The NYC broker fee 'ban' is something to get excited about, but renters need to know it's not exactly gone

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The NYC broker fee 'ban' is something to get excited about, but renters need to know it's not exactly gone

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REUTERS/Jim Young

New York City.

Renting in New York is going through a big change - and no one knows exactly how it's going to play out.

In a legal guidance that was revised on January 31, the New York Department of State banned brokers who work on behalf of landlords from forcing tenants to pay broker fees.

In plain English, that means that if you're looking to sign a new lease for an apartment, you're likely protected from having to shell out for a broker fee -- or so, at least, an initial reading of the change indicates.

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The ban, which is reportedly effective immediately, may be considered a win in the eyes of renters, but contrary to what may be interpreted from circulating headlines, they aren't completely removed from the equation. In fact, renters who hire brokers to help them search for an apartment will still be required to pay a broker's fee.

Historically, when it came to most New York rentals, landlords would call upon agents to fill their apartments with tenants and handle the contracts. The deal: agents would collect one-time fees from the tenants and the landlords would collect rent. That one-time fee usually ranged between 8% and 15% of the annual rent amount. Under the new rule, these landlords will have to either pay those one-time fees to the brokers or handle the leasing on their own.

We spoke with industry and legal professionals to help get a better understanding of the situation - find their insights below.

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Industry professionals predict rent increases

While the ban will save some renters from dishing out hefty upfront costs, professionals in the industry predict that landlords will increase the rents of market-rate apartments to cover fees.

"The owners who have hundreds of units, thousands of units, they're not going to be able to to do it on their own," Andrew Barrocas, CEO and founder of brokerage MNS, told Business Insider of filling the apartments.

"They will need to either hire a broker or build out an infrastructure in order to do the leasing on their own," he added.

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Both of those alternatives cost money, and in turn, Borrocas predicts that landlords will likely increase rents to mitigate the additional expenses.

In addition, rentals in New York are particularly complicated, broker Michael J. Franco of Compass explained to Business Insider. Experienced rental brokers are good at screening tenants, making sure tenants are financially qualified to pay the rent, and handling the application process.

For absentee landlords and landlords who own a lot of units, they may not have the time or the expertise to take on the burden. The broker's fee is a fee for service, so these landlords will have to decide if they want to take on the process themselves or pay someone to do it for them, Franco explained.

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"If the latter is chosen, it seems logical to me that the cost is going to be passed through to the rent," he said.

What about leases that are already being negotiated?

Business Insider spoke with Pierre Debbas, partner and founding member of Romer Debbas, LLP, to get his interpretation on what this means for leases that are not yet signed but were being negotiated before the rule was put into effect.

To Debbas, if the lease has not yet been signed, tenants are protected by the new rule. In addition, he suggests that the rule is not applicable to any leases that were signed prior to it being passed.

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"It's not completely clear, but a reasonable interpretation would lead to one saying that this would not be applicable to those leases [leases signed before the rule was passed]," he told Business Insider.

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