Rent Regulations Revisited
Robert Knakal Aug. 5, 2015, 1:12 p.m.
A couple of weeks ago, I wrote about the extension of rent regulations in New York for another four years. This result surprised no one as the issue of providing rent assistance, or rent welfare as some refer to it, on a random basis is such a political hot potato that elected officials have no choice but to support it. The renewal strengthened tenant positions and led Governor Andrew Cuomo to proclaim that this renewal provided the best deal for tenants in history!
About a month ago, the Rent Guidelines Board (RGB) added icing to the cake for tenants as, by a vote of 7 to 2, it adopted a rent freeze on regulated units for the first time ever. Order #47 sets forth rent increases for leases commencing on or after Oct. 1, 2015. Apartment renewal increases for a one-year renewal lease will be 0 percent and increases for a two-year renewal lease will be 2 percent. There will not be any low-rent supplement this time around as there has been in the past.
Statutory vacancy lease increases remain at 18 percent for a one-year vacancy lease (a new lease) and 20 percent for a two-year vacancy lease. However, based upon recent court decisions, this vacancy lease cannot help get a legal rent over the new $2,700 monthly threshold for deregulation. Neither can the individual apartment improvement cost (IAI). It used to be that the vacancy lease increase and the IAI could push the legal rent above the threshold and the unit could be removed from regulation. Now, the threshold can only be crossed when a tenant in possession pays above the threshold.
The RGB, which is appointed by the mayor who has a very clear housing agenda, concluded that operating costs have only increased by 0.5 percent this year versus last and this was the justification for the rent freeze. In its Price Index of Operating Cost (PICO) report, the RGB determined that fuel costs dropped by 27 percent last year and this was enough to counteract the increases in every other expense. The relative weighting of items in the expense basket the RGB considers has also disadvantaged property owners here.
The deck continues to be stacked more and more in favor of tenants as changes to policy generally appear to work against owners. The last time there were decreases in fuel costs, which was from 2008-2009, the RGB gave reasonable increases to owners for renewal leases. And the reductions in costs were greater then. During this period, #2 fuel dropped from $4.25 to $2.90 per gallon, a 31 percent drop; #4 oil dropped 35 percent and #6 dropped 33 percent. Yet, in 2009, renewal rents rose. Not this time around, however, as the political climate has changed dramatically.
Another thing to consider regarding this heavy weighting of fuel costs is that owners have been mandated to convert oil systems to more costly alternatives. Over the past 10 years, on an inflation adjusted basis, #2 oil has increased from $2.25 to $3.85 per gallon, a 71 percent increase. For #4 oil, the increase was greater, going from $1.50 to $3.20, a 113 percent increase and #6 oil has climbed from $1.40 to $3.00, a 114 percent increase. So the RGB justifies a rent freeze based upon a decrease in fuel prices but, at the same time, mandating changing over from less expensive #4 and #6 fuel to #2 doesn’t appear to be taken into consideration.
All of the political pressure to increase tenant protections is done in the name of affordable housing. But the ironic thing is that “affordability” has nothing to do with our system. Tenants receive these rent subsidies based upon inertia, not need. If politicians truly wanted to make housing affordable, rent-regulated tenants should have to demonstrate need. Section 8 tenants have to, as do tenants who reside in the 20 percent component of and 80/20 building. Means testing would mean that the folks who need subsidies would get them (very few people want to see people who can’t afford increases get displaced). It would also free up an estimated 100,000 to 150,000 units (10 percent to 15 percent of the total regulated stock) that are occupied by residents who should not be receiving these rent subsidies.
Means testing would also cut down dramatically on what tenant advocates call tenant harassment. A property owner would never have to take a tenant to court again to prove that their income is above the threshold for high-income deregulation. It would also greatly enhance the severe misallocation of our housing stock that price controls create and exacerbate.
The bottom line here is that the uphill climb for property owners continues to grow. Affordable housing is a tremendous need in this city but a more thoughtful way to get it seems to be a growing challenge. Making private owners provide public subsidies is simply a path of least resistance, as well as politically convenient.
Robert Knakal is the chairman of New York Investment Sales for Cushman & Wakefield and has brokered the sale of approximately 1,700 properties in his career having a market value in excess of $12.5 billion.