New York State Considering a New York City Small Business Rent Stabilization Act

The New York State Legislature is considering enacting Assembly Bill A.5568A/Senate Bill S.8319, the New York City Small Business Rent Stabilization Act, to institute a commercial rent control system in the City of New York and create a Commercial Rent Guidelines Board, which would set initial rents and rent increases. It is anticipated that the legislation would create a monumental burden and expense on commercial and residential landlords, and it is questionable as to who will benefit from it. Recently, the New York City Council introduced Resolution No. 496 calling on the New York State Legislature to pass, and the governor sign, the Small Business Rent Stabilization Act.

New Agency

The legislation would require the City of New York to establish an agency (the Agency), require all owners of commercial space to register with the Agency, have landlords provide confidential information to the Agency and pay a fee. The Agency would establish a Rent Guidelines Board to set rents and annual adjustments thereof. Landlords would not be permitted to charge or collect rents exceeding the initial legal regulated rent or adjustments thereof. For multiyear leases, the rent could not exceed the subsequent guidelines regardless of the provisions of the lease. Initial rents would be the rent charged on the last lease.

If there is a claim of tenant harassment, the landlord would be liable for damages of the greater of 10 times the proposed rent or $150,000, in addition to consequential damages. An "at will tenant" would have the right to demand and receive a written lease. If a landlord is found to have overcharged a tenant, the landlord would have to pay reasonable costs and attorneys' fees plus interest. Tenants would have the right to renew their leases for a minimum of 10 years. If the landlord intends to demolish the space, the tenants must receive one year prior written notice.

As public policy, the Small Business Rent Stabilization Act would be troubling for commercial and residential landlords with commercial space and consumers in general. If enacted, the legislation likely would turn the bulk of lease expirations into either litigation matters or opportunities for commercial tenants to demand money from landlords to avoid litigation or moving from the space notwithstanding the lease termination.

Defining "Small Business"

The bill's title is misleading because there is nothing limiting the proposal to small businesses. The word "small" refers to the size of the space (10,000 square feet or less for retail stores, professional offices and service offices and 25,000 square feet or less for manufacturing, art or cultural establishments). The legislation would apply to every lease or rental agreement in the City of New York that is not a residential lease and under the size limitations, including office and retail tenants. For example, a "jewel box" – a business that sells high-end items typically in a space of less than 3,000 square feet – could pay rent in the hundreds of thousands of dollars per year but be subject to the Small Business Rent Stabilization Act. A similar bill, the Small Business Jobs Survival Act, was introduced in the City Council in 2018 but appeared so potentially damaging that the City Council refused to enact it.

The proposal places a burden on New York City residents, taxpayers and voters and benefits commercial tenants who do not necessarily live or pay taxes in New York City. Even if the operator of a store lives in New York City, the owner could live anywhere in the U.S. or world. As such, the legislation places a cost on New York residents and property owners and does not necessarily benefit New Yorkers. The actual "tenants" the Legislature seems to want to protect are employees. Interestingly, the quid pro quo for what the Legislature is giving tenants is not capping the costs of shopping or doing business with the tenant, so the customers receive no benefit. It is unclear who, exactly, would benefit from the legislation.

Determining Consequences

Every new law has unintended consequences, but what will be the consequences of this one? In the author's experience as a board member of a bank for 12 years, including serving as board chair and head of the loan committee, the legislation, though intended to help, will make it more difficult for property owners to obtain financing or operate the buildings. How will lenders judge the impact of a lease expiration when in addition to the landlord and tenant, there will be a mediator, an arbitrator, a phalanx of lawyers and the yet unnamed city Agency who are going to become participants in the lease renewal process? There is also the reality that whenever the commercial tenant complains to the Agency that they are being harassed, the landlord will have to respond to the Agency and expend time and money defending itself.

There also is the question of litigation. Who will pay for all the tenants who will be commencing lawsuits to buy time and pressure landlords into doing what the lawyers want? The Tenant's Bar would take these cases on contingency, and the landlords would see their operating costs increase to pay for the litigation as these cases languish in court and the tenants remain in possession paying a rent that may be less than that adjusted for inflation or, as is now seen in the residential setting, frozen, which would result in tenants getting below-market rents or rents that don't cover the landlord's expenses.

As for real estate taxes, if the legislation (or anything similar to it) becomes law, it seems likely that every building owner with commercial tenants will challenge their assessments based on this burden. This is because with the free market not making decisions regarding commercial space, the question becomes why should assessments be based on the market? At a time when New York City needs tax money, this is not the moment to further complicate the tax system.

In general, a major issue with the legislation is that it will decrease property values and tax revenues. Limiting rent growth limits the potential income a building can generate, which directly lowers the market valuation of commercial properties. Because New York City relies heavily on property tax assessments, lower commercial property values will result in a smaller property tax base, leading to less tax revenue for public services.

As indicated above, banks issue commercial mortgages based on a property's projected net operating income. If income is capped by the Agency, banks would see commercial properties as riskier, tightening credit and making it more difficult for landlords to secure refinancing or construction loans. Moreover, with lower return on investment, landlords may scale back on building renovations, storefront modernizations and tenant improvements, potentially leading to poorly maintained commercial corridors.

If landlords are locked into strict rent caps and long-term lease renewal obligations with a tenant, landlords would likely become vastly more selective or combine space to avoid the consequences of small spaces, which would prevent businesses needing "small" spaces from opening. This could unintentionally hurt unproven first-time entrepreneurs, minority-owned startups or heavily cash-strapped small businesses, as landlords may favor highly capitalized tenants who pose zero financial risk. Businesses that might want to downsize or shift locations could find a stagnant market because other tenants cling to their rent-stabilized spaces indefinitely, reducing the natural turnover and flexibility of retail space.

Conclusion

New York's residential rent-stabilization system has limited the availability of housing, and this legislation would have a similar impact on commercial space. Price controls disrupt the market and lead to artificial scarcity and also can create adversarial legal battles between building owners and the Agency over whether authorized rent increases keep pace with rising inflation, property insurance and utilities. Finally, commercial rent stabilization (i.e., rent control) does nothing to fix the heavy regulatory burdens, high city fees, complex permitting processes and bureaucratic red tape that cause many small New York City businesses to fail in their first few years.

As proposed, this bill is unnecessary, unworkable and unfair, and changing the name from its predecessor does not make it less onerous.

For more information or questions, please contact the author.

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