S T A T E O F N E W Y O R K
________________________________________________________________________
1476
2019-2020 Regular Sessions
I N S E N A T E
January 15, 2019
___________
Introduced by Sens. HOYLMAN, BAILEY, KRUEGER, SEPULVEDA -- read twice
and ordered printed, and when printed to be committed to the Committee
on Banks
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-
EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD02520-01-9
S. 1476 2
alone commercial buildings. The legislature further finds that it is
necessary to scrutinize the role of the lenders involved in predatory
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
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(xiii) any government operating or capital subsidies and explanation
of such subsidies.
(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.
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§ 3. The superintendent of financial services, in consultation with
appropriate staff, is authorized to draft and issue a request for
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.
