S T A T E   O F   N E W   Y O R K
 ________________________________________________________________________
 
                                   3275
 
                        2019-2020 Regular Sessions
 
                           I N  A S S E M B L Y
 
                             January 29, 2019
                                ___________
 
 Introduced  by M. of A. EPSTEIN -- read once and referred to the Commit-
   tee on Banks
 
 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:
 
   Section 1. Legislative findings and intent. The legislature finds  and
 declares that the practice known as "predatory equity" is furthering the
 state's  affordable  housing crisis. Predatory equity is a model that is
 known to be exceptionally destructive of  existing  affordable  housing,
 and  is  commonly understood to be defined by one or both of the follow-
 ing: (a) a speculative sale in which the landlord  purchases  naturally-
 occurring affordable rental housing with the explicit or implicit under-
 standing  that  low- and moderate-rent paying tenants will be encouraged
 or actively pushed to move out of the building at a rate that  does  not
 reflect  normal  tenant  turnover, with the goal of the landlord to take
 advantage of the vacancies in order to use loopholes in the  rent  regu-
 lation  laws  to  dramatically increase the building's rent roll; and/or
 (b) a financing source used by a landlord to fund the  acquisition  debt
 or  the  acquisition equity in which the financing source expects a rate
 of return that is significantly in excess of the profit  that  would  be
 generated  by a building operating within the rent law's historic norms,
 and in which case the landlord is encouraged to resort to  tactics  that
 aggressively undermine the building's affordability in order to meet the
 demands of the financing source.
   Increasingly,  speculative  behavior  is  also  being  linked  to  the
 displacement of commercial tenants, mostly  small  businesses,  who  are
 being pushed out of mixed-use residential buildings and others in stand-
 alone  commercial  buildings.   The legislature further finds that it is
 
  EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                       [ ] is old law to be omitted.
              

                                                            LBD02520-01-9

 A. 3275                             2
 
 necessary to scrutinize the role of the lenders  involved  in  predatory
 equity,  in order to determine appropriate accountability for the finan-
 cial institutions involved. Affordable housing is  critically  important
 to  the  wellbeing  of  middle and low-income New Yorkers as well as the
 state as a whole. It is incumbent upon the state to take remedial action
 to resolve the affordability crisis and ensure that lenders  are  acting
 in  the  best  interest  of  the local community by preserving long-term
 affordability and stability through their lending.
   § 2. 1. For the purposes of this act:
   (a) "financial institutions" means a commercial bank,  trust  company,
 savings  institution,  credit  union,  or any other entity authorized to
 originate and service loans; and
   (b) "small business" means a business that has revenues of one million
 or less, or meets the definition of a small business as defined  by  the
 United States Small Business Administration (SBA).
   2.  The  department  of  financial  services  is hereby authorized and
 directed to prepare or have prepared a study to review  the  process  in
 which  financial  institutions  provide  loans to landlords acquiring or
 refinancing property that includes rent-regulated and/or small  business
 tenants.  Such  study  shall examine and report upon trends, both in the
 aggregate, and disaggregated by type of lender, range of building sizes,
 and any other criteria that would show trends in  predatory  equity  and
 shall include:
   (a) whether and how financial institutions are considering the follow-
 ing factors when reviewing a landlord's loan application:
   (i) debt service coverage ratio;
   (ii) capitalization rate;
   (iii) gross rent multiplier;
   (iv) loan to value; and
   (v) net operating income, including income and expenses;
   (b) whether and how financial institutions are including the following
 factors in their underwriting calculations of debt:
   (i) sources of income, including residential rent, commercial rent and
 maintenance from cooperative apartment owners;
   (ii)  current  rent charged and projected rent increases to be charged
 in the future;
   (iii) the number and size of units in  a  building  and  whether  such
 units are used for residential, commercial or another use;
   (iv)  whether  any preferential rent is charged and any projections to
 terminate such preferential rent in the future;
   (v) the number of vacant units in a property, including  whether  such
 units  are  classified as market rate, deregulated or rent-regulated and
 how many vacant units are used for commercial or another non-residential
 use;
   (vi) whether individual apartment improvements will  be  performed  on
 any vacant units;
   (vii)  the  number  of rent-regulated units at the time of loan origi-
 nation and how the financial institution verifies those numbers with the
 division of housing and community renewal;
   (viii) any projected construction or major capital improvements;
   (ix) projections of any turnover in rent-regulated apartments;
   (x) number of buildings financed in the loans;
   (xi) any reserve funds for buyouts;
   (xii) any regulatory agreements on the  building  and  explanation  of
 such agreements; and

 A. 3275                             3
 
   (xiii)  any  government operating or capital subsidies and explanation
 of such subsidies.
   (c)  whether financial institutions are appropriately considering only
 currently established rents and realistic maintenance costs when  deter-
 mining  the  net  operating  costs  for  the property such that they are
 acting in the best interest of the long-term affordability and stability
 of the local community;
   (d) whether financial institutions  are  appropriately  examining  the
 types  of  capital improvements included in the landlord's plans for the
 property;
   (e) whether  financial  institutions  are  using  realistic  appraisal
 values and appropriately doing so;
   (f)  whether financial institutions are ascertaining whether the land-
 lord or property manager is taking on more debt than  the  property  can
 support;
   (g)  whether financial institutions are considering a landlord's addi-
 tional private equity including  the  source  of  such  equity  and  the
 expected rate of return;
   (h)  whether financial institutions are considering a landlord's addi-
 tional debt on the building or buildings including debt from other lend-
 ers  and  whether  financial  institutions  are  considering  any  other
 outstanding debt a landlord has outside of the loan applied for;
   (i)  whether financial institutions are considering a landlord's other
 investments and what research is completed during such consideration;
   (j)(i) how financial institutions are evaluating the records of  land-
 lords  and property managers and whether such financial institutions are
 utilizing multiple sources and considering factors  including,  but  not
 limited  to liens and violations against the property managers and land-
 lords, media reports, investigations by governmental agencies, and find-
 ings that the landlord engaged in tenant or  commercial  harassment,  as
 well  as  any prior indication by not-for-profits or governmental organ-
 izations that such landlords or property managers have ever  engaged  in
 the  practices  associated  with  "predatory  equity" including, but not
 limited to hazardous conditions and tenant harassment; and
   (ii) whether financial institutions have an explicit plan  to  protect
 tenants  if they choose to lend to a landlord that has engaged in any of
 the practices reviewed in subparagraph (i) of this paragraph;
   (k)  whether  financial  institutions  intend  to   have   individuals
 personally  visit  the  buildings  and  correspond  with  the tenants to
 address their needs;
   (l) whether financial  institutions  hold  information  sessions  with
 and/or conduct outreach regularly to tenant advocacy groups, small busi-
 ness advocacy groups and organizers;
   (m) whether and how financial institutions monitor the number of rent-
 regulated units in a building prior to and after a loan disbursement;
   (n)  whether financial institutions have any established standards and
 practices when loaning to a landlord or property  manager  and  if  such
 practices  are  at  least as rigorous as those that apply to one to four
 family mortgages;
   (o) whether financial institutions take any measures to  ensure  loans
 are not used for buyouts;
   (p)  whether  mortgages  include  clauses  that require a certain debt
 service coverage ratio or  debt  yield  which  are  predicated  on  rent
 increases or tenant turnover; and
   (q)  any  other  criteria  the  department of financial services deems
 necessary to understand the nature and frequency of predatory equity.

 A. 3275                             4
 
   § 3. The superintendent of financial services,  in  consultation  with
 appropriate  staff,  is  authorized  to  draft  and  issue a request for
 proposal (RFP) to an outside firm or entity  in  order  to  conduct  the
 study.
   §  4.  The  department  of  financial services is authorized to charge
 financial institutions, collectively, for the costs  of  conducting  the
 study up to $350,000.
   §  5.  No  later than eighteen months after the effective date of this
 act, the department of financial services shall report to  the  legisla-
 ture and the governor on the findings of the study conducted pursuant to
 section  two of this act including on the scope, nature and frequency of
 involvement in predatory equity throughout the  financial  industry  and
 any legislative recommendations deemed to be necessary.
   § 6. This act shall take effect immediately.

                            
 
                     S T A T E   O F   N E W   Y O R K
 ________________________________________________________________________
 
                                  3275--A
 
                        2019-2020 Regular Sessions
 
                           I N  A S S E M B L Y
 
                             January 29, 2019
                                ___________
 
 Introduced by M. of A. EPSTEIN, SIMON, REYES, TAYLOR, GOTTFRIED, MOSLEY,
   D'URSO, CRUZ, BLAKE, M. G. MILLER, COOK -- Multi-Sponsored by -- M. of
   A.  NOLAN  --  read  once  and  referred  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:
 
   Section 1. 1. For the purposes of this act:
   (a)  "financial  institution"  shall include, but not be limited to, a
 commercial bank, trust company, savings institution,  credit  union,  or
 any other entity authorized to originate and service loans;
   (b)  "small  business" shall mean a business that meets the definition
 of a small business as defined  by  the  United  States  Small  Business
 Administration; and
   (c) "mezzanine debt" shall mean debt carried by a borrower that may be
 subordinate  to  the  primary  lien and/or common shares and reported as
 assets for the purposes of financing such primary lien.
   2. The department of  financial  services  is  hereby  authorized  and
 directed  to  prepare  or have prepared a study to review the process in
 which financial institutions provide loans  to  landlords  acquiring  or
 refinancing  property that includes rent-regulated and/or small business
 tenants. Such study shall examine and report by type of lender, range of
 building sizes, and any other criteria that would show trends in  preda-
 tory equity and shall include, but not be limited to:
   (a) whether and how financial institutions are considering the follow-
 ing factors when reviewing a landlord's loan application:
   (i) debt service coverage ratio;
 
  EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                       [ ] is old law to be omitted.
              

                                                            LBD02520-04-9

 A. 3275--A                          2
 
   (ii) capitalization rate;
   (iii) gross rent multiplier;
   (iv) loan to value; and
   (v) net operating income, including income and expenses;
   (b) whether and how financial institutions are including the following
 factors in their underwriting calculations of debt:
   (i) sources of income, including residential rent, commercial rent and
 maintenance  from cooperative apartment owners, and how financial insti-
 tutions verify the accuracy of such information;
   (ii) current rent charged and projected rent increases to  be  charged
 in the future;
   (iii)  the  number  and  size  of units in a building and whether such
 units are used for residential, commercial or another use;
   (iv) whether any preferential rent is charged and any  projections  to
 terminate such preferential rent in the future;
   (v)  the  number of vacant units in a property, including whether such
 units are classified as market rate, deregulated or  rent-regulated  and
 how many vacant units are used for commercial or another non-residential
 use;
   (vi)  whether  individual  apartment improvements will be performed on
 any vacant units;
   (vii) the number of rent-regulated units at the time  of  loan  origi-
 nation and how the financial institution verifies those numbers with the
 division of housing and community renewal;
   (viii)  any  projected  construction  or  major  capital  improvements
 planned for the property;
   (ix) projections of any turnover in rent-regulated apartments;
   (x) number of buildings financed in the loans; and
   (xi) whether the property has received  any  government  operating  or
 capital subsidies and explanation of any such subsidies;
   (c)  whether  financial  institutions  are  considering only currently
 established rents and reasonable maintenance costs when determining  the
 net  operating  costs  for the property such that they are acting in the
 best interest of the long-term affordability and stability of the  local
 community;
   (d)  whether financial institutions are adequately examining the types
 of capital improvements included in the landlord's plans for the proper-
 ty;
   (e) whether financial institutions are using accurate appraisal values
 and appropriately doing so;
   (f) whether financial institutions are ascertaining whether the  land-
 lord is taking on more debt than the property can support, including any
 mezzanine debt on such property;
   (g)  whether financial institutions are considering a landlord's addi-
 tional private equity including the source of such equity;
   (h) whether financial institutions are considering a landlord's  addi-
 tional debt on the building or buildings including debt from other lend-
 ers  and  whether  financial  institutions  are  considering  any  other
 outstanding debt a landlord has outside of the loan applied for;
   (i) how financial institutions are evaluating public records of  land-
 lords  and  property  managers  including,  but not limited to liens and
 violations against them;
   (j) whether and how financial institutions monitor the number of rent-
 regulated units in a building prior to and after a loan disbursement;

 A. 3275--A                          3
 
   (k) whether mortgages include clauses  that  require  a  certain  debt
 service  coverage  ratio  or  debt  yield  which  are predicated on rent
 increases or tenant turnover;
   (l)  whether  financial  institutions  consider  the use of additional
 financing, including mezzanine debt, and how this financing is  factored
 into the underwriting of the loan, including examining the risks associ-
 ated with transactions in which mezzanine debt is used;
   (m)  whether  the  use of mezzanine debt to finance projects involving
 rent-regulated and/or small business tenants is advisable, and if  there
 is  increased  risk of foreclosure as short-term interest rates rise and
 the cost of mezzanine financing increases; and what can happen  to  such
 tenants  and  small  businesses if there is more debt on a property than
 the property can support; and
   (n) any other criteria the  department  of  financial  services  deems
 necessary to understand the nature and frequency of predatory equity.
   §  2.  No  later than eighteen months after the effective date of this
 act, the department of financial services shall report to  the  legisla-
 ture and the governor on the findings of the study conducted pursuant to
 section  two of this act including on the scope, nature and frequency of
 involvement in predatory equity throughout the  financial  industry  and
 any legislative recommendations deemed to be necessary.
   § 3. This act shall take effect immediately.