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WSJ: Rent control law sends New York building values tumbling

"Every spreadsheet in New York just changed," says one broker

New York’s new rent control law could cause rent-stabilized apartment buildings to drop 20% to 45% in value, brokers and investors said in a Wall Street Journal story on Monday. That would put some properties underwater, worth less than their mortgages, and could lead to defaults as owners walk away, the story said. 

“It’s all over,” Lazer Sternhell, a real estate investor and broker of rent-regulated properties in New York, told the Journal. “You can’t raise the rents. You can’t deregulate.”

Almost two weeks ago, New York State Senate and Assembly leaders passed expansive changes to rent control laws that stunned the real estate industry. The state’s governor, Andrew Cuomo, signed the bill on June 14, a day before the existing, more moderate law expired.

Asking prices for regulated buildings are already falling, the Journal story said. In one example, a brokerage had previously pitched a partially vacant, 22-unit building in the East Village on the premise that a buyer could eventually double the monthly income from $26,300 to $52,600, the Journal said.

After the new rent law passed, the company notified potential buyers that they were lowering income expectations and cutting the asking price by 17%, the first of what could be many cuts, the Journal said.

“Every spreadsheet in New York just changed,” said Steven Vegh, a real estate broker who sells buildings to investors.

While some see problems, others see opportunities. Some real estate investors are lining up to buy cheap apartment buildings from desperate owners no longer able to pay their loans, Joseph Ficalora, the CEO of New York Community Bancorp, a financier of rent-stabilized apartments, said at a conference last week, according to the Journal story.

“This event will cause foreclosures, which will devalue properties,” Ficalora said. “Those devalued properties represent opportunities for our owners to actually buy into the market at a discount.”

In the final days before the strict rent control law passed, Cuomo rebuffed 11th-hour pleas from real estate moguls such as Douglas Durst and Richard LeFrak. Cuomo told them on a conference call they should “call their legislators if they want to do something about it,” according to The New York Times, quoting an anonymous source. While Cuomo didn’t support everything in the bill, the governor said he was committed to getting something in place before the existing law expired on June 15.
“The best bill they can pass, I will sign,” Cuomo said earlier this month at a news conference. “If you want to hear an explosion in this state, you let the rent control laws expire."

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