“Common sense”: Council bill would shift burden to hiring party to pay rental brokers

UPDATED June 23, 1:15 p.m.: New York City Council Member Chi Ossé unveiled his broker-fee reform bill Thursday, dubbed the Fairness in Apartment Rental Expenses Act, which would shift the burden of payment to whichever party hires the broker.

This would change the way most rental units are paid for, as tenants in New York now pay the broker, even though they work for the landlord. The bill does not seek to cap rental broker commissions at one month’s rent as initially believed by the Real Estate Board of New York when it began an email campaign against the legislation on Tuesday.

Ossé co-sponsored the bill with council members Shaun Abreu and Oswald Feliz.

“This bill is common sense,” said Ossé in a press release. “In every other transaction, the party who hires a service pays for the service. New York is unique among major cities in America in having tenants often paying the fee for a broker’s services. This bill is simple and fair in assigning that cost to whoever sought the service.”

While the legislation may seem like a no-brainer to renters, the bill has sparked outcry from the real estate industry, as did similar efforts four years ago. A REBNY representative said that by Thursday morning more than 1,000 members had followed through on a call to action the organization emailed its 12,000 residential brokers on Tuesday.

“Contrary to Council Member Osse’s claims, this legislation will negatively impact agent commissions while also leading to higher rents for many apartment seekers,” said a REBNY spokesperson on Thursday.

Ossé said in a release that while rents may increase as a result of his bill, spreading the broker fee across a 12-24 month lease may be preferential for many tenants. 

Median monthly rents in Manhattan hit a record high in May for the third straight month, nearing $4,400. Upfront costs for a unit at that price could climb over $16,000 — before moving expenses — when considering common requirements for first month’s rent, a security deposit and a broker’s fee of 15 percent annual rent, or $7,920.

“While it is possible that tenants will see some percentage of the broker fee realized in their rent, these pass-through costs would necessarily be distributed over the course of their 12 or 24 month lease,” said a spokesperson for Ossé’s office. “This would alleviate the prohibitively expensive up-front cost that too-often prevents New Yorkers from entering a new lease and moving into a new home.”

Those pass through costs may be less than what tenants pay now because landlords that own a large number of units may use that volume to negotiate discounted rates, according to Nestseekers broker Marina Kote, if they don’t decide to market the units in-house.

While that could be good news for renters, it’s bad news for brokers, and higher rents may pose a bigger obstacle to some tenants than a broker fee, according to Kote. Many landlords require tenants to earn 40 times more than the monthly rent, so if rents rise several hundreds of dollars per month, renters may not qualify for units for which they were previously eligible.

Security deposits can often be eliminated from upfront costs with third-party companies, Eugene Litvak, head of Compass’ Litvak Team. Services like Rhino and theGuarantors pay the deposits on behalf of tenants in exchange for a one-time non-refundable fee or cheap monthly fees. 

Co-op and condo fees can raise move-in costs, he said, which aren’t addressed in the bill.

It can sometimes be unclear who the hiring party is, Litvak said. In a case where a colleague brings a prospective tenant to an existing listing,  it could be unclear who gets paid what and by whom. 

“There are buildings that pay broker fees,” said Litvak. “You have that option today … I just don’t quite understand the outcome if we’re trying to protect prospective renters. I don’t see how we’re achieving that [with this bill] because landlords will just raise rents.”

Kote, who has roughly 120 rental units on the market, said passing the bill could result in “a pretty sizable dent” in her business.

“You also have luxury rentals too where you need to have experienced brokers that are doing a good job,” said Kote. “Even clients that are spending $2,000 on a unit, which is almost nonexistent right now, there are good agents out there that know what they’re doing and they have to know what they’re doing because they need to rent out the unit soon or they don’t have a job.”

Four years ago, a Department of State interpretation of the recently passed Housing Stability and Tenant Protection Act briefly shifted the onus of rental broker fees to landlords. Data shows that rents rose during that short period of time: Advocacy groups including REBNY, the New York Association of Realtors and 12 brokerages won a temporary injunction against state regulators while the decision was litigated.

In 2020, Albany Supreme Court Judge Susan Kushner ruled against the DOS interpretation and sided with the industry, permanently restoring the status quo to the dismay of many renters and housing advocates.

This article has been updated with comments from Compass broker Eugene Litvak.

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