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HPD and the Speculation Watch List

Local Law No. 7 of 2018 requires the Department of Housing Preservation and Development (HPD) to evaluate certain sales of select rent-regulated multiple dwellings for potential inclusion on a “Speculation Watch List”. HPD proposed guidelines for what buildings will appear on its “Speculation Watch List.” HPD seeks to include rent-regulated multifamily buildings that sell below the median cap rate of the property’s borough, saying such deals are potential red flags. HPD stated in its proposal that when a purchaser is willing to pay more than the property value, it indicates a greater potential for property owners to harass tenants to accept buyouts so that the purchaser can recoup its inflated purchase price through forcing tenants out in order to escalate rents. The intent of the list is to help protect tenants from landlords eager to free their buildings’ units from rent-regulation.

The City Council passed legislation in November 2017 to create the Speculation Watch List, leaving it to HPD to define what properties would qualify for the list. The legislation specified that the list would include recently sold multifamily buildings with six or more units, a majority of units which are rent-regulated. The legislation requires that HPD complete the list and update its findings quarterly. HPD will look primarily for sales transactions of rent-regulated buildings with low capitalization rates—its net operating income divided by its most recent acquisition price when compared to similar market transactions and—as an indicator for predatory owners drastically raising rents, and in some cases engaging in tenant harassment, to increase profits. A low capitalization rate is a strong indicator that a developer made an acquisition with a plan to a flip a rent-stabilized building into market-rate housing which is a process that often involves harassing tenants into vacating units.

HPD also set criteria for removal from the list. HPD Rules state that a listed building shall be removed from the list if, subsequent to the qualified transaction: (1) it begins providing affordable housing subject to local supervision; (2) it receives a full or partial exemption from real property taxation pursuant to article 2, 4, 5, or 11 of the Private Housing Finance Law or section 420-c of the Real Property Tax Law; or (3) it receives benefits pursuant to section 11-243 of the Administrative Code of the City of New York for any eligible work that was carried out with the substantial assistance of grants, loans or subsidies from any federal, state, or local governmental agency or instrumentality.

This publication is issued by Simon Meyrowitz & Meyrowitz, P.C. for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically indicated otherwise, any tax advice contained in this publication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein. In some jurisdictions, this publication may be considered attorney advertising.

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