New York’s rent regulation system is one that most politicians inaccurately refer to as an affordable housing program, or something that keeps housing affordable for New Yorkers. The problem with this perspective is that “affordability” has nothing to do with rent regulation, as there is no mechanism in place to determine what the tenant can afford to pay. The system rewards inertia. Means testing would be the mechanism to determine if housing was truly affordable, however, tenant advocates argue it would be too cumbersome to implement.
But means testing is already partially implemented. Section 8 tenants must prove they qualify, as do tenants who wish to occupy the 20 percent component of 80/20 buildings. Having tenants prove that they deserve rent subsidies would be more equitable for all participants in the market, would lead to a more efficient allocation of our housing stock and would dramatically reduce what tenant advocates consider harassment.
The harassment component of the system is something that is a major concern relative to quality of life issues for residents. I don’t believe that there are many property owners who want to kick the proverbial little old lady—who can’t afford to pay the rent—out on the street. It is the abusers of the system that property owners have a problem with and the abusers are numerous. Unfortunately, I have never heard of a tenant walking into the managing agent’s office, or a building owner’s office, to inform ownership that they are illegally occupying the unit. So, to the extent that ownership believes the tenant is abusing the system, the only way to determine if they are is to take the tenant to court. Most tenant advocates consider any litigation to be tenant harassment. But owners have few options short of litigation.
Requiring tenants to qualify for rent regulation subsidies would eliminate the overwhelming majority of this form of “harassment.” But advocates have been trying to expand the definition of harassment and, recently, have been successful in an area that is baffling. Many owners offer regulated tenants buyout offers, which are often enough to allow the tenant to purchase a co-op or condo unit that is larger, and in better condition, than their existing rental apartment. New legislation places strict restrictions on an owner’s ability to engage in buyout negotiations with regulated tenants. Given the existing relationship between an owner and a tenant, restricting communication between the two parties doesn’t seem to make sense.
And in yet another recent change, deregulation rules have been changed such that rent subsidies will be provided to tenants who make hundreds of thousands of dollars per year.
Historically, upon vacancy, an owner could increase the legal rent by adding the vacancy bonus and the individual apartment improvement (IAI) increase. The IAI is equal to 1/40th of the costs to renovate the unit. If the resulting rent level exceeded the $2,500 deregulation threshold, the unit would come out of rent regulation and the owner could charge a market rent. In many cases, the new rent level reached $3,000 to $4,000 per month, while the market rent could be double that. Under the old guidelines, the $6,000 to $8,000 per month market rent could be charged.
Today, the court has interpreted the deregulation level to be the last legal rent paid by an actual occupant of the unit. Therefore, the unit remains regulated until the next tenant vacates the apartment. This is a major change that leaves many units renting for thousands less than they should be renting for. Those that can afford the $3,000 to $4,000 per month must be making nearly $200,000 per year to be able to afford the high end of this range, yet they are getting significant rent subsidies. It is difficult to argue that folks earning that much should be getting regulated subsidies equal to thousands of dollars per month.
As time marches on, it appears the rent regulation system is straying further and further from a free market system. While some may argue that this is a good thing, it is apparent that the misallocation of housing in New York is getting worse and true affordability is becoming much more challenging to achieve.
Robert Knakal is the chairman of New York investment sales for Cushman & Wakefield.