What a New Form of Rent Bill Could Do to Change NYC Housing Market
Robert Knakal Nov. 19, 2013, 6 a.m.
There are two aspects of the New York City multifamily market that are creating tremendous stresses on the system and that could spiral out of control given the positions that the new mayoral administration has floated.
Real estate taxes and rent regulation laws both threaten the health of our housing market.
Before articulating the problems facing this market from these two issues, I would like to suggest a possible solution that could help the direction that the market moves in. The solution is to create an awareness of the overwhelming tax burdens faced by apartment building owners in this town. The best way to do this would be for property owners and management companies to segregate the amount of taxes paid by each nonregulated tenant. For example, if someone’s rent is $3,000 per month, the rent bill would indicate that the rent is $2,200 and the “real estate tax payment” the tenant is paying is $800, for a total of $3,000.
This approach would accomplish several objectives. First, and most importantly, it would make nonregulated tenants aware of how high their rents are because real estate taxes are so high. These free-market tenants would then realize that they are actually subsidizing regulated tenants who may, or may not, “deserve” such a rent subsidy and that they are unfairly paying more than other residents of the city. Second, this should motivate nonregulated tenants to become more politically active, which could provide politicians with the political will to make necessary, common-sense changes to our rent regulation system.
While most elected officials refer to rent regulation as an affordable housing program, there is nothing “affordable” about it. Tenants who are rent regulated are regulated because of inertia, not because of economic ability. I don’t think many property owners would want to throw people in the street who can’t afford to pay more rent. However, means-testing tenants who receive rent subsidies would put an end to folks getting subsidies who do not need them. I have clients who sell millions of dollars of properties in one year and then don’t sell anything until another full year has passed before selling properties for millions more. The reason they do this is to make sure they keep their income below the high-income threshold because they are rent regulated. Does this make any sense?
In New York City, there are many more nonregulated tenants than regulated tenants, yet the regulated tenants are much more vocal, leading politicians to back their cause in search of votes. I have been told, ever since I started in the business in 1984, that rent regulation would always become more tenant oriented because there were more regulated tenant voters than property owners. This is not the relationship that matters. It is the relationship between nonregulated tenants and regulated tenants that matters. There are many more nonregulated tenants, and to the extent they become more vocal, changes could be made to make the housing market stronger through more pragmatic rent regulation.
Another impact this awareness could have is to help elected officials solve the massive inequity that exists in the real tax system. If we look at a condo, a cooperative, a single-family home and a rental unit, all of which have similar market and rental values, we can see vastly different real estate tax burdens. Today, a $5 million condo unit of 2,500 square feet could rent for $25,000 per month. The taxes on this unit could be as high as $90,000 per annum or $36 per square foot. A $5 million single-family townhouse of 4,000 square feet could have annual taxes of $30,000 or just $7.50 per square foot. A $5 million co-op of 3,375 square feet might have taxes of just $18,000 per year or a mere $5.34 per square foot. And a rental unit in a new building that rents for $100 per square foot would likely have taxes of about $30 per square foot (these are actual examples). What sense does this make?
If the Real Estate Board of New York, RSA, CHIP, SPONY and all of the other property owner organizations got together and were able to convince a critical mass of owners to distribute rent bills that segregate “rent” and “real estate taxes,” the dynamics between the industry and politicians would change. To the extent nonregulated tenants got upset about how much they pay in real estate taxes, it could create enough political pressure to make significant changes to the system. If that doesn’t happen, it will be the same old thing that, under the new administration, could get much worse for the long-term best interest of our housing market.