If you’re trying to defeat a bill, it’s wise to craft a narrative with heroes and villains. You’ll want to highlight sympathetic victims and undeserving beneficiaries of the measure, should it pass.
Case in point: the ground lease bill.
This is the state bill that promised to impose rent control on ground leases, with the goal of protecting co-op owners from big rent increases that would drive up their common charges. Ground owners would be the big losers.
Some good news for real estate interests opposing the bill is that sponsors Sen. Liz Krueger and Assembly member Linda Rosenthal have removed a glaring rent-control provision. The bad news is that this improves its chances of becoming law without changing the bill’s fundamental unfairness.
But I do have a bone to pick with the industry about its winners-and-losers framing, effective though it may be on lawmakers who are fuzzy on this issue.
This part is beyond dispute: The bill would shift power to unit owners when ground leases come up for renewal, in part by altering the deconversion process — which changes buildings from co-ops to rent-stabilized — that occurs when the two sides don’t come to terms.
Now, the spin:
“The winners would be rich shareholders — many of whom own multiple units as investments and have sublet their units for years — at high rents from which they reap huge profits,” an industry publicist emailed me. “By contrast, middle-class tenants would be devastated by deconversion. They would lose their ownership, and what is likely a significant portion of their net worth.”
Another source, Zach Steinberg of the Real Estate Board of New York, told TRD’s Kathryn Brenzel that the bill would provide “a windfall for some of the richest New Yorkers.”
These are powerful messages in Albany, where Democrats don’t want to hurt “middle-class tenants” or benefit “rich shareholders.” But aren’t all unit owners in the same boat?
The bill would benefit middle-class “tenants” (who are co-op owners, not tenants) as well as “rich shareholders” (investors who buy units and rent them out for profit). It would prevent a big increase in the ground rent, so the value of units would rise. The value of the ground would fall.
What if ground lease negotiations fell through and the building became rent-stabilized? Middle-class shareholders would lose their equity and have to default on their mortgages, but would gain a rent-stabilized lease, which is quite valuable. The bill would make it even more valuable by making the initial rent dirt-cheap.
Investors who rent units out for five figures would fare worse in a deconversion. They would also lose their equity, but would not benefit from rent stabilization. Rent-stabilized units must be a primary residence. At best, an investor could move into one apartment. They would lose the others.
To be sure, the bill supporters’ spin is also dizzying. They say without the bill, deconversion would result in sky-high initial rents. Case law suggests otherwise.
The unit owners who would benefit from this bill paid bargain prices for their units precisely because the ground rent was going to go up. The Albany bill would let them have their cake and eat it too. It would punish one party in a contract at the expense of another, which is not the government’s role.
I tried to keep this as simple as possible, but it’s a tricky, nuanced issue. Lawmakers who don’t fully understand it would be wise to abstain should the bill come to a vote. Those who do grasp it will likely see it as an unnecessary solution that would mess with private contracts — if it survives years of legal challenges.
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