S T A T E   O F   N E W   Y O R K
 ________________________________________________________________________
 
                                  8675--A
 
                             I N  S E N A T E
 
                               May 10, 2018
                                ___________
 
 Introduced by Sens. HOYLMAN, HAMILTON, KRUEGER -- read twice and ordered
   printed, and when printed to be committed to the Committee on Banks --
   committee  discharged,  bill amended, ordered reprinted as amended and
   recommitted to said committee
 
 AN ACT to direct the department of financial services to study, evaluate
   and make recommendations concerning  lending  practices  by  financial
   institutions to landlords acquiring property that includes small busi-
   ness tenants and/or rent-regulated tenants
 
   THE  PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM-
 BLY, DO ENACT AS FOLLOWS:
 
   Section 1. Legislative findings and intent. The legislature finds  and
 declares that the practice known as "predatory equity" is furthering the
 state's  affordable  housing crisis. Predatory equity is a model that is
 known to be exceptionally destructive of  existing  affordable  housing,
 and  is  commonly understood to be defined by one or both of the follow-
 ing: (a) a speculative sale in which the landlord  purchases  naturally-
 occurring affordable rental housing with the explicit or implicit under-
 standing  that  low- and moderate-rent paying tenants will be encouraged
 or actively pushed to move out of the building at a rate that  does  not
 reflect  normal  tenant  turnover, with the goal of the landlord to take
 advantage of the vacancies in order to use loopholes in the  rent  regu-
 lation  laws  to  dramatically increase the building's rent roll; and/or
 (b) a financing source used by a landlord to fund the  acquisition  debt
 or  the  acquisition equity in which the financing source expects a rate
 of return that is significantly in excess of the profit  that  would  be
 generated  by a building operating within the rent law's historic norms,
 and in which case the landlord is encouraged to resort to  tactics  that
 aggressively undermine the building's affordability in order to meet the
 demands of the financing source.
   Increasingly,  speculative  behavior  is  also  being  linked  to  the
 displacement of commercial tenants, mostly  small  businesses,  who  are
 being pushed out of mixed-use residential buildings and others in stand-
 alone  commercial  buildings.   The legislature further finds that it is
 necessary to scrutinize the role of the lenders  involved  in  predatory
 
  EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
              

                       [ ] is old law to be omitted.
                                                            LBD15805-07-8

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 equity,  in order to determine appropriate accountability for the finan-
 cial institutions involved. Affordable housing is  critically  important
 to  the  wellbeing  of  middle and low-income New Yorkers as well as the
 state as a whole. It is incumbent upon the state to take remedial action
 to  resolve  the affordability crisis and ensure that lenders are acting
 in the best interest of the  local  community  by  preserving  long-term
 affordability and stability through their lending.
   § 2. 1. For the purposes of this act:
   (a)  "financial  institutions" means a commercial bank, trust company,
 savings institution, credit union, or any  other  entity  authorized  to
 originate and service loans; and
   (b) "small business" means a business that has revenues of one million
 or  less,  or meets the definition of a small business as defined by the
 United States Small Business Administration (SBA).
   2. The department of  financial  services  is  hereby  authorized  and
 directed  to  prepare  or have prepared a study to review the process in
 which financial institutions provide loans  to  landlords  acquiring  or
 refinancing  property that includes rent-regulated and/or small business
 tenants. Such study shall examine and report upon trends,  both  in  the
 aggregate, and disaggregated by type of lender, range of building sizes,
 and  any  other  criteria that would show trends in predatory equity and
 shall include:
   (a) whether and how financial institutions are considering the follow-
 ing factors when reviewing a landlord's loan application:
   (i) debt service coverage ratio;
   (ii) capitalization rate;
   (iii) gross rent multiplier;
   (iv) loan to value; and
   (v) net operating income, including income and expenses;
   (b) whether and how financial institutions are including the following
 factors in their underwriting calculations of debt:
   (i) sources of income, including residential rent, commercial rent and
 maintenance from cooperative apartment owners;
   (ii) current rent charged and projected rent increases to  be  charged
 in the future;
   (iii)  the  number  and  size  of units in a building and whether such
 units are used for residential, commercial or another use;
   (iv) whether any preferential rent is charged and any  projections  to
 terminate such preferential rent in the future;
   (v)  the  number of vacant units in a property, including whether such
 units are classified as market rate, deregulated or  rent-regulated  and
 how many vacant units are used for commercial or another non-residential
 use;
   (vi)  whether  individual  apartment improvements will be performed on
 any vacant units;
   (vii) the number of rent-regulated units at the time  of  loan  origi-
 nation and how the financial institution verifies those numbers with the
 division of housing and community renewal;
   (viii) any projected construction or major capital improvements;
   (ix) projections of any turnover in rent-regulated apartments;
   (x) number of buildings financed in the loans;
   (xi) any reserve funds for buyouts;
   (xii)  any  regulatory  agreements  on the building and explanation of
 such agreements; and
   (xiii) any government operating or capital subsidies  and  explanation
 of such subsidies.

 S. 8675--A                          3
 
   (c)  whether financial institutions are appropriately considering only
 currently established rents and realistic maintenance costs when  deter-
 mining  the  net  operating  costs  for  the property such that they are
 acting in the best interest of the long-term affordability and stability
 of the local community;
   (d)  whether  financial  institutions  are appropriately examining the
 types of capital improvements included in the landlord's plans  for  the
 property;
   (e)  whether  financial  institutions  are  using  realistic appraisal
 values and appropriately doing so;
   (f) whether financial institutions are ascertaining whether the  land-
 lord  or  property  manager is taking on more debt than the property can
 support;
   (g) whether financial institutions are considering a landlord's  addi-
 tional  private  equity  including  the  source  of  such equity and the
 expected rate of return;
   (h) whether financial institutions are considering a landlord's  addi-
 tional debt on the building or buildings including debt from other lend-
 ers  and  whether  financial  institutions  are  considering  any  other
 outstanding debt a landlord has outside of the loan applied for;
   (i) whether financial institutions are considering a landlord's  other
 investments and what research is completed during such consideration;
   (j)(i)  how financial institutions are evaluating the records of land-
 lords and property managers and whether such financial institutions  are
 utilizing  multiple  sources  and considering factors including, but not
 limited to liens and violations against the property managers and  land-
 lords, media reports, investigations by governmental agencies, and find-
 ings  that  the  landlord engaged in tenant or commercial harassment, as
 well as any prior indication by not-for-profits or  governmental  organ-
 izations  that  such landlords or property managers have ever engaged in
 the practices associated with  "predatory  equity"  including,  but  not
 limited to hazardous conditions and tenant harassment; and
   (ii)  whether  financial institutions have an explicit plan to protect
 tenants if they choose to lend to a landlord that has engaged in any  of
 the practices reviewed in subparagraph (i) of this paragraph;
   (k)   whether   financial  institutions  intend  to  have  individuals
 personally visit the  buildings  and  correspond  with  the  tenants  to
 address their needs;
   (l)  whether  financial  institutions  hold  information sessions with
 and/or conduct outreach regularly to tenant advocacy groups, small busi-
 ness advocacy groups and organizers;
   (m) whether and how financial institutions monitor the number of rent-
 regulated units in a building prior to and after a loan disbursement;
   (n) whether financial institutions have any established standards  and
 practices  when  loaning  to  a landlord or property manager and if such
 practices are at least as rigorous as those that apply to  one  to  four
 family mortgages;
   (o)  whether  financial institutions take any measures to ensure loans
 are not used for buyouts;
   (p) whether mortgages include clauses  that  require  a  certain  debt
 service  coverage  ratio  or  debt  yield  which  are predicated on rent
 increases or tenant turnover; and
   (q) any other criteria the  department  of  financial  services  deems
 necessary to understand the nature and frequency of predatory equity.
   §  3.  The  superintendent of financial services, in consultation with
 appropriate staff, is authorized  to  draft  and  issue  a  request  for

 S. 8675--A                          4
 
 proposal  (RFP)  to  an  outside  firm or entity in order to conduct the
 study.
   §  4.  The  department  of  financial services is authorized to charge
 financial institutions, collectively, for the costs  of  conducting  the
 study up to $350,000.
   §  5.  No  later than eighteen months after the effective date of this
 act, the department of financial services shall report to  the  legisla-
 ture and the governor on the findings of the study conducted pursuant to
 section  two of this act including on the scope, nature and frequency of
 involvement in predatory equity throughout the  financial  industry  and
 any legislative recommendations deemed to be necessary.
   § 6. This act shall take effect immediately.