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Since the rent laws were amended in June, it has been a rocky road for New York City landlords. (Among other things, the legislation has made it increasingly difficult for landlords to pass-along the costs of improvements and/or to raise the rents on their regulated apartments.)

The Wall Street Journal is reporting that as a direct and proximate result of the new laws, some landlords are missing loan payments and defaulting on their mortgages. Two large ownership entities supposedly in financial trouble include Emerald Equity Group and Sugar Hill Capital Partners, which reportedly hold more than $200 million in real-estate loans.

“Like many property owners and lenders, we are simply adjusting to the new regulations, and that will take some time to do,” said a spokesperson for Emerald.

Groups like Emerald and Sugar Hill invested in residential buildings thinking that the status quo would never change, or that any modifications would be inconsequential and have little impact on their financial projections or investmentreturns. And because the recent sea change in tenant protections was never anticipated, the decisions made up in Albany are now starting to have some very real ramifications. By way of yet another example, New York CIty experienced a third quarter dollar volume drop -- in residential rental buildings sales -- by some 51% since the same quarter, last year.

According to “people familiar with the matter,” landlords are in communication with their lenders, hoping to either restructure their deals or have the lenders take over the impacted properties.

This news is certainly ominous for those interested in investing in multi-unit residential housing, and purchasers are best advised to exercise extreme caution, as additional statutory modifications (and further strengthening of tenant protections) are anticipated in the months, and years, ahead. 

"Now, more than ever, due diligence is of critical importance when it comes to the acquisition of these regulated structures," noted Jonathan H. Newman, managing parter of Newman Ferrara LLP.  "Rather than risk bankruptcy or foreclosure, it is best that all purchasers understand what they're getting into, and that they make appropriate contingency plans."  

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To read the full Wall Street Journal report, click here.

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Should you require assistance with a real estate transaction, please do not hesitate to contact one of our capable attorneys at 212-619-5400.