Let’s Not Abandon MCI-Related Rent Increases!

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A giant cheer went out in New York City last month when two state legislators put forth a plan to stop landlords from raising rents through Major Capital Improvements, better known as MCIs.

SEE ALSO: Rent Regulation Is Essentially on Tomorrow’s Ballot

Senator Michael Gianaris and Assembly Member Brian Barnwell, both of Queens, introduced the legislation to end MCIs and instead offer landlords a tax incentive for carrying out major renovations to their properties.

And, of course New Yorkers cheered—because 70 percent of them are renters and, let’s face it, no one loves a landlord.

According to Gianaris and Barnwell, the MCI program is responsible for hundreds of millions of dollars in rent increases on rent-regulated tenants.

However, the Real Estate Board of New York claims that every year, landlords spend over $10 billion improving our housing stock while creating over 100,000 jobs for the workers who make the repairs.

It’s a “he said, she said” argument that we’ve all been hearing for years and it does nothing to ameliorate the city’s housing crisis.

The fact is, there aren’t enough homes for New Yorkers, period. But another Band-Aid approach like the tax being tabled by Gianaris and Barnwell cannot be accepted as a solution on any level. What’s often overlooked is why rents are rising—and it’s not because landlords are carrying out MCIs. 

New York’s multifamily sector has enjoyed several years of growth as more people opt into renting and out of ownership as a choice. The number of new apartments coming to market this year is around 360,000, per Yardi Matrix. But only a fraction of those are what’s considered affordable, or workforce housing.

Most of New York’s current housing stock was built more than 50 years ago. According to NYU Furman Center, 41 percent of the housing units in the city were built before 1940; just over 64 percent were built before 1960.  More than half of the apartments in New York City (52 percent) are in buildings that have two to 49 units, meaning they are likely owned by local investors—mom-and-pops, if you will—as opposed to the giant conglomerates that even New York landlords love to hate.

Last year, landlords’ operating costs rose 6.2 percent, according to RSA. Owners of rent-regulated properties were awarded a 1.25 percent rent increase from the city. Water and sewage bills have risen, heating costs are up, building staff salaries are rising, insurance premiums have been hiked and material costs for repairs are soaring. These aren’t conglomerates.  They are primarily local rental property owners facing a return on investment, or ROI, pointing south.

Yet instead of following other cities and tearing down old housing stock, the majority of New York’s landlords have worked to improve it and have used an MCI system that the city itself introduced to help pay for it. The most recent New York City Housing and Vacancy Survey showed the quality of apartments in the city to be at the highest levels since surveying began.

Landlords don’t determine rents, the market does. And the current market is telling us that landlords need to carry out more MCIs, not fewer. Any further legislation that prevents them runs the risk of not only dampening investment in upgrading housing stock but sending the very landlords who are doing the work running for the hills—or at least in search of other, easier ways to make money.

This year, New York City’s multifamily investment sales market has begun to look tired after several post-recession bursts of activity. From April 2017 to April 2018, overall multifamily dollar volume was down 3 percent, building volume was down by 19 percent, and transaction volume was up by 7 percent, per data from Ariel Property Advisors. Higher interest rates have pushed cap rates up which, in turn, pushes up prices. Investors south of 96th Street paid $798,000 per apartment in the first half of this year compared with $709,000 the year before while rents flattened, Ariel statistics indicate.

The current MCI program allows building owners to recoup the cost of major work to their properties through increased rents. They should not be expected to reduce the rents when the bill is paid. That would simply stagnate the market.

A few high-profile cases of bad-apple landlords abusing the system cannot be allowed to dismantle it wholesale. A good landlord will always aim to manage his property well and see opportunity in upgrading it, obviously with a view to making more money.

As the city continues to grapple with its affordability crisis, it must see owners as part of the solution, not the problem. Legislation such as that proposed by Gianaris and Barnwell threatens to obliterate the benefits of MCIs, which not only give people nice homes, but pump increasing tax revenues into the city as building assessments increase.

Moving the goalposts to limit the options of those who own most of New York City’s apartments can only exacerbate the problem. It will breed disinterest in improving housing stock and discourage banks from lending money on properties where rent growth is in doubt. This legislation threatens to push the city backward, not forward.

Adelaide Polsinelli is a vice chair at Compass.