Cornell has just formally announced the creation of its first NYC law clinic, a branch of the law school’s Entrepreneurship Law Clinic, to be located on the Cornell Tech campus. You can read more here.
Tag Archives: Center for Urban Business Entrepreneurship
NYC Rent Guidelines Board Final Vote Interview
I was interviewed on WCBS AM’s Drive Time about the vote of the New York City Rent Guidelines Board. Click here to hear it.
Rent-to-Ow!
Insider quoted me in Private Equity Sold Them a Dream of Home Ownership. They Got Evicted Instead. It reads, in part,
Erica Hines-Denson had no idea how bad the odds against her were.
Student loans and a recent divorce had dinged her credit score. But she and her new husband, Elquinton Denson, were building a blended family and they dreamed of buying a home in the greater Atlanta area. After lenders turned them down for a traditional mortgage, a realtor told her there might be another way. Something called a lease-purchase, or rent-to-own, agreement.
“This was our way to own a home finally,” Hines-Denson said. “It was like we found a loophole.”
It took just a weekend of house hunting to find a house they loved: a stately four-bedroom, 30 miles southeast of Atlanta, with a built-in bar in the basement where they pictured hosting family and friends. Listed at $275,000, it was in their price range.
There was a catch. The couple wouldn’t be buying. Instead, a Chicago-based company called Home Partners of America would make a cash offer and rent the house back to them, with an option to buy within five years.
Home Partners supplied a lengthy agreement detailing the terms, including built-in annual increases to their rent and to the eventual purchase price. The document was more than 50 pages long; Hines-Denson said the company gave them just 24 hours to review it and sign. But the opportunity seemed too good to pass up. “You’re like, ‘Oh Lord, this is my chance,'” she said. “So you’re moving quick.”
The deal quickly turned sour. The company locked her out of the online payment portal after she missed a single month’s rent, adding hefty fees that made it impossible to catch up. After she missed a second month, the company swiftly filed for an eviction.
While a judge stayed her legal case under the federal COVID-19 eviction moratorium, the company’s management agency continued to call, Hines-Denson said, threatening to remove her belongings. In a final insult, the company kept their two-month security deposit when she and her family finally moved out.
Private Equity Moves In
Home Partners, which launched in 2012, now owns more than 28,000 homes nationwide. It is the largest of a handful of new companies promising “a clear path to homeownership” for families not yet ready or able to buy.
The company’s success has inspired startup competitors such as the New York-based company Landis, which boasts of investments from entertainers Will Smith and Jay-Z. Once dominated by fly-by-night operators, rent-to-own is now attracting some of the biggest players from Wall Street and Silicon Valley. Andreessen Horowitz led a Series A funding round for a rent-to-own competitor, Divvy Homes, in 2018. BlackRock and KKR purchased a majority stake in Home Partners by 2014, before private-equity giant Blackstone Group bought the company in 2021 for $6 billion.
In its marketing, Home Partners emphasizes that it offers “flexibility, choice and transparency,” providing the opportunity to “rent your dream home” without making a long-term commitment. “Home Partners has created a path to home ownership for tens of thousands of people who may not otherwise have had one,” a company spokesperson told Insider. “We are tremendously proud of our business.”
Yet Home Partners tenants, in interviews and court documents, say they got stuck in barely livable dwellings, with leaking sewage, broken air conditioners, filthy carpets, or nonworking electrical outlets. They describe being blocked from seeing home-inspection reports and facing swift eviction filings for a single late payment. One tenant filed a lawsuit claiming she suffered injuries when the ceiling of her home collapsed.
Hines-Denson said she felt like she’d been “set up to fail.”
More than 4,000 Home Partners tenants have purchased their homes over the past decade, according to a July 2022 paper from Moody’s Analytics, coauthored by an advisor to the company. But over the same time, nearly four times as many tenants — roughly 15,000 — moved out without buying.
An analysis of contracts and sales and eviction data shows that rent-to-own tenants are often left with the worst of all worlds. They have to shoulder many of the costs and responsibilities of homeownership, and the financial odds are stacked against them to end up as owners. Meanwhile, many are paying above-market rent.
“I’m very sympathetic when someone says they’ve identified a large segment of the population not being served by the current housing and mortgage landscape,” said David Reiss, the research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“What you don’t want to hear next is, ‘Therefore, we can do whatever we want to them.'”
*. *. *
“Rent-to-own has this really sordid history,” said Reiss. “It’s an area of the housing market that remains underregulated. That’s part of the attraction for many operators.”
NYSBA Task Force on the Digital Economy (and the Real Economy)
The New York Law Journal ran a story on the NYSBA’s new Task Force on Emerging Digital Finance and Currency. The NYSBA Press Release is here. Joseph Bizub, my co-author, and I are members of the Task Force. We are writing about the impact of fintech on real estate investment. The Press Release reads:
The New York State Bar Association has launched a task force to make recommendations on how New York should regulate virtual currencies and digital assets and advise the association what the new technology can do for its operations.
“The rapid growth of the metaverse/Web3 and the digital economy present a confluence of issues for lawyers,” said President Sherry Levin Wallach. “At the same time, this technology has the power to significantly change the way we do business, bank, and interact both personally and professionally. It’s important that we are in front of the issues and able to engage productively in this quickly evolving space.”
The task force will work to educate NYSBA members and the legal community about the impact of the digital economy and the legal issues that are likely to arise in representation of clients. It will also evaluate legislative and regulatory proposals and explore how the metaverse and Web3 can benefit the legal profession and bar associations.
“We are already seeing the effects of this trillion-dollar industry in many areas of practice including entertainment, business, intellectual property, tax, criminal and environmental law and trusts and estates,” Levin Wallach said. “The Task Force on Emerging Digital Finance and Currency will ensure that the New York State Bar Association has a voice in this innovative and emerging field.”
Jacqueline J. Drohan, partner at Drohan Lee, and Dana V. Syracuse, co-chair of Perkins Coie’s Fintech Industry Group, will co-chair the task force. The vice chair will be Dr. Carlos Mauricio Sakata Mirandola, CMSquare, São Paulo, Brazil. Marc Beckman, founding partner of DMA United, New York, NY, and Nancy Chanin, who oversees business development at DMA United, will be consultants to the task force.
New York State Bar Association President-Elect Richard C. Lewis will be the task force’s liaison to the association’s Executive Committee. Joseph Bizub and Dina Khedr of Brooklyn Law School will be law student members of the task force.
The members of the task force include:
Alyssa Barreiro, head of fiduciary risk, BNY Mellon, Binghamton, NY
Joshua Lee Boehm, partner, Perkins Coie, Phoenix, AZ
Julie T. Houth, staff attorney, Robbins Geller Rudman & Dowd, San Diego, CA
Luca CM Melchionna, managing member, Melchionna, New York, NY
John W. R. Murray, partner, Foley Hoag, New York, NY
Jeffrey D. Neuburger, head of Blockchain group, Proskauer Rose; New York, NY
Rory J. Radding, partner, Mauriel Kapouytian Woods, New York, NY
David J. Reiss, professor of law and research director, Brooklyn Law School Center for Urban Business Entrepreneurship, New York, NY
Jason Schwartz, tax partner and co-head of Digital Assets and Blockchain Practice, Fried, Frank, Harris, Shriver & Jacobson, Washington, DC
Robyn T. Williams, associate, Devlin Law Firm, Cleveland, OH
Skyscraper’s Future up in The Air
The New York Law Journal quoted me in Upper West Side Skyscraper’s Future Uncertain After NY State Court Ruling. The story opens,
The development at 200 Amsterdam Ave. in Manhattan is slated to be the tallest building on the Upper West Side, with its 51 stories rivaling the skyscrapers located further downtown.
But whether this will ever happen has now become questionable, after a state court ruling that found city officials were wrong to follow an interpretation of city zoning law used by the developer to achieve the project’s awesome height.
Supreme Court Justice Franc Perry of Manhattan sided with local community groups looking to halt the building underway at the site. The plaintiffs—the Committee for Environmentally Sound Development and the Municipal Arts Society of New York—were joined by numerous local state and city elected officials in opposing what they say is not only an out-of-character monster development in the Manhattan neighborhood, but one that relied on a faulty zoning law interpretation to move forward.
“It is finally a declaration that zoning law means something and developers can’t make it up as they go along,” said Emery Celli Brinckerhoff & Abady name attorney Richard Emery, who represented the plaintiffs.
Since 1978, developers and city buildings officials have relied on the so-called Minkin Memo, named after the former head of the city’s Department of Buildings’ Irving Minkin, for guidance on what experts call an ambiguity in the city’s zoning law towards so-called tax lots. These are additional subdivisions of city real estate, which can overlap with or be included inside a zoning lot.
Under the Minkin memo, developers have been able to pull together extra vertical building rights that nearby property owners aren’t using, offering the opportunity to boost the size of a project such as 200 Amsterdam beyond what would normally be allowed.
“The zoning resolution is ambiguous about when a zoning lot can be formed from partial tax lot; it never deals with that problem,” said Stewart Sterk, the Mack Professor of Real Estate Law and director of the Center for Real Estate Law & Policy at the Cardozo School of Law.
Initially, city officials had no problem with the move. DOB issued a permit to the developers for a residential and community facility building at the site of the Lincoln Towers condos on the Upper West Side. The developers relied on the Minkin memo as the basis for the acquisition tax lots that combined partial and whole lots to provide the developers with the vertical building rights needed for their skyscraper.
Shortly after DOB green lighted the project, the Committee for Environmentally Sound Development challenged the DOB’s decision. The challenge snowballed, and soon seemingly every local elected official, from state Assemblyman Richard Gottfried to borough president Gale Brewer, were opposed to the plan. The project’s permit was appealed by both CESD and the Municipal Arts Society to the city’s Board of Standards and Appeals.
In March 208, DOB made an official about-face on the project. In a letter from assistant general counsel to the BSA, the department said the Minkin memo provided an incorrect interpretation and that zoning regulations did not in fact intend for zoning lots to consist of partial tax lots.
The BSA was not persuaded by the arguments and in July 2018 voted 3-1 not to grant the appeal, with one board member abstaining. The plaintiffs soon after pursued a review of the BSA’s decision in state Supreme Court.
In subjecting the developers’ permit to further review, Perry pointedly took issue with BSA view of the process.
“BSA found that the Subject Zoning lot is ‘unsubdivided,’ within the meaning of the [New York City Zoning Resolution], simply because Developer has declared it to be so,” the judge wrote.
Noting that the referenced law states that a zoning lot is defined by being “unsubdivided” within a single block, Perry said BSA’s interpretation would render the term “superfluous,” and run “afoul of elementary rules of statutory construction.”
Since DOB saw the light on the Minkin memo during the appeal process, the court said the department’s statutory basis for the issuance of the permit to begin with was undermined. BSA’s decision was nullified and vacated, and the board was directed to review the project’s permit application “in accordance with the plain language” of the zoning regulation and Perry’s order.
As Cordozo’s Sterk noted, the development at 200 Amsterdam was far from the first to use the Milkin memo to justify partial tax lot usage in a building plan. Perry’s decision has the ability to throw uncertainty around zoning and building issues into a business sector highly adverse to such things, Sterk said.
But just as important for Sterk is the question now of when a government agency becomes estopped from changing its mind after it’s already induced people to rely on its existing interpretation.
“That’s a big problem in this case, because clearly developers have put millions of dollars into this project in reliance on an existing interpretation,” he said.
Brooklyn Law School professor David Reiss, who is the research director of the school’s Center for Urban Business Entrepreneurship, said he saw the case as less of a “good guy vs. bad guy” dynamic as much as one of whether the assurances of government officials can be binding.
“There’s a reliance on government statements and government permissions,” Reiss said, while noting the project has already commenced.
Should the case stand, he predicted it would serve to rattle developers’ confidence in their dealings with the city going forward.
“It’s more uncertainty in a process that’s already pretty uncertain,” he said.
Luxury Rental Turned Into College Dorm
Realtor.com quoted me in ‘Help! My Luxury Rental Was Turned Into a College Dorm’. It opens,
Finally! After years of scraping by in cramped apartments in sketchy neighborhoods, you’ve made it—into a luxury rental with a doorman, concierge service, gym, bike room, and other posh amenities. It seems perfect.
Then you meet your neighbors, sunning themselves on the roof deck. Topless.
Sound like the opening to a Skinemax flick? On the contrary, it’s a reality for residents at The Azure, a new high-end apartment building in Brooklyn, NY.
“There were girls sunbathing topless up there,” one tenant with a child told the New York Post. “My wife was, like, ‘WTF?!’ There are a lot of families [here].”
You see, The Azure was facing significant vacancies, so the management company decided to rent out 30% of its units to King’s College, a liberal arts school in lower Manhattan. The result? Families who paid top dollar to live in a building with a business center, cold storage space for grocery deliveries, and other luxe features suddenly found themselves in what felt like a college dorm. A “dormdominium”! And you know what that probably means: late-night parties with eau de weed wafting through the halls and, um, some awkward bump-ins during rooftop barbecues with bikini-clad (or unclad) residents. And noise. Lots of noise.
“We bought into the luxury experience of the nice rooftop,” another tenant lamented. “We didn’t expect it to be packed with 18-year-olds.”
When luxury apartments turn into dorms: Why it happens
This rude awakening for well-heeled renters isn’t as unusual as you might think. It’s just what many luxury developers may find themselves doing now that the high-end rental market is softening, leaving empty apartments that must be filled to make ends meet.
“Building owners stuck with vacant properties will try to rent them to whoever they can within reason,” says Aaron Shmulewitz, a real estate attorney with Belkin Burden Wenig & Goldman in New York City. “When the economy goes bad, building owners have to scramble.”
Part of the problem is that a few years ago, the housing market was going so strong, developers got bullish on building—only to find themselves in a more sluggish market once their structures were complete.
“Opening a residential building is a many, many-year process,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “You have to acquire the site, you have to get financing, perhaps you have to get zoning approvals, you have to get your plans approved … then you have to build it and then you have to market it. You’re talking about years of work.”
Many of these builders were likely banking on the possibility that rental demand would just keep going up and up—but they bet wrong.
“We have a large amount of supply that came into the market within a fairly short period of time,” says Edward Mermelstein, a real estate attorney with One and Only Holdings in New York City. “At the same time, the demand has waned substantially.”
How do college kids afford a luxury rental, anyway?
While luxury rentals in any other city might be hurting right about now, New York is well-positioned to solve this problem, thanks to its high student population and limited dorm space.
“Renting to college students in Manhattan or Brooklyn has always been a trend, as there’s a total of almost 250,000 active students on this small island,” says Michael Jeneralczuk, a real estate agent with REAL New York. “With that said, luxury apartments are usually outside of student budgets.”
While a luxury rental might be outside of any individual student’s budget, a larger group of students can make it work. According to the Post, the King’s College students are paying a combined $6,000 per month for a two-bedroom apartment housing four people, which comes to $1,500 per person. This is more affordable than trying to rent alone; even a studio apartment at The Azure starts at $2,399 per month, according to the building’s website.
Meanwhile, the nonstudent rate for a two-bedroom apartment at The Azure starts at $3,391 per month. So by renting to King’s College students, the building is also making almost twice as much per apartment. So, at least for these two parties, it’s a win-win.
“It’s an opportunity to fill vacant apartments and collect rent,” says Becki Danchik, a real estate agent with Warburg Realty in New York City.
Given that the luxury rental market is slowing down nationwide, does this mean renters across the country might expect college-aged neighbors soon, too?
According to Reiss, it depends on development levels. In Los Angeles, construction has stalled, so apartments are filling up. Seattle, on the other hand, is facing similar issues as New York City.
“Seattle has had a construction boom, which means there are a lot of empty apartments,” says Reiss. “You face a similar situation where landlords are going to look to find some way to rent those out and make their money back.”
Cutting Back on Community Reinvestment
Bloomberg Law quoted me in Banks Look to Narrow Exams Under Community Reinvestment Act. It opens,
Banks see an opening to limit the types of violations that could lead to a Community Reinvestment Act downgrade as federal regulators begin rewriting rules under the 1977 law.
Banks say regulators have improperly used consumer fair lending and other violations involving credit cards or other financial products to evaluate compliance with the law meant to increase lending and investment to lower-income communities.
“When a bank violates a consumer protection law, there is no shortage of enforcement agencies and legal regimes available to seek redress and punishment. Adding the CRA to that long list thus has little marginal benefit, and risks diluting and undermining the CRA’s core purpose of promoting community reinvestment,” the Bank Policy Institute, a leading bank lobbying group, said in a Nov. 19 comment letter to the Office of the Comptroller of the Currency.
The OCC set the stage for a CRA rewrite in August by releasing an advanced notice of proposed rulemaking. The Federal Reserve and Federal Deposit Insurance Corp. have signaled a desire to sign on to a joint proposal.
With that momentum building, banks are taking their shot to limit the types of enforcement actions included in CRA reviews. They want CRA reviews to focus on mortgages, small business and other community development investments.
The question of how non-CRA-related violations apply to banks’ community lending reviews is not merely a theoretical exercise.
Wells Fargo & Co. saw its CRA grade downgraded two levels to “needs to improve”in March 2017 following the revelation of the fake accounts it generated for consumers. Several states and municipalities cut off business with the bank in response.
CRA exam cycles run three years for large national banks and can run longer for smaller banks that perform well. Banks receive one of four grades—outstanding, satisfactory, needs to improve or substantial noncompliance—and a poor grade can restrict their merger and branch expansion plans.
OCC, Treasury Leading Push
The Trump administration, led by Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting, has been pushing for the latest CRA revision.
Both of those officials ran into CRA trouble when they tried to sell OneWest Bank to CIT Group Inc. Mnuchin was OneWest’s chairman and Otting its chief executive.
The Treasury Department released a report on “modernizing the CRA” in April. Included in that report is a call to not allow fair lending enforcement investigations from the Consumer Financial Protection Bureau and other regulators to slow down CRA reviews.
Otting went farther, issuing a bulletin on Aug. 15 highlighting that his agency’s examiners will no longer take into account non-CRA lending violations when assessing a bank’s CRA compliance.
The FDIC and the Fed have not yet followed suit. But banks want the three agencies to set a common policy on dealing with non-CRA related enforcement actions in their community lending reviews.
“Regulators should develop consistent policies clarifying that CRA will not be used as a general enforcement tool,” the American Bankers Association said in a Nov. 15 comment letter.
There is some merit to the idea, according to David Reiss, a professor at Brooklyn Law School and the research director at the Center for Urban Business Entrepreneurship.
“It’s delinking fair lending concerns, which are regulated elsewhere, from CRA concerns. From an industry perspective that may make a lot of sense,” he said in a Nov. 30 phone interview.
The proposal, taken in a vacuum, may be reasonable. But in the context of broader attempts to weaken the CRA, it should be viewed more skeptically.
