New York City Residential Brokers Shaken By State Regulators. What Happens Next?

Posted by: TheGuarantors on February 7, 2020




On February 10th, the Monday following the release of our post below, a New York State judge temporarily blocked the state’s ruling that had barred tenants from paying broker fees. The temporary restraining order is expected to be in place until at least March 13. 

Broker fees are in place for now, but It can be hard to predict how the eventual ruling will play out. No matter the outcome, we will be here to help all parties assess and navigate how, if, and when this regulation will impact the industry. 

Read our take below from when the guidance first passed and what may happen after March.

This is surprising news, but this legislation won't completely change the landscape. Rather, large landlords will continue on much as before, small landlords may suffer a painful period of adjustment as they pay the brokers (rather than the tenants), brokers may benefit by allying themselves clearly with landlords, but may also get squeezed as more landlords bring leasing in house. Tenants are better off as their up front costs are lower. We’ve broken it down further for you below:

Earlier this week, New York State regulators clarified that a $20 cap on application fees for apartments, passed as part of sweeping rent regulation last June, applies to broker fees as well. Though brokers will still be able to charge and collect fees as part of their services, the fees will be paid by landlords instead of tenants, unless a tenant explicitly hires a broker to help them in their apartment search. Until this latest guidance was released, many had wondered to what extent the broker community would be impacted by the 2019 legislation.

What does this mean for tenants?

  • Historically renters paid up to 15% of their annual rent in upfront commissions to brokers, which for a $3,000 apartment equals $5,400. By requiring that fee to be paid by landlords, a tenant applying for a $3,000 apartment will effectively reduce their move-in expenses by almost 200% - paying only one month’s security deposit. Tenants will now be able to consider a much larger pool of apartment options, and can even further reduce their upfront costs by using our Security Deposit Replacement.
  • Yes, landlords may increase rent to help cover the cost of broker fees they are now responsible for, but that cost is spread out across the entire year and therefore much more manageable for the renter. For those who are looking for help to meet the 40x income requirement, we offer our signature Guaranti Lease product which helps tenants meet landlord qualification standards.

How are brokers affected?

  • It is important to note that the broker fee itself is not capped in this current guidance, only the amount that tenants can pay brokers working on behalf of landlords. By shifting the commission responsibility to landlords, brokers can and should create longer-lasting partnerships with building owners, reducing their customer churn experienced with individual renters.
  • For brokers who are already performing at the top, and for others looking to do so, this new clarification on the rent regulations presents an opportunity. Landlords will need help in transitioning to the new fee structure, and brokers can play a key role in advising landlords on how to manage new costs without losing tenant referrals. This can pave the way for building exclusives - and true compensation for the value-add services brokers provide.
  • In many ways, this change mirrors that already seen in commercial brokerage, especially for office and industrial properties. 20 years ago, the broker’s focus was more on getting the tenant representation agreement, knowing the buildings in the market and negotiating a deal quickly. Today, commercial brokers are expected to provide the tenant much more in the way of value add advice and services, to differentiate themselves from online listing services for space. Tenant representative agents that have made this transition have strong businesses. On the other hand, more leasing activity, especially for small tenants, has migrated to brokers employed directly by the landlord.

What is the impact on landlords?

  • Small landlords may be hit the hardest in the short term, with no notice of the regulatory change and smaller budgets with which to cover broker expenses.
  • Larger landlords can expect to continue operations with their in-house leasing and broker teams.
  • Landlords of all sizes will face a choice in how they leverage brokers - independent or exclusive - in the future; there are an increasing number of platforms and technologies bringing transparency to the leasing process, and making a tenant-led, “DIY” apartment search easier. Conversely, competition in a market like New York remains strong and tenants must leverage other data sources (like brokers) to win an apartment.

As a partner to the real estate industry, we aim to find the opportunities and the bright side in any legislative reform, helping our clients seize those wins. However, we do want to note that regulators should look to engage the market ahead of big decisions such as this, to avoid panic and knee jerk reactions. By providing more clarity, transparency, or notice, the industry can prepare and take a more measured response.

No matter the current regulatory environment, we will always aim to be the go-to, most trusted resource for the industry:

  • We will continue to help tenants gain access to the apartments they desire
  • Our tools continue to help brokers close more deals, faster, regardless of who pays their commissions. Brokers have been valuable partners to us since we launched five years ago, and we aim to continue those relationships through any future regulatory changes.
  • Through our program, landlords increase their pool of applicable tenants, which could become increasingly important as they understand how brokers will play a role in funneling deals their way. We have and always will develop products that reduce the risk for landlords in an ever-changing environment.

We'd love to hear your thoughts. Reach out to us here.