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Are landlords still doing buyouts during the pandemic?

Some landlords are open to negotiations with tenants that include free rent or partial payment now, with the buyout taking place further down the road.

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Question:

Are New York City landlords still doing buyouts during the pandemic?

Answer:

“You bet they are. Buyouts are far from dead and we are absolutely getting traction on deals for decent amounts of money,” says Steven Wagner, a co-op and condo attorney at Wagner, Berkow & Brandt who has decades of experience negotiating these kinds of deals on behalf of renters.

“If a landlord can raise the rent, a buyout will make economic sense, even if the landlord might not realize the full benefit until the building is sold or refinanced,” Wagner says. 

Many New York City landlords are dealing with cash flow issues as a result of the pandemic because they have tenants who are unable to pay their rent or have left the city. They may also have commercial tenants who are struggling financially. However, Wagner says, many landlords are prepared to play the long game and they recognize there’s an opportunity right now to get tenants out of rent-stabilized apartments. 

“This is an investment. Landlords may not be able to rent it right away because of the pandemic, but next year when there’s a vaccine and more people return to New York, they will. That’s why it makes sense,” Wagner says. 

The question these days is whether a landlord’s cash flow will allow for them to buy someone out.

“The buyout offers might not be as high as we’ve had in the past but if you have a landlord who has the resources, you can still make a substantial deal,” Wagner says. 

He points out some landlords are open to negotiations with tenants that include free rent or partial payment now, with the buyout taking place further down the road when the landlord is in a better position to pay.  

Here’s where the deals are happening most often.

Rent-stabilized apartments that can be combined or divided

If a landlord combines two rent-stabilized apartments or divides a single apartment into two, the identity of the apartment is changed. In these situations, apartments will remain in the rent stabilization program but a landlord may be able to increase the rent and re-establish the legal rent-stabilized rent for the apartments (or apartment). In that scenario, a landlord would be more motivated to buy out a tenant.

Wagner says he just negotiated a $150,000 buyout on behalf of a tenant of a large apartment in a building where the landlord has a history of dividing apartments into two.  

Even in the current rental market, this can make financial sense for a landlord. “It enables a landlord to take an apartment that they are getting $1,200 for and divide it into two and get $2,500 for each of them, or more,” Wagner says. 

If you are a tenant in a smaller apartment that could be combined into a larger one to command a higher rent, there may also be an opportunity for a buyout. 

“If the landlord has the resources, it might be worth it for them to negotiate a deal enabling the combination of apartments and renting them for more than the sum of the rents they could get for separate apartments under stabilization without the buyouts,” Wagner says.

Rent-stabilized apartments in co-op or condo buildings

If you are in a rent-stabilized apartment in a condo or co-op building that’s already been converted, a sponsor may be keen to unlock the equity in the apartment, which is likely to be substantial. Generally, apartments in co-ops and condos are removed from the rent-stabilization program when a tenant leaves—at that point the landlord can sell it or rent it out at market rate. 

Wagner says some sponsors are open to cutting the deal now. You might get free months and/or a partial payment now, with landlords deferring the full payment until some time next year. 

“With a co-op or condo, another option is to put a loan or mortgage on the apartment that would have to be paid when the apartment is sold, so the tenant can leave and the apartment owner agrees that when a deal closes on the sale of the apartment, the tenant will get paid,” says Wagner. 

Major building-wide renovations

If your building is in need of major upgrades, you may have an opportunity for a buyout. If 75 percent of the building is gut-renovated or replaced by the landlord, the owner has the opportunity to remove an entire building from rent regulation. 

Wagner just arranged a buyout deal for $175,000 in which the landlord wanted to renovate the entire building. 

Sale or demolition

Wagner worked with several tenants who received buyouts in excess of $1 million in addition to several months of free rent where the building was part of a development site. In another potential buyout situation, Wagner says a landlord is considering a payment in the mid-six figures to remove tenants in order to sell the building. The deal is conditioned on the building being vacant.

Preferential rents and overcharges

Changes in the law now require a landlord to stick with a preferential rent and to use it as a basis to calculate rent increases until the tenant vacates the apartment. Landlords may be willing to buy out tenants who have preferential rents so the rent can be raised to the legal regulated rent. Wagner adds, it is always a good idea to check the rent history of a stabilized apartment for overcharges. 

"There is a greater chance of treble damages under the new laws, which could encourage a landlord to settle up the overcharge claim and add some money for a buyout," he says.   

New York City real estate attorney Steven Wagner is a founding partner of Wagner Berkow & Brandt, with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.