Will New York's new rental laws suppress multifamily lending?

Values on rent-regulated buildings in New York City have plummeted in the roughly two months since New York Gov. Andrew Cuomo signed sweeping new rent-control restrictions into law, and that could be troubling for some of the city’s largest multifamily lenders.

David Chiaverini, an analyst at Wedbush Securities, said Wednesday that values on rent-regulated apartment buildings in the city’s five boroughs have fallen by up to 30% since the law took effect June 14.

That matters to lenders, he said, because it’s standard industry practice for landlords to do cash-out refinancing of existing mortgages and use the proceeds to buy other buildings. With values declining, many now won’t have that option, likely slowing demand for multifamily loans, Chiaverini said.

“When you own a multifamily building, you try to extract as much cash from the property as possible, then use that cash to buy another property,” he said. “Now, landlords are not going to have as much as equity as they previously had.”

New York bankers are downplaying concerns that their business will suffer as the new laws take effect and at least one, New York Community Bancorp CEO Joseph Ficalora, said he believes his bank will even gain more multifamily business as other banks scale back.

There was also concern that existing loans would quickly sour as property values have declined, but bankers said they are seeing no evidence of that.

They say that’s because they underwrite multifamily loans based on existing cash flow, not projected future cash flows based on higher rents. That will allow their borrowers to make all future loan payments.

“We lend on current, not projected cash flows, and this conservatism has served us well in the 50 years in which we have been actively involved in this type of lending,” Ficalora said on Wednesday’s call.

“Our multifamily portfolio has always been underwritten based on in-place rents without anticipating increases,” Kevin Cummings, the CEO of the $27 billion-asset Investors Bancorp in Short Hills, N.J., said on an earnings call July 25.

A few months earlier bankers were wringing their hands about the proposed changes to rent-stabilization laws, but it turned out that the final version didn’t include the worst-case scenario impact on banks, Chiaverini said. Some bankers were worried that lawmakers would force their landlord clients to cut rents to 2014-era levels, or earlier.

Still, the changes, designed to give greater protections to tenants, could have a significant impact on New York's multifamily market.

Under the new law, landlords now can require no more than a month’s rent for a security deposit and must provide tenants with advance notice if they plan to raise rents by more than 5%. Tenants now have several new legal protections that make it harder for landlords to evict them.

The changes are in effect statewide, but it’s in New York City, the nation’s largest market for rent-controlled and rent-stabilized properties, where they will have the greatest impact on renters, landlords and lenders.

The banks involved in this sector have hundreds of billions of dollars at stake. New York Community, based in Westbury, N.Y., held $18.4 billion of multifamily loans affected by the new laws as of June 30, or 60% of its total multifamily portfolio. The $49 billion-asset Signature Bank in New York reported about $5.6 billion of loans on rent-regulated buildings, or 35% of its total multifamily book.

Flushing Financial in Uniondale, N.Y., has the largest exposure as a proportion of assets. It held $1.6 billion of multifamily loans tied to rent-regulated properties, or 71% of its total multifamily book.

Some banks have taken steps to reform their lending policies. New York Community and Signature both have adopted the best-practice guidelines for making multifamily loans put forth by the Association for Neighborhood & Housing Development, a New York-based housing advocacy group that supported the new laws.

These guidelines, such as requiring minimum debt-service coverage ratios on loans, allow landlords to continue to make a profit, while protecting tenants from being priced out of their homes, said Jaime Weisberg, senior campaign analyst at ANHD.

Ficalora said Wednesday that he expects some banks to de-emphasize multifamily lending in New York as a result of the new laws, but he told analysts that the $53 billion-asset New York Community will remain all-in.

“Many of the people in this market will retreat from the market and … this dislocation of the market works to our advantage,” Ficalora said on the earnings call. “We're highly confident that we'll be able to grow our portfolio very nicely and that we will be able to perform significantly better than the market.”

Landlords may still get the last word, however. A trade association for landlords sued in July to overturn the law, saying it deprives them of their constitutional rights as property owners.