#274 NYC Micro Apartments Exposed

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How does 4.5’ ceilings sound? It sounds a little like a John Malkovich movie but it’s a real thing in NYC…

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In this week’s In the News we discuss micro apartments in NYC, landlord/tenant Immigration law in Illinois, creative ways landlords are getting around new rent rules, and how venture capital money is driving up rents in the Bay Area.

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Resources Mentioned in this Episode

https://will.illinois.edu/news/story/immigrant-tenants-can-sue-illinois-landlords-under-new-state-law

https://www.nbcnewyork.com/news/local/NYC-Landlord-Busted-for-Dividing-Apartments-Into-Micro-Rooms-555958871.html

https://therealdeal.com/2019/08/21/creative-ways-nyc-landlords-are-getting-around-the-new-rent-rules/

https://medium.com/@sbuss/software-was-eating-the-world-now-landlords-are-eating-everything-e21ba6802f54

Show Transcription:

Speaker 1: (00:00)
Hey everybody, welcome back to another episode of RentPrep for landlords is episode number 274. I’m your host Eric Worral. We’re gonna be doing an in the new segment. We’re going to be talking about some new legislation in Illinois, uh, protecting immigrants, uh, from landlords. Uh, we’re going to be talking about an update on what’s happening in New York City because there’s a lot of rent control laws that have gone in place there and the ways that landlords are fighting back and kind of, uh, finding creative ways to get around their new rent rules and a kind of a, depending on your sense of humor, either a funny or sad story out in New York City about landlord said are dividing apartments into micro rooms. We’ll get to that right after.

Speaker 2: (00:42)
Yes. Yeah, yeah, yeah. We’ll come to the rent prep for landlords podcast and now your hosts, Steven White and Eric Worral. I don’t know, maybe I just have a, a, you know, a bad sense of humor. But this article from my NBC New york.com title is NYC landlords busted for dividing apartments into micro rooms. I was just published on August 20th and it said that the average New Yorkers, small apartment is nothing compared to these illegal illegal micro apartments in the lower east side. It should be illegal. I liked that word and it’s a lot better than illegal. Uh, the Department of buildings said that the landlords of one 65 Henry Street subdivided an apartment on the first floor and another on the third floor and two at least 18 tiny rooms without a permit. So the crazy part about this is the way that they did it, they said that the building department spokesman Andrew Ridowsky told the New York Post that the units had ceilings that are four and a half feet tall.

Speaker 2: (01:39)
The apartments were divided horizontally. The report said, which is insane. And as far as they had the, the, you know, the stones to do this on their first floor. I said that every New Yorker deserves a safe and legal place to live, which is why we’re committed to routing out dangerous fire traps and ordering landlords to make these apartments safe. Tenants living in truncated window dwelling units like this possesses an extreme hazard to their safety as well as the safety of their neighbors. And first responders, you said officials placed a stop work order on the building as well as a partial order to vacate after the, uh, fire department report illegal occupancy, at least 11 quality of life violations were issued against one landlord. Uh, Zhou Ping me on August 14th according to the dob, the tenants are getting help from the Red Cross.

Speaker 3: (02:29)
[inaudible]

Speaker 1: (02:34)
uh, you know, not a funny story as far as like, you know, tenants having their life in jeopardy if there was a fire or something like that. But it does kind of remind you a little bit of that Seinfeld episode where Kramer has a bunch of, uh, tenants living inside of dresser drawers where it’s just so ridiculous that a landlord cut a apartment in half horizontally. Like who even like thought that was like, you know what, seven foot ceilings are way too much. Maybe they were nine foot because he said that there were four and a half, uh, based on my incredible math skills. But just imagine opening the door and it’s almost like some kid, you know, went crazy with legos and just cut, cut the apartment in half. And I don’t know, maybe, I don’t know if I ever actually saw the movie.

Speaker 1: (03:20)
I think I might’ve saw some of it. John Malcovich his movie where he gets off the elevator at like the, the four and a half floor, whatever. Maybe it’s like that when you go up to the third floor. Uh, but that’s, that’s uh, that’s pretty crazy. And you know, this is a, these are the types of stories that you hear where, you know, if you’re pro landlord and you feel like you’re just getting so much stuff thrown at you and there’s so much pro-tenant stuff out there, it’s because of stories like this, like these types of stories make headlines because they’re so ridiculous. But I guess at the same time, you know, there’s people living there too who are choosing to live there or at least maybe they, yeah. Did say that there was tenants already there. Um, and that kind of speaks to the fact that there’s just an affordability crisis as well.

Speaker 1: (04:04)
Uh, because these people, uh, we’re renting out these micro apartments for $600 a piece. I wish they would give an actual, um, square footage, but I guess that’s kind of a little bit skewed because do you cut the square footage in half if it’s only four and a half where foot ceiling, you know, if you’ve got a 10 by 10 room, but there’s a difference between a 10 by 10 room, that’s a hundred square feet with eight foot ceilings versus one that’s four foot. You know, you, it’s hard to say that that’s still a hundred square foot room, but I have a feeling that the person who probably wrote the rental listings probably was lacking some morals when they wrote it up and they were like, no, it’s still a, it’s a 10 by 10 square foot, a hundred square foot room. You’re good. Oh, by the way, does your skin have to duck a little bit as a six, five dude, I don’t think I would live in that place.

Speaker 1: (04:49)
But that’s another story. Uh, we’re gonna read a quick story here coming out of Illinois. This one comes from Illinois, that Edu and it says a, this was published on August 21st by Sam Dunk. Lau says the immigrant tenants can sue Illinois landlords under new state law, so it says the immigrants to Illinois are or Illinois are able to sue their landlords if they are evicted because of their citizenship status. It’s not illegal for a landlord to hang citizenship over attendant’s head as a way to threaten or discriminate against them. The new state law comes as fears of ice raids and deportation have gripped immigrant communities nationwide few years, which some landlords are reportedly taking advantage of to the t. A Trump administration also proposed new rules on Wednesday that would allow immigration officials to indefinitely detained migrant families, but the federal government cannot let for-profit contractors to fill that purpose. In Illinois, the state ban those kinds of immigration detention centers from operating within the state. Earlier this summer and the governor signed the Illinois Immigrant Tenant Protection Act makes it the second state after California to enact such a law. He said that we’re stronger when we offer all of our residents the opportunity to improve their lives and the lives

Speaker 3: (06:02)
children.

Speaker 1: (06:06)
So, uh, this is a, another interesting case of where there may be a federal law or regulation, but then a state, um, law comes out that supersedes it. And, uh, I don’t remember which podcast it was, but we had talked about how, um, at least in New York state, uh, they were worried about, uh, immigrants, uh, not being able to, uh, live in the state because dairy farms are so reliant on immigrants. So there is kind of this, you know, uh, it’s easy to just say like for maybe one side to say, Oh, get the immigrants out of here. Get the illegals Outta here. But for a dairy farmer who relies on that population to run their, their farm at a profit, uh, the obviously don’t want to see them go. So, uh, it’s interesting seeing all the fallout that can come from this. And again, a really good reminder to check your state laws.

Speaker 1: (06:54)
Uh, make sure you’re up to date on your state laws as in this case, uh, Illinois has just changed theirs. So that’ll lead us to our last story here. It came from the real deal.com, and it is by Georgia chrome ray and Catherine Brenzel. I swear like there’s never an author who their name is George Smith. It’s always a little bit weird. I guess those are the ones who aren’t that bad. The I title here is creative ways New York city landlords are getting around the new rent rules. I know this is a recurring theme on the podcast, but basically, uh, when government steps in and you know, creates new rent laws or regulations, there’s always going to be a fallout. We’ve talked about this before in, um, I believe it was actually Vancouver, Canada. Um, they started to tax, um, mansions or vacant properties because they were tired of seeing all the vacant properties.

Speaker 1: (07:46)
So these people ended up by taking these mansions. It was a psych luxury mansion tax and they ended up running ’em out to college kids. So now these people that were upset because there were these vacant properties next to them are now dealing with the fact that there’s like essentially a frat house next to them living in this ridiculously nice mansion. So you know, you might have one intention of being like, we want the property owner to keep up on the property and make sure it’s not getting dilapidated. And then that a luxury, a mansion tax ends up just backfiring and suddenly you have a fraternity in the neighborhood and nobody wants to fraternity in their gated neighborhood and know that some, uh, there’s some real problems that some real rural problems that people are dealing with. I can’t imagine the suffering that you have when you wait and you wait for your gate to come up. And then you see somebody who’s half your age coming out of there and there, you know, 2007 Nissan and you’re just really upset that you had to look at that person from plan a. Here are the five takeaways that, uh, the five ways that landlords are responding to the new rent laws in New York City. I should say New York in general. Number one is Frankenstein

Speaker 2: (08:56)
apartments, I. E. Combining two vacant rent stabilized units to set first rent. So we just talked about at first when I read Frankenstein apartments up, that they’re talking about cutting the apartments in half, like the previous story with a micro apartments. But no, they’re talking about how the new rent law was signed, that landlords were confined to vacant rent stabilized departments to set a new first rent. And in cases where the initial rate exceeded a certain threshold, most recently in $2,775, the unit would be deregulated. So under the new rules, which no longer permit such deregulation, some landlords are still opting to combine units to secure this onetime rental. So basically a landlord has a property open up and they go, you know what, I can knock down the wall and when the property next door opens up, uh, we can create a new Barger unit, which allows us to get around the, um, the rent stabilization of those two apartments by creating essentially a new apartment at a much higher rent.

Speaker 2: (09:50)
By just saying that though, for landlords, it’s like requiring the stars to align to have two apartments over, up next to each other at the same time. But in some senses, uh, they are actually offering people to move to a different apartment. They’re paying them to move to a different apartment in the building cause then then allows them to do this. So that is one way that they’re trying to get around it. Another, uh, issue that they’re having is re identifying public eviction data. So provision and the new law bars, the sale of eviction data to the private firms, formerly known as the tenant blacklist. But nothing prevents firms from using public eviction data, which is a nominees. I’ll chalk that up to one of those words. I’ll probably stay wrong throughout this podcast. The work around it, it’ll be computationally trivial to DNR. Tonies Dean atomize de anonymize the eviction data, especially in small buildings.

Speaker 2: (10:35)
Some data privacy practices depend on k anonymity whereby in order to protect the identities of the people in sensitive data sets, they hopefully high number of records cannot be disambiguated. I don’t know why I chose this particular article to read to you on the podcast, but I will give you the rundown cause there’s way too many, you know, $6 words in here. Basically, uh, what they’re doing is by, uh, kind of a process of elimination. You can figure out who that person is. And the example that they give here is that that you can look at the records and it says, all right, your name might be left off the data set, but there’s enough people in your zip code with a dog named Max who voted for Dennis a cuso niche and our Amazon prime membership throw identity thieves off. Uh, but that principle has its limitations.

Speaker 2: (11:21)
And that was laid to bare in 1997 after Massachusetts governor’s hospitalization was discovered when researchers published and nominees and Nana anonymized, anonymized, Gosh, I’m the worst insurance data set. Governor William welds identity was discovered by combining their data set with publicly available voter registration and demographic data. So it says that New York City tenant advocates say that landlords may be planning to pull out the same sort of feat with publicly available eviction data. So basically they find this publicly available data and then they’re just kind of scrubbing it against another data set to figure out, you know what, Jane Doe that just applied here, I know that you were evicted at some point, so I’m sorry that one’s a little bit of a mouthful, but we’re gonna move on. Uh, the third way is that they’re upping the requirements to get around the tenant blacklist. And I’ve seen this happen quite a bit.

Speaker 2: (12:12)
Uh, instead of denying an application based on a prior eviction, which is no longer allowed to, some landlords are simply up in the other requirements in order to tick a different box, New Jersey based landlord, Daniel Stein, who just bought a Rochester multifamily complex called the new rules around eviction data. Absolutely ridiculous. But now if they’re talking about Rochester, New York, that’s actually just about an hour from where we record these podcasts. But there are ways to get around it. He said we have very strict income and credit requirements when looking at attendance application. If they’ve been evicted two to three times in the last year, as long as you’re not meeting the other requirements, we can get rid of them that way.

Speaker 3: (12:45)
[inaudible]

Speaker 1: (12:51)
uh, this, uh, is a, you know, one of the deterrents that a lot of people bring up of why rent regulation in these really strict and, uh, laws that are pro tenant, uh, can have these negative effects. And this is it right here. What this guy is describing is, okay, I can’t look at eviction data anymore. Well, instead of asking for a six 50 credit score, I’m not gonna ask for seven 20 credit score. Is it gonna make it harder to find a tenant? Absolutely. But the person who had been evicted the last couple of years probably unlikely that their, you know, I’ve kept good credit history as well. Uh, they probably got a few debtors. Uh, they’re probably not going to get, uh, you know, through with a seven 20 credit score. So there are ways that you can do that. Or maybe it’s just stricter income, you know, requirements.

Speaker 1: (13:34)
Maybe you have to make forex of the monthly rent instead of three x or something like that. But this is within the legal rights of the landlord to do. I am surprised though, when I see landlords who will put their name to this thing, here’s what I’m doing. Uh, but, uh, that’s neither here nor there. Whatever that saying means. All right, number four. This one’s a one of those kind of technicality loopholes. Uh, but it’s collecting application fees. According to new law landlord, lesser sub Leicester, a grantor can only charge up to $20 to conduct a background check, but real estate attorney say that leaves the door open for brokers and managers. Attorney Jeffrey Schwartz argues that since the law does not specifically mention managing agents, they can collect the application fees for handling the sale in leases of cooperative apartments. So the housing stability and Tenant Protection Act of 2019 specifies that a co-op court corporation may not charge an application processing fee in connection with a new tenancy.

Speaker 1: (14:32)
He said in his statement, but this section of the law does not specifically mention managing agents as other sections of the act do. So according to the city assembly members, Linda Rosenhall and Harvey Epstein, a plan to introduce legislation that would impose hefty fines on landlords and others who act on their behalf if they violate the application rules. But it’s looking like if you’re a property manager or a leasing agent that perhaps those application fee rules do not apply to you. And this is where, you know, they don’t really nail knock it out of the park the first time around when they introduced new legislation. And then there’s loopholes like this that happened because you know what, somebody who was relying on that money to, you know, run leasing, they’re gonna, they’re gonna think twice about, uh, ways that they can still get that money. I mean, that’s just natural.

Speaker 1: (15:21)
That’s human, you know, that’s just human nature in some ways. So, all right, number five is closing the door on rent regulated apartments. This one I’ll admit, just seems kind of crazy to me, but I said with limited means for increasing rents on stabilized departments, some landlord say there as simply closing vacant apartments and hoping for the rules to change. Last month, the Rent Stabilization Association and Community Housing Improvement Program filed a lawsuit challenging the constitutionality of the new rent law alleging that it represented that legal taking of private property and violated due process rights. I think I said all those words correctly. So Bob Koneckle said some of his clients were prepared to keep apartments closed off for 10 to 15 years. To see if the law changes. You know, I’m just not believing him on that one. I don’t know how many landlords are going gonna hold out and not collect rent for 10 to 15 years.

Speaker 1: (16:12)
That’s kind of, you know, uh, biting off your nose to spite your face kind of situation. That seems crazy and less like I am completely ignorant and these apartments are being rent controlled at $100 a month and they’re worth, you know, four grand. I could maybe see that, but I don’t see a landlord doing this for more than six months to a year when they’re like, okay, this is crazy. That just seems kind of like a, I’m a hollow, threatened my opinion, but he said if your last rent from a stabilized tenant was significantly under market and you get possession of that unit, somehow you’re giving essentially a life estate to the new tenant. So I think the new calculus is that rather than give a life estate to a tenant at a rent well below market, keep the unit vacant and hope that at some point in the not too distant future, either the litigation over the constitutionality of the law prevails or we get some new laws that are more rational and motivate the private sector to invest in the housing stock.

Speaker 1: (17:07)
Oh, that’s an interesting one. Uh, like I said, I don’t think anybody’s going to sit there and just, you know, take a owl on a, an apartment for 10 to 15 years, uh, that, that’s gonna that’s gonna hurt to just take a zero on that. Um, but I could see somebody, you know, if they think something’s going to happen in the near future doing that because you get that next tenant in and all of a sudden you’re losing 30% of what you should be getting on that apartment and they’re locked into some crazy low rent for a long time. Um, you know, in a, I’m sure a lot of these tenants too, they know, you know, attendant knows that they’ve got a sweet deal and they’re going to make it so they can stay there as long as they can. So, uh, I thought that was a pretty interesting article though. Again, highlighting the fact that there’s always going to be, you know, for every action there’s an equal and opposite reaction. So be aware of that when you’re making new laws and regulations. So I, the last one that I’m going to leave you with just cause we’ve got a little bit of time here, a interesting article. I’m just gonna link to it. It’s from medium. Uh, if your

Speaker 2: (18:06)
the software, this guy is clearly a nerd, but he’s saying that software was eating the world. Now landlords are eating everything. Just a really quick paragraph onto the read. This guy said that this is talking about San Francisco, but in 2011 Mark Anderson wrote software’s eating the world, the average seed round. So seed investing from venture capitalists was 500,000 and the median rent in San Francisco just in 2011 was $2,600. At the end of 2018, seed rounds were up to 2.1 million, so more than four acts. And the median rent is $3,650. So it’s talking that about per employee, that’s an extra thousand $50 and that’s, you know, post tax dollars, uh, per month sent directly to landlords for a four person startup, the yearly burn rate increased by roughly 73,000 pretax just in rent. If the seed round should last four years, that means an extra 292,000 in pretax expenses. So it Sam, that that money is being funneled directly to landlords instead of growing the company or other productive activity. Yeah. Okay.

Speaker 1: (19:09)
Um, I see where this guy is coming from cause he’s a, uh, probably a software engineer. Uh, but it’s just interesting when you hear things because the, the tech world is getting blamed in that area of the world offer the increased price and rents. But it makes a lot of sense when you can say that the average seed round of investing for tech went from 500,000 to 2.1 billion in four years, or sorry, seven years. Uh, it still, that’s crazy. Uh, that’s a, that’s a pretty big bump that, you know, investors are just investing big time in tech. So, you know, if you were a landlord who happened to have a property in San Francisco, you probably love it. If you live in San Francisco and you’re a teacher or somebody who’s just had a job there and now can’t afford to live, you don’t, I know, uh, I don’t know if I mentioned it before in the podcast and went to San Francisco, uh, earlier in the year and my, um, Uber driver, he owns like a one and a half million dollar house and he was saying he’s lived there for like 30 years and he has how long he’s owned it.

Speaker 1: (20:08)
And he goes, yeah, it’s kind of wild. And he’s like, I’m driving Uber cause you know, I don’t have like going to have a great job, but it’s just weird that he has a one and a half million dollar value to house. But if he wants to stay in that area, he’s like, I can’t afford to move anywhere else so he could sell it and obviously moved to, you know, some, some more low cost of living. Uh, but it’s really interesting to see, uh, cause that’s so foreign, uh, in buffalo where I’m from, where, you know, property values just kind of raised consistently but not super aggressively. Uh, and even if they do, it’s like the case of me selling my rental property, it went from 114,000 and maybe 250,000 in the course of 10 years. We’re not talking about properties up like four or five X. Um, yeah, it’s a interesting world out there. So it’s a, it’ll be interesting to see what it looks like in another 10 years as well. All right guys, that concludes this week’s episode of in the news on the rem prep brew landlords podcast. I always appreciate you guys listening. If you come across any recent news stories, you want to share them, feel free to hit me up in the Facebook group at the rent prep for landlords, Facebook group a. All right guys, until next week, have a great week and take care.