broker industry that has such financial leverage over how people rent apartments.

The elimination of broker fees, in addition to the laws passed last year, pushes New York further as a national leader in creating rules favourable toward renters.

Brokers can still collect a fee, the state said in the revised rules, but it must be paid by the landlord unless a prospective tenant hired them to help find an apartment.

The new rule, buried in a legal guidance on last year's rent laws, caught lawmakers, many landlords and brokers off guard.

The Real Estate Board of New York, the influential trade group, immediately threatened to challenge the rule in court and urged its members to protest.

"This is a dire issue with our members, so we are going through every single avenue," said Reggie Thomas, the board's senior vice-president for government affairs. "It's an all-hands-on-deck thing because this came out of left field."

Brokers warned that the new rules would simply increase what tenants pay in monthly rent, since many landlords will likely pass on the cost of a broker's fee to their residents in higher rent.

"What was the intended purpose of this?" said Jared Antin, director of sales at Elegran. "If it's to minimise the cost to the tenant, it just changes when the cost is due. Instead of upfront, they will pay it monthly."

But state laws limit how much rents can be raised in New York City's roughly 1 million rent-regulated apartments. There are more than 900,000 market-rate apartments that are not regulated.

Tenant advocates cheered the new broker fee rule, saying it helps tilt an uneven real estate playing field.

"These are important tenant protections, and it's about time we had them," said Michael McKee, treasurer of the Tenants PAC. "Real estate brokers have been able to get away with a lot for a long time, so it's about time they got reined in."

Newcomers to New York City have long been mystified and frustrated about having to pay a broker's fee even when they found an apartment online.

But, unlike most cities in the US, landlords often choose not to work directly with renters or market their units on their own. Instead, they hire a broker.

For months, real estate insiders had privately feared this particular interpretation of the new rent laws, which emboldened Democratic lawmakers passed last year after regaining control of the Legislature for the first time in a decade.

The new laws, aimed at protecting tenants and strengthening rent regulations, said that tenants could be charged no more than US$20 in fees when applying for an apartment, including background and credit checks.

The rent laws passed in June 2019 also capped security deposits at one month's rent, further diminishing the lump sum amount renters typically must pay before being given keys to an apartment.

It was unclear from the language, however, whether that US$20 cap also applied to broker fees or whether it was lawmakers' intent to abolish the practice of tenants paying broker fees.

For a US$2,500-per-month apartment, a broker could collect up to US$4,500 in a one-time payment based on a 15 per cent fee.

In its most recent guidance, however, state regulators clarified that the cap did indeed apply to broker fees, effectively banning the practice.

Now the burden falls on landlords to pay brokers their fees, or they can choose to list, market and lease their units on their own.

The changes could effectively turn New York's rental market into a no-fee market if renters choose to hunt for an apartment without hiring a broker themselves.

It was the latest in a long string of recent defeats for New York's real estate industry, which has seen its power diminished after years of allying itself with Republicans when they were in control in Albany.

"This one is just like salt in the wounds," said Jay Martin, executive director of the Community Housing Improvement Program, a trade association representing about 4,000 building owners. "It's going to decimate the brokerage industry."

He said the prohibition would disproportionately affect small building owners, who typically outsource the work of showing apartments and finding tenants to real estate brokers.

Given New York City's exorbitant rents, broker fees have become the target of progressive lawmakers seeking to curb housing costs. Last year, for example, Councilman Keith Powers introduced a bill to cap broker fees at one month's rent.

Some tenant activists rejoiced over the new guidance, saying it would help reduce the barriers for housing for many tenants and potentially reduce New York's growing homeless population.

"It's about rehousing 92,000 homeless people," said Cea Weaver, campaign coordinator of Housing Justice for All, a statewide coalition of tenants that pushed for the new rent laws.

"Hopefully, it'll make it easier for people being pushed from substandard housing to substandard housing."

Still, Ms Weaver said that she was sceptical the real estate industry would abide by the new guidance, which is subject to change.

The best way to protect tenants, she said, was if state lawmakers passed a good-cause eviction bill that would make it even harder for landlords to raise rents and evict tenants.

For market-rate apartments, the cost of broker fees could still trickle down, but it might be impossible to pass on the costs to tenants of rent-regulated units. Increases on those rents are set by the government.

About 2.4 million people live in rent-regulated apartments in New York City. Most significantly, Mr Martin said, the changes could lead thousands of real estate brokers to lose their jobs.

"I don't think it's hyperbole to say that," he said.

There were more than 25,000 licensed real estate brokers in New York City as of early-2019, according to New York's Department of State.

Eric Benaim, chief executive of Modern Spaces, a brokerage firm with about 100 employees, said that the changes hurt agents, who make a living based on collecting broker's fees. "They are just on this high of just punishing real estate and those in the business," he said. NYTIMES