Hotel and Office Conversions — an Update | Kramer Levin Naftalis & Frankel LLP




Since January 2021, multiple proposals were introduced in the New York State legislature to permit underutilized hotel and/or office buildings, many of which have become financially distressed due to the COVID-19 pandemic, to be converted to residential use and to override local zoning or building code requirements that would otherwise prevent such conversions. These proposals varied with respect to geographic applicability, affordability requirements and involvement of the private sector. With the legislative session concluding, it now seems clear that only one of the proposals, the Housing Our Neighbors With Dignity Act, a funding mechanism that does not override local zoning or building code requirements, is likely to be enacted.

The first proposal was introduced by Gov. Andrew M. Cuomo as part of the state budget. The Governor’s Proposal[1] would have permitted, within certain areas of New York City, residential conversions of hotels with fewer than 150 rooms and certain office buildings, subject to an agreement with the Division of Housing and Community Renewal (DHCR) to provide at least 25% of the residential units as affordable housing. The state budget was passed without the governor’s proposal. The state budget did, however, include $100 million for the DHCR to support the conversion of distressed commercial properties to permanent affordable housing through a new program (the Adaptive Reuse Affordable Housing Program), but did not include any details about the new program. The second proposal, introduced by Sen. Brian Kavanagh, chair of the Senate Committee on Housing, Construction and Community Development, would have modified the Multiple Dwelling Law (MDL) to facilitate the occupancy of Class B hotels located within 800 feet of a residential district as a permanent residence for low-to-moderate-income households. Like the Governor’s Proposal, it seems to have no future in this year’s legislative session.

The third proposal, the Housing Our Neighbors With Dignity Act, sponsored by Senate Deputy Majority Leader Michael Gianaris and co-sponsored by Sen. Kavanagh, now appears likely to be enacted. It was passed by the state legislature on June 9, 2021, and has been delivered to the governor for signature.

The Housing Our Neighbors With Dignity Act (HONDA). HONDA would apply to the entire state and, if enacted, would amend the Private Housing Finance Law to enable the Housing Trust Fund Corporation (HTFC), a public benefit corporation managed by DHCR staff, to provide financing for the acquisition or conversion by qualifying nonprofit organizations of distressed hotels and commercial office buildings for conversion into supportive or permanently affordable housing. The converted properties would be owned, operated and managed by qualifying nonprofit organizations.

HONDA would require all units to be rent-stabilized and affordable to households with incomes between 50% and 80% of the area median income at the start of a resident’s lease, with 50% of the units set aside for households experiencing homelessness immediately prior to moving into the converted buildings. In New York City, properties converted pursuant to HONDA (other than properties that (i) have fewer than 120 residential units or (ii) have entered into a regulatory agreement with a federal, state or local government entity that requires (x) at least 50% of the residential units in such converted property be for homeless, disabled individuals or homeless families with a disabled head of household, (y) the provision of on-site supportive services and (z) the remaining residential units to be rented to households earning up to 80% of the area median income) would be required to pay their building service employees, including but not limited to guards, doormen, building cleaners, porters, handymen, janitors, gardeners, groundskeepers, elevator operators and window cleaners, at least the applicable prevailing wage. In addition, for distressed hotels in New York City where workers are represented by a union, union leadership would need to be notified before a hotel is acquired and the original owner of the property must certify that the union has agreed to the acquisition. HONDA states that additional operating expenses for converted properties would be met through a combination of subsidies, vouchers, commercial rents or other sources of income. Unlike the Kavanagh bill and the governor’s proposal, HONDA does not amend Section 301 of the MDL to override state and local laws. Instead, it would require each unit to contain, at a minimum, a living/sleep space, a private bathroom with bath or shower, and either a full kitchen or a kitchenette with at least a 24-inch refrigerator, sink, cooktop, microwave oven and outlets for countertop appliances. HONDA would be deemed effective as of April 1, 2021, and would not terminate automatically.

If enacted, HONDA may provide limited opportunities to increase the supply of affordable and supportive housing statewide. However, its effectiveness will necessarily be affected by the availability of state funding and securing the right mix of subsidies to support operating expenses. Whether HONDA can provide immediate relief to the majority of COVID-19-impacted owners of distressed office and hotel buildings is unclear because it does not expand current residential conversion opportunities. Conversions under HONDA would have to comply with applicable zoning and housing codes, including being located in a district that permits residential use.

[1] See “The Governor’s Proposed Commercial Conversion Initiative.”

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