Residential Tenants No Longer Have to Pay Broker Fees in NYC

Residential Tenants No Longer Have to Pay Broker Fees in NYC

Residential Tenants No Longer Have to Pay Broker Fees in NYC

[Update: As of Feb 11, 2020, tenants still have to pay broker fees due to a temporary restraining order issued by justice Michael Mackey of the New York Supreme Court in Albany County, which delays the effect of the original ruling until further notice.]

New York State Department of State (NYSDOS) issued a statement last week (see purple text under “Additional FAQs”) saying that residential tenants will no longer be obligated to pay a one-month broker fee when they lease a new apartment. This law intends to reduce rental housing costs in New York City.

Landlords will now have to pay the brokerage commission. This new regulation will have a significant impact on landlords, brokers, and tenants. It will likely have unintended and detrimental consequences for tenants.

Key takeaways:

  • Effect on Tenants
    If you are tenant, it is now less likely that a broker will show you a rent-stabilized apartment. Rents will be greater as owners factor in commission costs into the lease.
  • Effect on Landlords
    Rent regulated landlords will, when possible, stop using brokers to rent their apartments. Free market landlords will increase the rent to cover increased commission costs.
  • Effect on Brokers
    Brokers representing residential landlords will no longer be able to collect their commission from the tenant. Now, they will have to collect their commission from the landlords. Tenants will be permitted to hire brokers to find apartments on their behalf.

What is the Intent of The New Regulation?

Rental housing in New York City is among the least affordable in the United States. The combined payment of a brokerage commission, the first month’s rent, and the security deposit are a stretch for middle income and low-income individuals and families. Cutting out the commission is an attempt to improve housing affordability.

What Impact Will This Regulation Have On Landlords?

There are two categories of landlords in New York City. Those that own rent-regulated apartments and those that own free-market apartments.

The landlords who own free-market apartments will be able to absorb the cost of paying the brokerage commission by increasing the base rent to cover the cost of the added commission. The result will be an increase in New York City residential rents. Owners of free-market apartments will have a higher base rent to calculate future rent increases. They will benefit over the long term.

For landlords that own rent-stabilized apartments, the new law will reduce their net operating income. They will not be able to raise rents to cover commission costs. New York City’s rent stabilization laws will not allow them to do so. These owners will therefore be under pressure to rent apartments themselves to save brokerage fees. Small absentee landlords and large owners will have difficulty forgoing the services of brokerage firms. As a result of reduced profitability, owners of rent-stabilized apartments will cut back on the maintenance of their properties. Look for a decline in the condition of the rental housing stock. Valuations of rent-stabilized apartment buildings will also decline as these properties will generate less income.

What Will This Do to Real Estate Brokers? 

Brokers specializing in apartment rentals now have to collect their commission from landlords. Since owners of free-market apartments will be able to adjust to the new regulation by raising rents, brokers will have an incentive to show apartments in these now more expensive buildings where they can collect higher commissions.

Brokers will be less likely to show apartments in rent-stabilized (below market) buildings. Many of these owners will be unwilling/unable to pay the brokerage commission. If a broker can’t collect commissions showing these more affordable apartments, why would they show them?

If you are a tenant, the new law will allow you to hire a broker. In this case, the broker would find the apartment, and you will pay their broker a commission when the lease is signed. This may result in the growth of apartment search services/tenant representation. However, many apartment-seekers may not understand the value added by this service and may therefore resist hiring a broker to assist them with their search. This is true for the commercial real estate (CRE) market as well, as many inexperienced tenants may not appreciate the value that we are able to add and resulting reduction in time, cost and stress involved.

What Does the Regulation Mean for NYC Tenants Looking for an Apartment?

Unless tenants agree to pay the one-month fee for a tenant representation broker, they will not have access to a full inventory of rent-stabilized apartments.

Tenants will face increased rents for deregulated apartments as owners will factor the commission payment into the rent.

Landlords will also become more selective regarding potential tenants. Increased commission costs will incentivize landlords to prevent any mistakes regarding their selection of a tenant. The net effect is that landlords might require a 700 FICO score from a potential tenant rather than the 650 score that was previously necessary.