Why You'll Never Get that Awesome Rent Controlled Apartment by the Park

Tenant advocates protesting rent increases (nycurbed)

Tenant advocates protesting rent increases (nycurbed)

This week the Rent Guidelines Board held a preliminary vote that called for an increase of 0-2% in one-year leases and a .5-3.5% increase in two-year leases for any leases signed between Oct 2016 and Sept 2017 across more than 1 million rent regulated apartments in NYC. Though there will be five public meetings before the final vote takes place on June 27, this initial vote frames the debate going forward.  This means that last year's historic rent-freeze (on one-year leases) will almost certainly not be repeated this year.  Still, as is the case with every other year, both landlord groups and tenant groups are unhappy with the result.

Tenant advocates protesting rent increases (brokeassstuart)

Tenant advocates protesting rent increases (brokeassstuart)

Background on Rent Regulation

Just to give a quick overview, NYC has two forms of rent regulations - rent control and rent stabilization.  Just under half of all rental units in NYC fall under some type of rent regulation. 

Rent Control was initially introduced in NYC by the federal government in 1943 to control inflation during WWII and the housing crunch expected with returning veterans; it was reformed to include all buildings built before 1947, but none after.  NY State took over rent control in 1951 (most states abolished it, but NY still had severe housing shortages) and introduced some ability for units to be decontrolled if their rent reached a certain threshold or became vacant. Despite every New Yorker's dream of finding a rent controlled apartment by the park, the reality is that rent controlled apartments only represent 1.8% of rental units, or about 38,000 units and they are disappearing fast. So you're not gonna find one.

Rent Stabilization was introduced by the state in 1969 after vacancy rates had plummeted and rents started to skyrocket over the previous few years. The law included all buildings built after 1946 with more than 6 units and any rent controlled buildings that had been decontrolled.  Stabilization has less restrictions than Control, mostly around when they can be deregulated and what other costs can be placed on tenants in them. Rent stabilized apartments (including my apartment in Stuy Town) represent 45% of rentals or 987,000 units. 

The rent laws are periodically renewed in Albany and have been the center of some truly epic fights, most recently in 2015. I won't get into those battles in this post, but will in the future. The main thing to remember is that these laws, in theory, would come off the books if the NYC vacancy rate ever surpasses 5% - which it hasn't done in over 50 years (it was 3.45% as of 2014).   In the meantime, the RGB is where this battle plays out every year.

The RGB as sin eater for city and state politicians (sbkmulletman.deviantart.com)

The RGB as sin eater for city and state politicians (sbkmulletman.deviantart.com)

The Rent Guidelines Board

The Rent Guidelines Board was set up in 1969 to oversee what, if any, increases in rent would be passed to rent-regulated tenants.  The board is made up of 9 members all appointed by the Mayor.  Two seats go to tenant advocates, two go to landlord advocates, and the other 5 (including the Chair) are intended to represent the general public. The terms of each appointment are staggered slightly between 2 and 3 years depending on the seat. Currently all nine have been appointed by Mayor de Blasio and, in some circles, it has been considered the most tenant-friendly board on record.

The main tool the RGB uses to determine their policy decisions is called the Price Index of Operating Costs (PIOC).  This factors in the yearly variances in the price of goods and services (like oil, electricity, staff, insurance, property taxes) that impact the overhead for landlords. This year, the Board determined that the PIOC fell by 1.2%, only the second time in its history, which some observers had suggested, before the vote this week obviously, might mean yet another freeze or even a roll-back. The backlash against the freeze from last year was likely too much for the board to ignore this time around, resulting in the increase.

Most landlord advocates, including the Rent Stabilization Association (the city's largest landlord organization) argue that PIOC fails to determine the actual costs to landlords for two main reasons. First, a blanket recommendation can not possibly factor in the varying impact of costs between big and small landlords, between different parts of the city, and different types of buildings.  The second is that it does not factor in major capital improvements, new compliance costs, or debt service, which are significant budgetary items for many landlords.

Most tenant advocates argue that the Board actually overestimates landlord's costs (which the RGB report itself describes) and that last year rent stabilized landlords had a net operating income return of 50%, which has increased every year over the last 10.  Especially now that energy costs have gone down, they argue that landlords have benefited significantly while interest rates and wages have not kept pace in the same time span.

Not surprisingly, I think both sides have fair points.  The RGB and its PIOC calculations are clunky and inelegant tools to address such a vast and complex system.  But something has to address it and the RGB does so while serving as a sort of sin eater for city and state politicians - a helpful symbol for parties to attack that at least partially insulates officials from the universally unpopular results. It functions as a populist valve rather than a meaningful policy vehicle.  This does a disservice to the many legitimate issues that landlords and tenants want addressed, but that is surly some of the point.


What does the future hold for NYC? (rogersmavel.com)

What does the future hold for NYC? (rogersmavel.com)

What is to be done?

Renting a home may not be the oldest profession, but it has been around for a long time and arguing over the rent is never going away. Landlords and tenants know that.  But they can still find common ground that could potentially improve everyone's position and the collective health of the city.

First, in a strictly micro-sense, they could advocate that the RGB and the city incorporate more dynamic IT solutions (coughs) to better calculate individual landlord costs and individual tenant costs.  Whether it's water use, heating, electricity, gas/oil whatever - there are already countless tools available that could be installed to measure the efficiency of buildings and the use-demands of individual tenants.  This could help calibrate a more accurate and tailored PIOC report as well as a fair allocation of costs within a building while also incentivizing better resource management for all parties. The cost to install these tools isn't cheap currently, but it could be spread out in tax-abatements. The argument here is that they would eventually significantly reduce the city's operating costs to monitor these elements and save the city in the long-run.  More information, and better ways to analyze it, will drive down costs for everyone in the market.

Second, in a macro-sense, landlords and tenants must both advocate for building more housing.  Obviously.  And though this can be done through changes in zoning, land-use, building diversity, transportation and many other factors, politically those options create divisions among tenants groups and landlord groups.  None of these issues fall easily into pro-landlord or pro-tenant categories so progress is painfully slow or non-existent.  Creating a clear policy platform that can gain the support of the most tenants and the most landlords would be difficult, but not impossible. Mayor de Blasio has tried, perhaps successfully, but the response hasn't differed all that much from the response to the RGB. 

Finally, in a philosophical sense, landlords and tenants should address some fundamental questions: Would everyone be better off if there was no rent regulation or universal rent regulation?  Before any landlord or tenant screams bloody murder, hear out the logic for both.  Considering radical alternatives might reveal practical solutions. (Assume for this debate that we live in a more elastic housing construction market and can build more housing across the board.)

No Regulation - What if there was some ideal natural vacancy rate (there are interesting debates about this) for NYC and the region factoring in employment and wage figures, inflation, goods/services costs, that would remove the need for rent regulation while still providing enough options for tenants and competition for landlords to retain affordability and diversity in any given neighborhood?  Houston is generally considered to be a model of affordability in a major city and has no regulation at all.  There is a 10% vacancy rate in the city which means there are a lot of options for people.  Now, you'll never see me argue for the type of sprawl that Houston is famous for, and I'm not suggesting 10% is universally ideal (or even ideal to Houston) but clearly we can learn something from the supply/demand tension that it has. Advocates are right to defend rent regulation right now because it's sudden absence without a significant increase in housing would result in massive disruption.  But if the city/region was able to produce the amount of housing that creates an ideal vacancy rate, that disruption (and the cost of subsidizing housing) would vanish.

Total Regulation - Before anyone gets the idea of some Soviet-style apparatus controlling where and how you live, think about what establishing a basic floor and ceiling for all rent pricing would look like.  It might look like a city that treats housing as a basic human need rather than a wealth generator.  Part of the reason that housing ends up being so expensive is the speculation on the value of the land it is occupying. If you remove that price inflation but guarantee some fair return on costs and risk, you would turn off some of the worst type of speculators and leave people interested in the long-term development of a neighborhood (and likely encourage local ownership).  You would still encourage personal investment and reward it fairly, but you would remove the extreme profit motive that in some cases perverts the landlord-tenant relationship. A major criticism levied against much of the modern development and redevelopment of NYC is how it maximizes short-term profits while sacrificing long-term sustainability and community health.  It might seem radical to suggest departing from this model, but it might create a more livable and exciting city than we are heading towards.

I introduce these concepts partly because I do think they both have merit and are helpful to think about, but more so to show again why institutions like the RGB are holding us back from the more important conversations and decisions we need to make as a city.  No one thinks the housing system works right now, as the most recent RGB vote showcases.  How can we just nibble on the edges or blame partisans for a system that is obviously designed to avoid the harder challenges?  We don't need sin eaters, we need prophets.