Directs the department of financial services to study, evaluate and make recommendations concerning lending practices by financial institutions to landlords acquiring property that includes small business and/or rent-regulated tenants; requires a report on the department's findings and recommendations for legislative action within eighteen months.
STATE OF NEW YORK
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8675--A
IN SENATE
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:
1 Section 1. Legislative findings and intent. The legislature finds and
2 declares that the practice known as "predatory equity" is furthering the
3 state's affordable housing crisis. Predatory equity is a model that is
4 known to be exceptionally destructive of existing affordable housing,
5 and is commonly understood to be defined by one or both of the follow-
6 ing: (a) a speculative sale in which the landlord purchases naturally-
7 occurring affordable rental housing with the explicit or implicit under-
8 standing that low- and moderate-rent paying tenants will be encouraged
9 or actively pushed to move out of the building at a rate that does not
10 reflect normal tenant turnover, with the goal of the landlord to take
11 advantage of the vacancies in order to use loopholes in the rent regu-
12 lation laws to dramatically increase the building's rent roll; and/or
13 (b) a financing source used by a landlord to fund the acquisition debt
14 or the acquisition equity in which the financing source expects a rate
15 of return that is significantly in excess of the profit that would be
16 generated by a building operating within the rent law's historic norms,
17 and in which case the landlord is encouraged to resort to tactics that
18 aggressively undermine the building's affordability in order to meet the
19 demands of the financing source.
20 Increasingly, speculative behavior is also being linked to the
21 displacement of commercial tenants, mostly small businesses, who are
22 being pushed out of mixed-use residential buildings and others in stand-
23 alone commercial buildings. The legislature further finds that it is
24 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
S. 8675--A 2
1 equity, in order to determine appropriate accountability for the finan-
2 cial institutions involved. Affordable housing is critically important
3 to the wellbeing of middle and low-income New Yorkers as well as the
4 state as a whole. It is incumbent upon the state to take remedial action
5 to resolve the affordability crisis and ensure that lenders are acting
6 in the best interest of the local community by preserving long-term
7 affordability and stability through their lending.
8 § 2. 1. For the purposes of this act:
9 (a) "financial institutions" means a commercial bank, trust company,
10 savings institution, credit union, or any other entity authorized to
11 originate and service loans; and
12 (b) "small business" means a business that has revenues of one million
13 or less, or meets the definition of a small business as defined by the
14 United States Small Business Administration (SBA).
15 2. The department of financial services is hereby authorized and
16 directed to prepare or have prepared a study to review the process in
17 which financial institutions provide loans to landlords acquiring or
18 refinancing property that includes rent-regulated and/or small business
19 tenants. Such study shall examine and report upon trends, both in the
20 aggregate, and disaggregated by type of lender, range of building sizes,
21 and any other criteria that would show trends in predatory equity and
22 shall include:
23 (a) whether and how financial institutions are considering the follow-
24 ing factors when reviewing a landlord's loan application:
25 (i) debt service coverage ratio;
26 (ii) capitalization rate;
27 (iii) gross rent multiplier;
28 (iv) loan to value; and
29 (v) net operating income, including income and expenses;
30 (b) whether and how financial institutions are including the following
31 factors in their underwriting calculations of debt:
32 (i) sources of income, including residential rent, commercial rent and
33 maintenance from cooperative apartment owners;
34 (ii) current rent charged and projected rent increases to be charged
35 in the future;
36 (iii) the number and size of units in a building and whether such
37 units are used for residential, commercial or another use;
38 (iv) whether any preferential rent is charged and any projections to
39 terminate such preferential rent in the future;
40 (v) the number of vacant units in a property, including whether such
41 units are classified as market rate, deregulated or rent-regulated and
42 how many vacant units are used for commercial or another non-residential
43 use;
44 (vi) whether individual apartment improvements will be performed on
45 any vacant units;
46 (vii) the number of rent-regulated units at the time of loan origi-
47 nation and how the financial institution verifies those numbers with the
48 division of housing and community renewal;
49 (viii) any projected construction or major capital improvements;
50 (ix) projections of any turnover in rent-regulated apartments;
51 (x) number of buildings financed in the loans;
52 (xi) any reserve funds for buyouts;
53 (xii) any regulatory agreements on the building and explanation of
54 such agreements; and
55 (xiii) any government operating or capital subsidies and explanation
56 of such subsidies.
S. 8675--A 3
1 (c) whether financial institutions are appropriately considering only
2 currently established rents and realistic maintenance costs when deter-
3 mining the net operating costs for the property such that they are
4 acting in the best interest of the long-term affordability and stability
5 of the local community;
6 (d) whether financial institutions are appropriately examining the
7 types of capital improvements included in the landlord's plans for the
8 property;
9 (e) whether financial institutions are using realistic appraisal
10 values and appropriately doing so;
11 (f) whether financial institutions are ascertaining whether the land-
12 lord or property manager is taking on more debt than the property can
13 support;
14 (g) whether financial institutions are considering a landlord's addi-
15 tional private equity including the source of such equity and the
16 expected rate of return;
17 (h) whether financial institutions are considering a landlord's addi-
18 tional debt on the building or buildings including debt from other lend-
19 ers and whether financial institutions are considering any other
20 outstanding debt a landlord has outside of the loan applied for;
21 (i) whether financial institutions are considering a landlord's other
22 investments and what research is completed during such consideration;
23 (j)(i) how financial institutions are evaluating the records of land-
24 lords and property managers and whether such financial institutions are
25 utilizing multiple sources and considering factors including, but not
26 limited to liens and violations against the property managers and land-
27 lords, media reports, investigations by governmental agencies, and find-
28 ings that the landlord engaged in tenant or commercial harassment, as
29 well as any prior indication by not-for-profits or governmental organ-
30 izations that such landlords or property managers have ever engaged in
31 the practices associated with "predatory equity" including, but not
32 limited to hazardous conditions and tenant harassment; and
33 (ii) whether financial institutions have an explicit plan to protect
34 tenants if they choose to lend to a landlord that has engaged in any of
35 the practices reviewed in subparagraph (i) of this paragraph;
36 (k) whether financial institutions intend to have individuals
37 personally visit the buildings and correspond with the tenants to
38 address their needs;
39 (l) whether financial institutions hold information sessions with
40 and/or conduct outreach regularly to tenant advocacy groups, small busi-
41 ness advocacy groups and organizers;
42 (m) whether and how financial institutions monitor the number of rent-
43 regulated units in a building prior to and after a loan disbursement;
44 (n) whether financial institutions have any established standards and
45 practices when loaning to a landlord or property manager and if such
46 practices are at least as rigorous as those that apply to one to four
47 family mortgages;
48 (o) whether financial institutions take any measures to ensure loans
49 are not used for buyouts;
50 (p) whether mortgages include clauses that require a certain debt
51 service coverage ratio or debt yield which are predicated on rent
52 increases or tenant turnover; and
53 (q) any other criteria the department of financial services deems
54 necessary to understand the nature and frequency of predatory equity.
55 § 3. The superintendent of financial services, in consultation with
56 appropriate staff, is authorized to draft and issue a request for
S. 8675--A 4
1 proposal (RFP) to an outside firm or entity in order to conduct the
2 study.
3 § 4. The department of financial services is authorized to charge
4 financial institutions, collectively, for the costs of conducting the
5 study up to $350,000.
6 § 5. No later than eighteen months after the effective date of this
7 act, the department of financial services shall report to the legisla-
8 ture and the governor on the findings of the study conducted pursuant to
9 section two of this act including on the scope, nature and frequency of
10 involvement in predatory equity throughout the financial industry and
11 any legislative recommendations deemed to be necessary.
12 § 6. This act shall take effect immediately.