New York City legislators have been stumping upstate in favor of rent control. Since tenant voters in the city outnumber owner-voters by 20:1, it's no mystery why they do this. But beneath the obvious rationale lie other, more economically sordid sets of motives. These are not the result of any grand conspiracy unless it be one of dunces. Rather, it's what happens when the only natural resource is land and that land is hemmed in on all sides. We also have to ask, Who Benefits?
Unless they fill in the East River, there is very little land or property available for speculation. So that exerts a pressure on some people to do something about it. Although the city is the largest land-holder, most property is owned by someone who wants to reap the profit from it. The first hypothesis is that speculation pressure leads people who own "unproductive" land to be targets of "persuasion" to let it go.
The second hypothesis is that this pressure on property for speculation fosters the growth of government bureaucracy ostensibly to meliorate the conflict that erupts between present and future owners but in reality in order to get a piece of the action. By government I am also referring to politicians. These two elements speculation pressure and bureaucratic sponsorship are the Bobbsey Twins of rent regulation. This is why Ernst Mayer's dictum rings so true today. He said and let me italicize it because it is so important:
Constitutional Law passes but Administrative Law persists.
It's a wonderful pun. Of course constitutional law "passes." That's how it is enacted. But it also passes on, in the same way some of our dear old friends have done. We hearken patriotically to constitutional law, but unfortunately, it is administrative law that rules our lives. And Administrative Law persists like a barnacle on a boat, like a leech on a victim, like a tiny tax on a state...
That brings us to the question: How is property "opened up" so to speak?
Although there are lots of mechanisms, from taxation to redlining and on down to goon-busting, we're going to focus on two interrelated elements: excessive administrative/legal costs and discriminatory regulation by building and ownership type. We think these comprise violations of our civil rights under the Constitution.
These are a powerful combination, nearly as effective as war in leveling an ordinary neighborhood. They have the advantage of providing an easy scapegoat, in the form of naïve owners, for the mischief that occurs beyond their control. "You should have known what you were getting into before you bought that property," is a common admonition that I hear.
The women I represent in POW! (Property Owning Women - still Prisoners of War after 50 years) thought they knew what they were getting into because the laws on the books seem to protect them. But the reality of their application at bar is quite otherwise. Several had emigrated from eastern European countries and had lived under socialist tyranny. One of these women sought to enlarge her living space from two (total) to three rooms by evicting a tenant from a room adjacent to her family's. Her application was denied because, it was ruled she did not "need" a third room in her apartment. She lived with her husband, senile mother and two opposite-sexed teenagers five people in two rooms. Margo said to me: "I thought when we came to America that at last we would be free. This is worse than any tyranny we suffered in Romania. They only told you how to believe. They didn't tell you how you had to live!"
Margo's costs in this proceeding were excessive financially as well as emotionally. As you know, stress correlates with decreased lifespan and with increased illness, especially heart troubles. When people are not treated well, they literally suffer heartbreak. Clearly, this decision was a further violation of her constitutional rights, specifically involving the Third, Fifth and Eighth Amendments. Let me concatenate the three:
Private property [shall not] be taken for public use, without just compensation and no Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law. Excessive fines shall not be imposed...
If the government has no right to force owners in peacetime to harbor as tenants those soldiers devoted to protecting our nation, how can it constitutionally force them to quarter tenants who perform no service at all? No wartime emergency is involved, and no public good is served by the transfer of wealth involved in the private subsidizing of tenants.
This case reveals the hidden agenda of rent regulation, which is to foist a general social cost upon a particular class of people in society. (In order to do that, of course, the class has to be demonized as "greedy landlords!") Let's start with legal and administrative excess with regard to owners of buildings with less than six units. This category of building, by the way, is supposed to be exempt from regulation. But thanks to the rules by which DHCR operates, a building's status cannot be changed from a class 2 multiple dwelling to a class one family house without undergoing a lengthy and expensive process:
At the end of this expenditure, usually about $100,000, what do you, the NYC building owner, have? Your tenants are still covered by rent regulation and the building is still not your own. It is in this fashion that 32,000 tenants are still living in buildings with 1-5 units,(1) some paying less than $5 a night to live in midtown Manhattan. When rent controls were enacted, buildings with 1-5 units were excluded from regulation.(2) Isn't it interesting how "mission creep" has brought them under control? The stories of many of these owners are like mine.
In my nine-room building in Harlem, vacant since 1975 except for my five-year tenure in the 1980s, eleven units are officially recorded although official papers show one class A apartment on the ground floor, three class B rooms on the second, and four class B rooms on the third floor, for a total of eight. Where 11 units come from in a building containing only 10 rooms is a mystery lost in the bureaucratic maze.
When I first moved in, building inspectors eyed it with their tongues hanging out as they salivated over the 30 obvious violations. They were severely disappointed when told that there would be no tenants there, but they still managed to get my mother, as "tenant," to agree, on an unannounced visit, that problems existed. (This was not strange because I admitted freely to them myself.) It mattered not at all that she made no complaint. On her behalf a violation was noted. After three years of arguing with them about it including having her write a letter denying that she filed any complaint and that she was a relative, not a tenant, the agency changed its tack and cited me for a nonexistent "sidewalk crack." For your information, that problem was equally unresolvable without paying a hefty fee.
This sort of regulation is not a legitimate government function to preserve the safety of the public. It is a hidden tax collection scheme, just as the insistence that private citizens harbor unwanted tenants hides the city's unwillingness to admit the cost of its housing policies.
In my current 13-room building farther south, there are 13 official SRO rooms although only one tiny 7x10 room has remained occupied by a tenant since 1988. That's a decade! Both of these buildings should have been removed from regulation, thereby removing the need for me to file annual rent registrations, pay 13 fees for DHCR to "administer" these units, have my boiler and sprinkler annually inspected at a cost of $300 (or face fines of $500), file many reports and generally make myself available at any time to housing, health, DEP, DEC, postal and police inspectors, depending upon the whim of my litigious tenant.
Just to complete the requirements, I also have to follow an exterior and interior painting schedule, clean the rugs once a year (!), maintain the public areas in a certain way, am prohibited from having a glass door opening onto a public hall, and must keep lights on in all public spaces 24 hours daily unless there is a skylight. Heaven defend me if there is a single paint chip in the hallway! My tenant will demand an immediate rent decrease based upon a "reduction in services," although precisely what services the lack of a paint chip denies eludes me.
In regulated walkups with six to 19 units, (still considered "small" by the agencies) there are some 228,000 tenants(3). Owners reside in or live nearby about half of these five and six story brownstones and old-law tenements.(4) The age of these structures requires relatively constant attention which it isn't cost-effective to hire out, although only 1.2% of all regulated buildings are "dilapidated."(5)
I raise this issue because current regulations ignore the real differences between owner-occupied or owner-nearby and absentee-owner buildings. NYC landlord/tenant laws are written solely from the perspective of a vindictive prosecutor hot on the trail of a negligent and criminal landlord, assumed to be profiteering like a buccaneer from his pad in the Bahamas. No effort is spared in making the punishments as economically harsh as possible. For instance, theoretically, an owner who fails to rent rooms in a 10-unit SRO is subject to daily penalties. Over 30 days an owner could face $90,000 in fines and serve 6 months in jail. Since more than half of SRO owners are women in their golden years, this becomes an easy mechanism for property transfer, doesn't it!
Failure to file certain repetitive papers can cause an owner to lose any legitimate increases to which she is entitled, and some mistakes can cause rent rollbacks as well as treble damages. The degree of administrative/legal arrogance is such that the code in the books is often ignored while pro-tenant judges "make law," Alice in Wonderland style. For instance, Judge Gallet ruled last April that the rent regulation law grants a life estate to a tenant that overrides the bankruptcy code. Judge Birnbaum ruled that a woman who presented herself as an abused wife and who left her husband's apartment two years earlier is entitled to a renewal lease (at the low regulated rates) when he moved out. Judge Friedman ruled that if a profiteering tenant repays illegally collected rent, she cannot be evicted. Judge Ellerin et al ruled that without a lease provision dealing with the issue, there is no limit on the number of occupants in an apartment, whether they are related or not. The Court of Appeals ruled that a cubicle SRO unit is subject to rent stabilization. Finally, bankruptcy filing protects a tenant from eviction (Judge Schlesinger).
Tenants, coached by activists, have caught on to the game and are fully aware of how to use the regulatory system to avoid paying rent and to extort money from hapless owners. Because of the agencies' draconian stances, tenants typically file false complaints to DHCR and HPD. Valid or not, the agencies must assume that the complaints are justified and investigate (at no cost to the tenant). This not only proves the agency is living up to its mission, it also makes work for employees without which the agency might have no reason for being.
The building owner necessarily starts off behind the eight ball in any administrative hearing because of the law's bias. The consequence is that this regulatory system promotes criminal behavior because by definition, tenants cannot be found guilty of malfeasance. Deadbeats are major offenders since only 1% of them will ever be evicted. My sole tenant, who is charged a magnificent $150 monthly rent for a single room in midtown Manhattan has not paid her bill since 1993, yet continues not only to live in my building, but to be rude about it, as well. Come to the city, folks, and live free!
Rooming houses, the first home for many young people starting out and the last home for those at the ends of their ropes, have no lease protections, and can neither get low-rent supplements (averaging $15/month for a unit renting for under $400 monthly) nor MCI (major capital improvement) increases. For the last few years they have not been given any rent increases, either, so there is no way for them to break even, let alone make a profit.(6) In 1993 when the Rent Guidelines Board compiled data on costs, it relied on answers from a self-selected sample of only 12% of 41,000 buildings polled. Not good practice! Not good at all! Yet they were aware of the problems, admitting that small buildings were worse off than large ones according to every variable reviewed.(7) Following this understanding and seemingly sympathetic pronouncement, they bowed to the big boys (who argued that no class of building in the city should be given preferential treatment!) and refused to grant any increases to the very same class of buildings.(8)
Nor are such owners allowed to "go out of business," even though the law specifies that an owner is entitled to do so if he cannot attain an 8.5% profit. Well, it should come as no surprise that DHCR always finds that owners profit because it attributes market rents to the rooms in the building used by the owner, disallows mortgage payments and jiggles the numbers in other ways. But people like the generous Harry Macklowe (he of the Madison Avenue building with the falling bricks) have special amendments added to laws to enable them to go out of business with style. A special provision was added to the 1997 rent regulation bill enabling him to evict three or less rent control tenants from a building he owned so that he could demolish it and build something bigger and taller and more expensive and more profitable!
This gift was agreed to by the very same legislators who berated us small owners for being "greedy" and who tearfully bemoaned the loss of "affordable" housing at every public speaking opportunity. We all agree they made a fine showing if you like crocodile histrionics (that's the smile before the bite), but the upshot is that one of Mr. Macklowe's unprofitable rooming-house hotels is coming down and a high rise luxury hotel is going up.
In effect, Mr. Macklowe was allowed to go out of the low-class
poor-investment hotel/rooming house business that he owned so
that he could go into the business of high-end, highly
profitable luxury housing.
When you put it like that, you have to ask why we are not allowed to go out of the low-class, poor investment rooming house business so that we can go into the business of a luxury co-op, or a bed and breakfast inn, or just market rate rentals.
When small owners inevitably get into financial difficulty, as they must with costs at 108% and incomes at 64% of the average, the city rushes to foreclose with 18% interest rates and 5% additional penalties. When they're down, hit 'em again, harder! But then what happens? Why the buildings are handed over, taxes forgiven and millions of dollars in subsidies are given to nonprofits to run, with hefty "administrative fees" for the principals. The city now also allows them to raise the rents so that the buildings run on a pay-as-you-go basis. Does that not sound like a transfer of wealth program from the city to the favored few?
Basic Housing Data and How to Mislead the Public
Property rites in the city depend upon official statistics about its housing stock. So this is where the games underlying these rites begin: obtaining accurate and comparable figures. And the driving force behind these games is maintaining the fiction that there still exists a "public emergency" with a vacancy rate below 5%. Tables are oh, so carefully constructed to obscure the number of dwelling units, the number of buildings of different types and the percentage of occupants falling in each category.
This tactic allows an agency to overstate the case and unwittingly, I'm sure, mislead many tenants. For example, it is often said that 69% of all units are rentals, thus scaring the daylights out of tenants who foresee disaster if controls are abolished for more than 2/3 of the city's population. Actually, regulated units comprise only 36.7% of the city's total housing stock. Of these, only a small minority are truly needy, for truly needy people live in areas where they receive preferential rents, secure Senior Citizen or SSI subsidies and the like.
No, the people clamoring for rent protection are the mink-coated east-siders in Sen. Roy Goodman's district where the median income is $52,277 and 87% of his constituents live in regulated housing.(9) Their gross rent to income ratio is half that of impoverished Mott Haven in the Bronx and the lowest in the city. Studies show that on average, they would pay 30% more in rents were controls lifted. If they're paying $500 now, they would have to fork over $650. Wow! What a blow to a family earning $52,277 a year! Excuse me. What a blow to the 65,475 families earning over $50,000 living in regulated units!(10)
Sen. Goodman, no stranger to privilege (he's said to be the Ex-Lax heir), wants them to keep their rent protections because that ensures that they will stay put. All sides agree that rent regulation encourages tenants to hunker down, hard. So we see why politicians favor rent regulation: their hidden agenda is to maintain a stable voting base of power. He's worked hard to secure their allegiance and he doesn't want to have to go out and seduce a whole new bunch of voters. He wants them to die in their digs, whatever rent they pay, just so long as they vote for him.
When we examined the raw data we found that the vacancy rate was actually closer to 7% because there were actually 203,000 vacant units, not 111,000, out of a total of almost 3 million housing units. That's 7% not of the regulated units alone, but of every type of housing available in the city. As a fraction of regulated units, it represents a 17% vacancy rate.
Many of these units would need rehabbing, but were controls lifted, owners would have great incentive to fix them up and make them available. Of buildings under rent regulation, Manhattan, the richest borough, has the largest number about 40% located in predominately stable, economically advantaged neighborhoods. Yet, next to the Bronx, which was burned out in the 1970s when vacancy decontrol was temporarily eliminated, Manhattan has the smallest urban population. Go figure!
The Cost of Regulation
The most important message I can bring you today is that few people upstate realize how costly rent regulation is to them. They often mistakenly believe this issue is a problem for the city to solve. They are not aware of how the various financial subterfuges that support rent regulation go on the bills they pay. We estimate that the cost to each family of four is about $3,000 per year. Just think of it you folks are all paying "rent" for apartments that you can't even visit.
Rent regulation affects just over a million families in the state, or about 15% of its population. They pay roughly half the market value for their apartments, about $600 per household per month.(11) This tax-free subsidy(12) for the third of the city's population enjoying rent regulation is borne by owners, and costs about $6.5 billion annually.
What happens when owners have to take a hit? They pass it along to the state and ultimately, to YOU! They deduct it from their income taxes which decreases the monies available for worthy projects.
In addition to the rental income hit, owners also help to subsidize through their fees and fines the 24 agencies that regulate them. Isn't it interesting that, for all its bleeding heart liberalism, the city's public housing by contrast, comprises only 7.9% of the rental market? No fools, these minions of the Empire State. The City has put another one over on its small property owners. Of course, owners, like other taxpayers, are subsidizing public housing as well.
When owners cannot afford to upgrade their stock, many smaller construction firms lose out. There's a domino effect throughout the lower end of the economy. Those who can do so join large firms. But these firms rarely erect affordable housing. Neighborhood deterioration sets in, costing the city more in social services and urban flight than it ever gained in lower rents. Did you know that personnel costs are 50% of New York City's expenditures? Prior to changing its policy of taking over in rem buildings, the City's cost for each building reclaimed from abandonment was $333,000 annually. This led to a budgetary crunch that was only repaired by hiding the deficit in dormitory authority bonds. While that program has ended, everybody in the state is still picking up the tab because there's interest to be paid on those bonds out to the never-ending future!(13)
Over 20% of personal income in the state is state and city debt. Debt service outstrips the Empire State's budget and our current debt is $102 billion.
The stated function of rent regulation was to help the consumer. Exactly how did it do that? Here is a graph of the number of dwelling units completed from 1921 to 1996.(14) What it shows is an amazing dearth of building activity in the wealthy 1990s compared with the impoverished 1930s. I grew up in NYC in the 1930s and 1940s. Our family was initially at the poverty level, living in a top floor walkup apartment without heat or hot water, and costing about $5 a month. Yet we moved freely each October from one flat to another. I remember that "househunting" was a favorite pastime, offering a glimpse into the lives of others that has only been matched by television in today's age. Since rent control came into effect, however, nobody I know in a regulated apartment has been willing to move since 1943, except to a funeral parlor.
The latest census figures show that while the per capita income in Manhattan is $52,000,(15) this masks an income disparity in the state between the top 20% of wage-earning families earning $132,390 annually and the bottom 20%, earning $6,787 that is second only to that of you guessed it that Capital of Pork, Washington D.C. Were the comparisons made in the city itself, the gap would be the largest in the nation.
And when small owners not only lose money on their properties but are made bankrupt, the City and the State both lose income and real estate tax monies, and ultimately, population. New York has been a net exporter of people for the last decade.
Including rent adjustments and other allowable surcharges.
|Assume:||$60.83 start||$60.83 start|
Prior to 1983. Hotels could go to market rates upon vacancy. Ch. 448 of 1983 RS Laws instituted RGB guidelines.
Between 5/1/81 and 6/30/82, surcharge of 1.87% allowed.
What We Can Do
The silver lining in the cloud of regulation is how it helps to unite the people in our upstate communities with the downstaters against a common evil of regulation, whether it be in the form of dictating to the landowner who can use his stream, or telling the building owner who can live in what rooms. The citizens of New York State are not powerless to control the juggernaut of regulation, wherever it appears, if we act together. But many of our efforts founder on the unreal expectation that the problem will disappear when the regulatory rule is ended. This ignores the fact that lots of people have a lot at stake in the program. They're just not going to go away. They're going to make trouble if they feel threatened, just like we're doing. So, realistically speaking, the primary issue is finding an exit strategy for the bureaucrats that rule our lives. An example is the workfare program which uses existing people in a different and more productive manner than did the old welfare program.
As a preliminary step, we would retain regulation but remove the hidden incentives that promote extortion and chicanery on both sides:
With these changes in place, rent regulation might be a bearable restraint on trade. Most of the hidden agendas maintaining it would have been removed. With that accomplished, it will be easier to proceed with abolishing it entirely. Further along in the process, we should:
These strategies provide a set of options for change. The Homeowners and Property Owning Women that I represent sincerely look for your support in this endeavor that will benefit us all. Thank you.
Table 17, Housing and Vacancy Survey of 1996 by NYC Rent Guidelines
(2) Even the Emergency Tenant Protection Act of 1974, which is "updated" every few years, excluded buildings with fewer than six dwelling units. (§5)
(3) 1966 Housing and Vacancy Survey, Table 17, NYC Rent Guidelines Board. In 1993 there were 257,063 tenants.
(4) 1993 Housing and Vacancy Survey, Table 19, NYC Rent Guidelines Board. In 1993, on average, owners occupied 17% of rent controlled buildings and 32% of free market buildings.
(5) 1993 HVS, Table 21, NYC Rent Guidelines Board.
(6) See comparison table.
(7) Rent Guidelines Board, 1995 Housing report.
(8) The situation is far more egregious than depicted. Of 188 hardship applications between 1984-90, only 5 were granted (pp. 215-216 in Anthony J. Blackburn Housing New York City 1993. HPD, June 1995. But to be fair to the "big boys," it's a fact that citywide, 2% of hotels have permanent low-rent tenants paying $200 monthly for rooms the hotels could rent for $200 a night. Again, the onus falls on about 35 of the 100 smaller hotels who harbor about 1500 rent regulated tenants. (John Holusha "For Many City Hotels, Some Guests are Permanent." New York Times, December 21, 1997, p. RE9.)
(9) Charles W. deSeve, American Economics Group: The Effect of Deregulation on Rents and Economic Activity in New York City. Washington, DC, 1997. Note that the median income would be higher but the Census Bureau has no category above $100,000 annual income, a category into which 516 RC and 13,161 RS tenants fall.
(10) US Bureau of the Census, Housing and Vacancy Survey Table 10, 1995 data.
(11) NYC Rent Guidelines Board and the Census. HARK's estimate is based on the calculation of difference between regulated and unregulated rents, adjusting for unit size and location.
(12) Were the tenant's rent paid by his or her firm, it would be unearned income cited on Form 1099 on which the tenant would pay tax. But since the owner is paying it, it amounts to a gift!
(13) Some of the costs involved: $10.6 billion for taking over and renovating buildings lost through abandonment, $238 million for 24 agencies involved in regulation, $1 billion in real estate tax losses, $100 million in personal income tax losses, $150 million in increased costs for neighborhood services and police protection owing to building abandonment and increased crime, the loss of about $4 billion in initial spending on capital improvements and the loss of $5.6 billion in sales revenue, and $10 billion for bond financing to cover the state debt.
(14) Data from Real Estate Board of New York, 1997.
(15) Bureau of the Census, State Abstracts, 1 996.
(16) One of New York City's many "crazy ladies" filled her room with ceiling-high stacks of newspapers dating back to the 1920s. She had only a tiny aisle about 8 inches wide and the owner was given a summons by the fire department as well as a building code violation for a condition over which he had no control. Furthermore, he was not allowed to evict her, based upon §2524.3 of the Code which describes as "wrongful acts of the tenant" the commission or permitting of a nuisance.