A Look Inside NYC SRO Properties

NEW YORK, NY – November 6, 2017

By Josh Lipton and Andrew Levine, ONE Commercial Realty Services

The byzantine rules pertaining to single room occupancy properties (SROs) have befuddled owners, investors
and tenants alike. Shame on the relevant city agencies for botching the noble goal of housing the less financially
fortunate and society’s most marginalized only to create deep confusion as to the rights and obligations of SRO
tenants and landlords. The rules surrounding SRO properties often incentivize ownership to keep existing
apartments vacant in the hopes of vacating the remaining units as part of the multi-step process of re-purposing
the SRO to an alternative use.

In a city with a chronic affordable housing shortage, simplifying the SRO rules and maximizing tenant
occupancy should be a top priority. For over half a century, SROs have been a form of affordable housing for
New York’s low-income residents and most of these dwellings contain single rooms without a bathroom, kitchen
or shower; all of which are typically located elsewhere on the floor and shared with other tenants.
This property classification was largely introduced following World War II to balance inequalities, combat
homelessness, and welcome veterans back home through a social safety net and, at one point in time, constituted
hundreds of thousands of units spread throughout New York City. Today, the number of SRO units is estimated
at somewhere between 15,000 to 35,000.

Largely codified in New York’s Multiple Dwelling Law, an SRO is defined as “the occupancy by one or two
persons of a single room, or of two or more rooms which are joined together, separated from all other rooms
within an apartment in a multiple dwelling.” SRO buildings can fall under Class A (permanent residence) and
Class B (transient housing) types and, in both instances, will be deemed rent stabilized (RS) if erected on or
before July 1, 1969, contain six (6) or more units, charged no more than $350 a month as of May 31, 1968 and
are occupied by a permanent resident, an individual who has continuously resided in the same building for a
period of at least six (6) months (but bear in mind that an individual who has resided in an SRO unit for thirty
(30) consecutive days may not be evicted) and has, for all practical purposes, locked in a pathway to permanent
resident status. Not having a written lease doesn’t mitigate an SRO tenant’s rights; in fact, such individuals are typically
statutory tenants under oral rental agreements and do not have written leases. Because SRO tenants’ rights attach
to the building and not an individual unit, rotating tenants into different units within the same building does not
re-start the six-month clock. Moreover, SRO tenants’ family members have succession rights and will enjoy
permanent resident status if they too have resided continuously in the building for six (6) months.

SRO tenants that fall under the protections of RS rules will enjoy the benefits of rent freezes or, in certain years,
nominal measured rent increases and obligatory lease renewals governed by the Rent Guidelines Board. Tenant
restrictions under the RS regulations obligate tenants to use the premises as his/her primary residence, refrain
from subletting, and pay their rent on time.

Conversion to Alternate Use/Deregulation—Obtaining the Certificate of No Harassment (CNH)
SRO owners often struggle with below market rents—a situation further exacerbated by tenants who often fail to
pay these nominal amounts. Accordingly, it is little surprise that these owners have sought ways to convert their
properties into an alternative use and de-regulate the RS tenants. The process isn’t easy and requires the receipt
of a CNH—a requirement put in place in response to unsavory owners who sometimes engaged in threats or acts
of physical violence against tenants, the withholding of essential services like heat and hot water or attempts to
unlawfully evict tenants.
To protect such tenants, the city enacted law in 1983 which obligates owners to receive from the Department of
Housing Preservation and Development (HPD) a CNH prior to obtaining permits to demolish or re-configure an
SRO building (such as changing the number of rooms in the building or adding/removing bathrooms or
kitchens).

HPD will, once receiving a CNH application, investigate to determine whether any tenants were “harassed”
during the preceding three years. Harassment can take many forms but is generally viewed as conduct
undertaken by ownership that causes or is intended to cause a person to waive or surrender their occupancy
right. The receipt of a CNH (often taking 6 months or longer assuming no harassment is found to have
occurred) often allows owners to convert an SRO property into a free market property.
Even after receiving the CNH, any current tenants still in place retain their RS status while vacant apartments are
no longer rent regulated and can be rented as free market apartments once construction into Class A apartments
has been completed. Converting a multi-unit SRO property into, say, a 1-2 family townhouse, requires both a
CNH and the legal surrender of all existing apartments. The denial of a CNH results in the owner being
prohibited from acting to convert, or demolish the building for 36 months, at which point the owner can re-apply for the CNH.
Those SRO properties that hit the market with a CNH in place and are fully vacant trade at a substantial
premium to those SROs that do not. Separately, purchasers typically find financing these properties difficult as
few lenders are willing to take on the regulatory risk. Lenders that have financed this niche product typically do
so at higher rates than a traditional multifamily loan and the debt is recourse.

Vacating an SRO Property—Owner Occupancy Destabilization

As the current owner of an SRO property (or prospective purchaser), what steps can be taken to vacate an SRO
property? Like rent regulated units, the same laws apply to evict SRO tenants using their apartments or
occupancy illegally. This includes eviction through non-primary residence, illegal sublet, demolition, chronic
nonpayment, nuisance, and all other laws listed in the rent stabilization code.
Similarly, tenants in an SRO property, like RS tenants, may be forced to surrender their apartments if ownership
would like to recover the units for their private or family use but only after a CNH has been obtained. The rules
surrounding owner occupancy destabilization are complex but generally include the following three
requirements: (i) only one of the individual owners of any building may recover possession for personal use; (ii)
the owner must establish that he or a member of his immediate family intends to live in the unit(s) identified for
at least three years; and (iii) the owner must prove he is acting in good faith. Upon meeting these requirements,
the owner establishes his right not to renew the RS tenant’s lease and, accordingly, that tenant may be evicted and
the owner (or his family member) may move in or takeover the additional space.

Conclusion

It is clear that New York City must revamp legislation pertaining to SRO properties to make use of housing
stock often left unused. In many instances, investors “land bank” SRO assets by purchasing them at a basis well
below market, writing off the nominal tax burden before pushing aggressively for tenant turnover. Thousands of
units sit vacant in a bureaucratic abyss, while the City and Albany quarrel over tax credits to developers over
potential but still unbuilt affordable housing stock.
Instead of integrating the homeless into the communities from which they come, current and past NYC
administrations use hotels in prime locations such as: Long Island City, Williamsburg, Sunnyside, Gowanus and
Kew Gardens to combat homelessness. This approach mirrors the failed policies of 1945-1965 when the City
constructed “tower-in-park” housing projects throughout New York.
To make matters worse, City Hall is paying developers a premium to construct homeless shelters or to opt into
service contracts that would allow their buildings to be used as “transitional housing” for homeless families. By
enrolling in these lucrative programs, owners—who are often politically connected—make more (management
free) by renting them to agencies than they would by leasing them out to ordinary people at market rates.
What is clear: no one knows what to do about New York’s homeless problem, but, as often is the case, the City
has failed to reform SRO rules and regulations that could largely be used to a) benefit landlords of these riddled
investment opportunities and b) combat a low-income and homeless housing crisis that lacks the supply of
vacant rooms SROs have to offer.

Josh Lipton is an Executive Managing Director of Investment Sales at ONE Commercial Realty.

Andrew Levine is a Director of Investment Sales at ONE Commercial Realty.

 

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