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N.Y.C. Broker Fees Are Here to Stay. Why Do They Exist in the First Place?

On top of shelling out for rent and security deposits in New York City’s highly expensive rental market, many prospective tenants looking for an apartment must deal with another major cost: a broker fee.

That hefty fee, a one-time payment that is typically between 10 to 15 percent of the annual lease amount, is paid by the renter to the broker on the listing regardless of whether the broker helped the tenant find the unit and sign the lease. For a $2,500 per month apartment, for instance, the fee could be as high as $4,500.

Before renters receive keys to a new apartment, they will likely have to pay that fee on top of the first month’s rent and a security deposit, which is usually equal to one month’s rent. It all adds up to many thousands of dollars.

This week, New York State made clear in new guidance to the real estate industry that broker fees were legal, ensuring that in the digital era of virtual tours, a vestige of pre-internet listings would endure.

Here’s what it means for renters.

Yes — but only for a very brief period in early 2020.

Just before the pandemic hit the city, the New York Department of State, which interprets laws and issues guidance based on those interpretations, said that under sweeping rent protection laws passed by the State Legislature in 2019, the collection of broker fees was banned. The suite of laws was meant to strengthen the rights of tenants.

The announcement stunned brokers, renters and even some lawmakers, who had not considered a limitation on broker fees when they passed the laws in 2019, which did impose limits on other types of rental fees.

Technically, broker fees were prohibited for a few weeks in February 2020, from the moment the state said they could not be collected to when a state judge halted the ruling after the state’s largest real estate lobbying group, the Real Estate Board of New York City, filed a lawsuit. The group eventually won the lawsuit, and based on that, the state updated its guidance on Tuesday.

Before the internet and smartphones, landlords and brokers were the gatekeepers to available units and had to hustle to list apartments in an array of publications, answer calls, arrange tours and handle all the necessary paperwork. It was a major investment of time and effort so brokers received a commission in the form of a one-time fee.

But that system seems archaic today when any prospective tenant can find an apartment online, in many cases tour it virtually from their phone and never meet a broker. It has seemed even more irrelevant during the pandemic, as many landlords and brokers, for the sake of social distancing, encouraged renters to view apartments in person by themselves.

Yet prospective renters who find an apartment on their own might have to pay the same broker fee as someone who sought a broker’s assistance from the start.

Real estate groups defend the fee by asserting that brokers offer a significant resource for renters, and arguing that without the commission, they would be without an income.

Critics say the fee erects another barrier to entry for living in New York and makes it especially difficult for young and low-income people to move to the city, where the median asking price is $2,800 per month for a one-bedroom apartment in Manhattan, according to the listing site StreetEasy.

While that median price has dropped nearly $550 during the pandemic, apartment prices in New York are still among the highest in the country.

Market-based rentals land in two categories: fee or “no-fee” apartments. In reality, a fee is charged in both cases, but the difference is who pays the commission.

In a no-fee apartment, the landlord will pay a fee to the broker who assists with the listing. A property owner could absorb that cost or it could be passed on to the renter in the form of a higher monthly lease.

During the pandemic, a glut of available units has led many landlords to switch to no-fee listings to entice renters.

Almost everywhere else, prospective renters work directly with property owners, who list their units on Craigslist or place “For Rent” signs in their yards. But in New York City, brokers are still in the middle.

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