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Autumn 1990
   
The Hidden Cost of Housing Madness
William Tucker
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William Tucker is the author of The Excluded Americans: Homelessness and Housing Policies, recently published by Regnery-Gateway.

The secret of the city’s fiscal crisis lies with the Schneiders. Gertrude Schneider and her late husband, Harry, a health teacher at Morris High School, were once Bronx landlords. “By the 1960s we probably owned 15 buildings with 500 units. He never made enough to quit his job, but we saw it as retirement security. He did the repairs and I dealt with the paperwork.”

Another thing they had to deal with was rent control. By the mid Sixties, the Schneiders’ found themselves saddled with rents that had not changed since the war, except for a one-time 15 percent increase in 1953. “We were collecting only $25 to $30 for five- and six-room apartments,” recalled Mrs. Schneider.

Along with many landlords, Mrs. Schneider had high hopes for Mayor John Lindsay, who had commissioned two studies, by George Sternlieb of Rutgers, and by the Rand Corporation, both of which were highly critical of rent control. But in 1969 Lindsay extended regulations (through rent stabilization) to post-1947 housing.

The next ten years proved disastrous for the Schneiders and for New York City housing. “We had fuel prices that were rising 200 to 300 percent and there were City Council members who still insisted it was all a hoax. We couldn’t pay the mortgage. The bank took one of our buildings because we owed $65,000 and eventually had to unload it for $12,000.” In addition to maintaining rent control, the city and state made it much harder for landlords to collect rents or evict delinquent or destructive tenants.

In the 1970s and early 1980s the city government seized thousands of failing buildings in rem, that is, for back taxes. New York lost hundreds of thousands of low- and middle-income apartment units. Harry Schneider quit his teaching job to manage his properties, but could not fend off disaster. Before Harry died in 1979 the Schneiders lost all but one building.

For generations, most of New York’s rental housing was managed by people like the Schneiders. Those days, of course, are over. Today, Harlem and the South Bronx echo with the whine of power saws, the thump-and-wheeze of electric nail-guns wielded, or at least funded, by the city government. The Department of Housing Preservation and Development (HPD), executor of the Mayor’s 10-year, $5.1 billion Housing Program, is rebuilding New York’s housing stock.

After making a whirlwind press tour with Abraham Biderman, Commissioner of HPD, Ken Auletta of the New York Daily News reported:

Heading north on Adam Clayton Powell Boulevard nearly every abandoned building is already under city construction or padlocked, waiting for renovation bids. Reaching 140th St., the eye settles on seven whole blocks under construction, and Biderman explains, “We are creating a little city.” . . . At this point, Biderman pulls out a black looseleaf book with a computer printout of the 5,000 vacant buildings the city controls. “We own these neighborhoods,” he declares, sweeping his right arm up and down the boulevard and toward the South Bronx.

The city is unloading these buildings, whose renovation it is largely funding, but not back to the sort of mom-and-pop landlords like the Schneiders from which they came. The buildings are being turned over to highly respected “professional” landlords, including the Milstein brothers and Sam Lefrak, and to nonprofit organizations—church groups, neighborhood preservation companies, and the like—whom the Department of Housing Preservation and Development (HPD) is setting up in the housing business.

The Schneiders’ story is a sad but familiar one. Their loss is also the story, in large part, of the city’s fiscal crisis. Housing policies that drove private developers and small landlords out of the rental housing market (and particularly the low end of that market) account for much of the current budget crunch, and the city government’s ongoing fiscal difficulties. In order to fill the housing gap it created, the city government has become first New York’s largest landlord and then its largest developer, roles that carry enormous costs in direct expenditures, tax subsidies, and other lost tax revenues.

New York City’s budget deficit is estimated at $1.8 billion for 1990 and already predicted to exceed $900 million in 1991. It can be estimated with reasonable certainty that the city pays $1.1 billion each year to provide services that, in other cities, the private housing market provides for free. This is a conservative estimate. The true cost may be much higher.

The $1.1 billion includes direct expenditures to build and rehabilitate housing, tax subsidies for favored projects, and the administrative costs of running HPD, which manages city-owned housing units. No other large American city so grandly substitutes tax money and municipal management for private housing. Yet there is little evidence the New York approach has improved housing for low- to middle-income New Yorkers. The experience of other cities suggests that if New York’s small private landlords had been allowed to ply their trade in an open or even reasonably regulated market, low- to middle-income housing would be easier to find, of higher quality, and no more expensive than it is today. And the city budget might be in balance.

Before analyzing in detail the costs and consequences of the city’s billion dollar housing effort, it should be noted that these programs include only the city government’s extraordinary housing efforts, those without an analogue in most other large American cities. Quite aside from these extraordinary efforts, New York now has the country’s largest inventory of ordinary public housing. This housing, built mostly with federal money, costs the city relatively little to operate. New York’s inventory of regular public housing is not only four times as large as the next largest inventory (in Chicago), but larger than the next 10 cities combined. (See Table 1.) On a per capita basis, New York ranks seventh in the nation, with 24.9 units per thousand people. Chicago, by contrast, has only 13 public housing units per thousand, and Los Angeles a mere 2.8. The city government’s extraordinary housing expenditures cannot be blamed on federal neglect.

To add up the costs of the city’s housing policies, a good place to start is with the Mayor’s program. This 10-year, $5.1 billion enterprise is a perfect symbol of government housing policy in New York. It is, for the most part, a response to the abandonment and deterioration of once privately run housing. The number of new units to be constructed is relatively small. Most of the money will be spent rehabilitating units from the City government’s accumulation of formerly private properties. The 10-year plan looks like this:

Rebuilding of Vacant City-Owned Buildings 47,000 units - Permanent Housing for the Homeless: 15,000 units - Low- and Moderate-Income Families: 32,000 units ($2.4 billion)

Rehabilitation of Occupied City-Owned Buildings 82,000 units - Buildings Currently in City Ownership: 50,000 units - Buildings Projected to Come into City Ownership: 32,000 units ($1.3 billion)

Rehabilitation of Privately Owned Buildings ($600 million) 86,000 units

CConstruction of Affordable New Homes ($500 million) 28,000 units

Construction of Affordable New Multi-Family Buildings ($300 million) 9,000 units

Total Program ($5.1 billion) 252,000 units

About half of the $5.1 billion is financed directly by the city government, with the rest coming from federal, state, and private sources. The city’s share will be borrowed through the sale of city bonds. The annual drain of the debt service to the treasury will be roughly $300 to $400 million over roughly 20 years. Largely as a result of the Mayor’s program, HPD’s 1990 capital budget of over $1 billion is now the second largest among city agencies, surpassed only by the school system. (See Table 2.)

City officials, beginning with Edward Koch, have often tried to disguise this expenditure by arguing that some of it will be covered by “profits” from the development of Battery Park City. Yet these “profits” (which are actually rents derived from municipal ownership of the land) could just as easily be put into the general fund and used to reduce taxes or pay for other programs. (In fact, Mayor Dinkins has already considered doing that as the budget problems have worsened.)

Because of the generous exemptions given to both the nonprofit and profit-making landlords who will build or rehab, own and run them, the 215,000 apartment units in the program will not yield property taxes for nearly 20 years and then will not be fully assessed for another 12 years. The remaining 37,000 single-family homes will receive partial abatements for 10 years.

This gargantuan public-works effort is half the size of the MX missile program. Yet it represents only a portion of the city government’s housing efforts, which easily exceed those of most of the other major American cities put together.

New York City is the principal participant in New York State’s Mitchell-Lama program intended for moderate- to middle-income housing. Of 165,000 Mitchell-Lama units built in New York State, 135,000 are in New York City.

Mitchell-Lama units are subsidized in two ways. First, builders receive long-term low-interest loans, usually from the New York State Housing Finance Agency or the State Urban Development Corporation. (Over 60,000 units in New York City were also built with municipal loans.) Second, Mitchell-Lama units get an abatement on municipal property taxes, usually between 80 and 90 percent. Eligibility requirements for tenants vary according to a complicated formula. There are welfare recipients as well as people making more than $100,000 a year. The median Mitchell-Lama tenant has an income of $25,000. The median household income in New York City is approximately $23,000.

In 1986, the Citizens Budget Commission estimated that the cost in foregone property taxes for Mitchell-Lama units amounted to $188 million per year. By 1988, the Mayor’s office placed the figure at $264 million. Designed to keep the middle class in the city, the Mitchell-Lama program has done so only by exempting middle-class residents from property taxes.

In addition to Mitchell-Lama are the 421a, 421b, and J-51 programs. The state 421a and 421b programs encourage new construction by giving builders 10-year partial tax exemptions. The 421a program applies to newly constructed multiple-dwelling units, and the 421b program applies to new one- and two-family homes. Most 421a buildings are brand-new luxury apartment houses such as the Bristol and the Greenthal on the Upper East Side. In 1986, the Citizens Budget Commission estimated that tax expenditures for 421a and 421b totaled $83 million. In 1988, the Mayor’s office put the figure at $80 million.

J-51 is a city program that allows an owner to deduct up to 90 percent of the cost of making permanent improvements to a property. On a major renovation, the exemption will probably wipe out property taxes for 20 years. There is also a J-51 maximum program, which permits the property to be brought onto the tax rolls for 12 more years at the pre-renovation assessment. Most early J-51s were in midtown Manhattan, contributing significantly to its gentrification in the 1970s. Since 1982, J-51s have been restricted to upper Manhattan and the outer boroughs. In 1986, the Citizens Budget Commission estimated J-51 tax exemptions cost the city $136 million per year. In 1988, the Mayor’s office estimated the figure to be exactly the same.

Thus tax subsidies to largely middle- and upper-income tenants through the Mitchell-Lama, 421a and -b, and J-51 programs total well over $480 million a year. Still there is more.

In almost every other city in the country, the “housing department” refers to the public housing authority. New York has one too. But it also has the Department of Housing Preservation and Development, HPD, which acquires, manages, repairs, and disposes of tens of thousands of residential properties including those in the Mayor’s 10-year program. No other city has such a second housing authority. A few cities have now set up small housing departments to administer federal block grants, but none is on the same order of magnitude as HPD. Chicago’s housing department costs the city treasury $3 million annually; Los Angeles’s costs $9 million. Boston, Detroit, and San Francisco do not have housing departments.

HPD, on the other hand, has an annual budget of $520 million. This makes it about one-third the size of the police department and roughly comparable to the fire and sanitation departments. (See Table 3.) The police department puts 26,000 uniformed officers on the streets. The fire and sanitation departments employ 12,000 and 8,000 uniformed officers respectively. HPD, on the other hand, fields only 500 building inspectors.

Nearly all of HPD’s efforts go to handling residential properties once held by private owners. HPD’s Office of Property Management (OPM), which does most of the managing, owning, and occasional rehabilitating, employs 2,100 people, more than the Department of Transportation has to engineer and maintain the city’s entire street and bridge infrastructure. OPM’s budget of $60 million exceeds the entire appropriation for the New York Public Library.

Of HPD’s $520 million budget, $123 million comes out of municipal tax revenues. In 1989, $92 million came from rents collected from tenants, both residential and commercial, in city-owned buildings. Another $182 million came from the Federal Department of Housing and Urban Development’s Community Development Block Grant (CDBG). This $182 million must be counted as a cost to the citizens of New York: In other cities, block grants are used to build parks, playgrounds, and similar municipal facilities. In New York City, HPD uses the entire $182 million to operate occupied housing that has been taken for back taxes.

The reason other cities can spend their CDBG monies on parks and playgrounds is that, outside of the federally sponsored public housing stock, no other city in the country owns more than a handful of occupied apartments. Most cities hold tax auctions, turning abandoned properties over to other private owners. Some cities refuse to take in rem properties altogether. Chicago, Los Angeles, Baltimore, and Houston have no in rem properties at all. Philadelphia has accumulated about 8,000 buildings, but they are all vacant one- and two-family homes in deteriorating neighborhoods that the city cannot sell at any price. Boston takes a few in rem properties but quickly cycles them back into private ownership. In New York, on the other hand, the city government’s vast collection of occupied, in rem housing constitutes 2.5 percent of the rental housing stock, making HPD New York’s largest landlord (Sam LeFrak owns only 2 percent). When HPD’s unoccupied stock and the Housing Authority’s public housing are added, the city government controls 16 percent of the rental market.

Thus New York City government’s extraordinary intervention in the housing market costs the city treasury over $1 billion. The city government’s annual debt payments for the Mayor’s program ($350 million), tax expenditures and subsidies for the Mitchell-Lama, J-51, and 42 Ia. and -b programs ($480 million), and the city’s share of HPD’s operating budget ($123 million) add up to over $950 million in annual direct expenditures. Adding the $180 million in federal CDBG money diverted to municipal housing efforts produces a reasonably “hard” estimate of more than $1.1 billion.

The real cost is probably higher. For instance, the city government spends $128 million on temporary shelter for the homeless. This number is way out of line with expenditures in other cities because of New York’s widespread use of hotel rooms as shelters. Some of that $128 million should be added to our total of extraordinary costs, but it is difficult to say how much.

In addition, the $1.1 billion total does not include any estimate of tax revenues lost on the 215,000 units that, under the Mayor’s program, will be effectively removed from the city’s tax rolls for a generation. Nor does it include an estimate for tax revenues lost on the tens of thousands of additional units, outside the Mayor’s program, that will be granted J-51 exemptions (of varying amounts) in the next few years. Nor does it include lost tax revenues from thousands of abandoned buildings that were never rehabbed, many of which were demolished.

Still, to show that a program is expensive is not the same as showing that it is wasteful or unnecessary. The city government’s extraordinary expenditures for housing must be counted as waste because the city (and state) governments’ housing policies themselves crippled the private low- to middle-income rental housing market and created the vacuum these expenditures are meant to fill.

This is not the place for an exhaustive review of the literature on rent control, or the evidence, which has mounted inexorably over the years, that rent control and its attendant regulations are largely responsible for the general tightness of the New York rental housing market. The economic profession is all but unanimous on the subject. Nearly all of those few studies that yield ambiguous results on the effects of rent control have focused on cities whose rent regulations are both younger and far less stringent than New York’s. (For an excellent and concise review of the scholarly evidence see Residential Rent Control: An Evaluation, by Brookings Institution scholar Anthony Downs, published by the Urban Land Institute, Washington, D.C., 1988).

The condition of the national housing market strongly suggests that New York’s housing problems are self-inflicted. Rental vacancy rates throughout the country are now at 7.5 percent, the highest since 1964. In New York, on the other hand, vacancy rates have not been above 3 percent since the late 1960s. There is no “housing shortage” anywhere except New York and those few other cities such as Boston, Newark, Washington, San Francisco, and Los Angeles that have also adopted rent control.

Rent control discourages new construction. Thus, private developers in New York put up only about 100,000 new housing units a year, fewer than are built in Dallas, which has one-seventh the population of New York and vacancy rates of over 12 percent. In fact, in many parts of the country, landlords and developers consider their biggest problem to be a surplus of housing.

“The problem we have out here is these big pension funds and insurance companies who come in here to build new housing,” complains Mark Sween, president of the Minnesota Multi-Housing Association. “These people can’t even think in terms of less than $30 million. They build big new complexes of 300 to 500 units that just sit there half vacant for a few years, and drive up vacancies for everyone else who can’t afford it.”

Vacancies in the Minneapolis area are running so high that landlords have begun “raiding” each other’s buildings, leafleting tenants with promises of rent reductions or several months free rent if they break their leases and move to another owner’s building. Houston, Dallas, Phoenix, New Orleans, and Denver all have similarly saturated markets. Complained Neil Fjellestad, President of the San Diego Apartment Association, “There’s nothing worse than a big pot of money floating around the country looking for real-estate investment.”

The last time a major insurance company built housing in New York, however, was when Metropolitan Life constructed Stuyvesant Town and Peter Cooper Village in 1947 (both begun before rent control). Both projects are now rent stabilized, and Met Life officials say they will never again invest in New York as long as there are rent regulations.

Even more important than the effect rent controls have had in discouraging new construction has been their impact on small landlords. Yet these are the very people who provide most of New York’s rental housing. The median New York landlord owns only 14 units, or one small building. With generally undiversified holdings, slim profit margins, and far smaller cash reserves than the big established real-estate groups, small landlords have been much harder hit by rent controls. They cannot afford to wait years for vacancies (which permit slight upward adjustments in the rent) or to warehouse units in hopes of taking them co-op. The procedural complications of rent control—the extensive tenant-protection provisions, the loss of tenant selection, the difficulty of evicting people who do not pay rent—also weigh more heavily on small landlords. A single tenant who refuses to pay rent or bothers other tenants, and successfully fights eviction through labyrinthian court procedures can throw a building’s entire financial structure into chaos.

Finally, small landlords are often overwhelmed by the paperwork requirements of rent control. The rent regulations, for instance, include hardship provisions allowing special rent increases to financially pressed owners. But the application process is enormously complex, with the instructions alone running 14 densely printed pages. In five years of interviewing landlords around New York City, I have only met two firms that successfully obtained hardship rent increases: the Church Management Corporation and the Lefrak Corporation. Both had their applications prepared by staff accountants. The Lefrak organization’s application consisted of 87 pages of closely documented financial information. Both of these applications were approved before the State Division of Housing and Community Renewal took over the process in 1984. Since that time, DHCR has approved only five hardship applications.

Within HPD, the prevailing view has long been that the marginal investors—immigrants, widows, and mom-and-pop operators—are too incompetent to handle New York’s housing. Harold Schultz, deputy general counsel for HPD’s Office of Property Management, expressed this perfectly in an interview in 1986. “If New York’s landlords are in trouble,” he said, “it’s their own fault. Rent regulations have little or nothing to do with it. There are a lot of owners who don’t know what they’re doing. They can’t even add or subtract. Dealing with regulations is just part of being a landlord.”

The outcome of this attitude has been an inexorable transfer of hundreds of millions of dollars in real estate from New York City’s small landlords to HPD and its favored associates and developers.

First established in 1971 as the “Housing Development Administration” under the Lindsay Administration, the housing agency (which became “HPD” in 1977) was charged with coordinating the city government’s burgeoning housing programs. At the time, thousands of residential properties were in arrears in their property taxes. Almost half the property taxes in the decaying South Bronx were uncollected. (The city’s inability to collect a large portion of its property taxes was considered one of the main reasons for its financial collapse in the 1970s.) To improve tax collection, the city government began accelerating the procedure by which buildings were taken in rem.

The underlying assumption of the program was that landlords could pay the taxes, but declined to do so as part of a deliberate strategy of “milking” buildings—taking out rents while skipping mortgage and tax payments in preparation for abandonment. As it turned out, this assumption was wrong. Most landlords were behind in taxes because they were not making any money. Instead of collecting property taxes, HPD began to collect apartment buildings.

The abandonment of residential property in New York during the 1970s has become legendary. Between 1974 and 1984, New York lost 300,000 apartment units. Some of this housing was eventually leveled—creating the moonscapes of the South Bronx and Bedford Stuyvesant—but much of it ended up in the hands of HPD. By 1984, HPD held title to 8,000 buildings containing 108,000 apartments—62,000 occupied and 46,000 vacant.

Though HPD’s original intent had not been to acquire buildings, the agency clearly came to relish the role. Policy shifted from passive acceptance to active acquisition of small properties. Perhaps the best place to witness this transformation is in the department’s 7a administration program and in HPD’s active funding of the “neighborhood preservation companies.

The 7a program is named after article 7a of the Real Property Actions and Procedures Law of 1965. As originally conceived, 7a was a program by which respectable members of the community—lawyers, accountants, and licensed realtors—would be given trust of buildings whose owners had proved incapable of handling them. At the request of a portion of the tenants, or on initiative from HPD, a housing court judge could appoint an administrator as trustee of the building’s finances.

The administrator was empowered to collect rents from the tenants. However, he was not obligated to pay mortgage installments, insurance premiums, or property taxes—items that normally account for 60 to 80 percent of a landlord’s expenses. These remained the responsibility of the owner. The administrator, on the other hand, was supposed to use all the rent monies to operate, repair, and improve the building. Even so, 7a administrators often could not run the building from the rent rolls, so HPD allowed them to raise the rents—called “restructuring”—a form of relief entirely forbidden to landlords. Thus, in what would become a basic pattern of city housing policy, HPD began taking buildings from landlords who, because of rent regulations, did not have enough cash flow to run them, and then turning them over to city-favored surrogate landlords—after ensuring that the surrogates would have resources the real landlords were denied.

Despite these advantages, the 7a program has not turned out as planned. In the early years, the law was little invoked because of the difficulty of recruiting lawyers, accountants, and other professionals to the task. With the founding of HPD in 1971, the 7a program was dusted off and put into wide use. In 1977, at the request of HPD, the state legislature dropped the professional requirements so that virtually anyone could become a 7a administrator.

In practice, appointments quickly fell to tenant activists, community-organization leaders, and friends of housing court Judges. Several judges have kept a stable of regular 7a administrators, who handle several buildings at a time. At least one Judge Ralph Waldo Sparks, became the center of a scandal involving his 7a administrators.

In 1983, rumors of corruption became so common that the 7a program was investigated by the City Department of Investigation (DOI). The resulting report, entitled “An Analysis of Corruption Vulnerabilities in New York City’s 7a Administration Program,” found 7a administrators were virtually unsupervised, with hundreds of thousands of dollars disappearing from rent collections. Among 249 monthly reports filed by administrators in 23 buildings, DOI found only one-quarter even contained bank statements. In the nine buildings where consecutive bank statements were available, 52 percent of the money collected in rents had disappeared. “We noted completely irrelevant items, such as tickets to a dinner dance, being charged to the building. Furthermore, we observed duplicate invoices, payments to non-existent vendors and contractors, and fraudulent documents.” The DOI concluded, “There is no governmental unit that functions effectively to hold 7a administrators accountable for their management of buildings and proper use of rental income.”

Most landlords with buildings in 7a never get them back, in part because without rent revenues they quickly fall behind on mortgage and tax payments. The 7a law has turned out to be not an emergency maintenance program but a major weapon by which HPD acquires buildings. As an HPD response to the Department of Investigation’s corruption charges put it, “The primary objective of 7a [is that] a building that would otherwise have been abandoned and emptied was, in fact, stabilized and survived to in rem vesting.”

Housing Court, established at the same time as HPD, has also been an important mechanism for transferring properties from small landlords to the city and its surrogates. The court adjudicates landlord-tenant disputes under a set of rules profoundly biased against landlords. Under New York law, for instance, even minor violations of the housing code can justify a rent strike. New York’s housing law is also full of technical provisions that can be used by an artful legal aid lawyer to delay evictions or support rent actions. Delay is endemic to any legal system, but devastating to small, cash-short landlords who may be vindicated only after they are bankrupt. The city’s surrogate landlords, however, do fairly well in housing court, often obtaining evictions of troublesome or non-paying tenants who had been allowed to abuse their private landlords for months or years.

Pushing small landlords into court, or into 7a, is a task frequently performed by “Neighborhood Preservation Companies,” or NPCs. The NPCs are private, nonprofit, tenant- and community-activist groups that get 90 percent of their funding from city, state, and federal agencies. (HPD, for example, contributes $18 million a year under a line item called “community consultant contracts.”) Their activities are closely intertwined with HPD’s efforts. Village Voice reporter Wayne Barrett, himself a former tenant activist, says, “The neighborhood preservation companies are basically the branch offices of HPD.”

In theory, the NPCs are supposed to improve neighborhood housing through community organization. In practice the NPCs have become the shock troops in HPD’s efforts to take buildings away from private owners. NPCs routinely scout vulnerable buildings, organize the tenants, apply for 7a administration, have their own members selected as administrators, manage the buildings (often providing housing for their members and affiliates in the process), and frequently end up owning them. Particularly active groups may manage as many as 20 buildings at a time.

In the city’s tradition of favoring surrogate landlords over their small time predecessors, NPCs get substantial subsidies for individual buildings. Scores of buildings are now being transferred to the NPCs at little or no cost and renovated with government funds. HPD has set up a “Community Management Program” to facilitate such transfers.

Half the money in the Mayor’s $5.1 billion program is going to more than 40 NPCs and similar nonprofit organizations. The Cooper Square Committee, for example, an NPC on the Lower East Side, has been given $15 million to renovate 975 apartments. The Northwest Bronx Community Coalition, which operates under six separate nonprofit corporations, is managing 2,000 apartments. As The New York Times put it, the NPCs “are being transformed from tenant-rights advocates, community organizers, and thorns in the sides of city officials, into builders, property managers, and landlords in New York City’s poor neighborhoods.”

Thus, for years New York housing policy has been driven by three ideas: First, that no one can build new housing in New York without government subsidies. Second, that the traditional small landlords are too venal or incompetent to provide housing for low- and moderate-income groups. And third, that the only people capable of solving these two problems are the developers and nonprofit groups that are handpicked by the city government. Established developers, in the city government’s view, can cross-subsidize low-income tenants by building mixed developments that include higher-income tenants; nonprofits can keep rents low, the city assumes, because they do not have to make a profit.

It is quite clear, however, that none of these assumptions is correct.

With housing booming nearly everywhere else, it is obvious that it is largely the specter of rent regulations that keeps private housing investment out of New York (although zoning battles, anti-development campaigns, and preservationist impulses also play a part).

Second, the pattern of small ownership that predominates in New York is no different from the traditional pattern of rental-housing ownership throughout the country. Although it is not widely recognized, rental ownership is the most widely practiced small business in America. There are six million landlords in the United States, one out of every 40 Americans. The median owner has five units.

Landlords, particularly small ones, have generally been drawn from the ranks of the undereducated. In particular, landlording has always appealed to immigrants, who were often unable to cope with the language or did not have licensing or professional credentials for other businesses. Many people have also entered the profession through the building trades.

How do landlords with little education and no economies of scale compete for their share of the market? The answer is simple. Traditional landlords keep costs down by routinely doing their own operation and maintenance work without charging for their time. They keep the books, collect rents, take out the garbage, handle legal and procedural matters, and often act as their own superintendents. This gives them an edge over larger professionals, who must hire accountants, attorneys, and resident managers to do their work for them.

In addition, these amateur investors do not always seek professional levels of profit. A small landlord will often pay himself by giving himself or a close relative a free apartment. Another pattern is for an owner to “carry” a building on only minimal profits, often supporting it with income from another job, in anticipation of the day 20 years hence when the mortgage is paid off and the rents will provide a tidy retirement income.

Anthony Downs, the well-known housing expert with the Brookings Institution, summed up this pattern of ownership in his book, Rental Housing in the 1980s (1984):

Many large-scale real-estate investors avoid residential properties, primarily because the high tenant turnover ... raises management costs ... compared to [commercial] real estate. But small-scale investors who manage their own properties rarely take full account of the cost of their time. So they have lower management costs.... That often leads small-scale operators to charge lower rents than those needed by large-scale operators to earn yields competitive with alternative investments.

Undoubtedly, this pattern of small ownership is what has made rents in New York so eminently affordable—despite all impressions to the contrary. Michael A. Stegman’s 1987 Housing and Vacancy Report, published by the city, found that the median New York City tenant has an income of $16,000, while the median contract rent (excluding utilities) is $348 a month. Thus, the median tenant pays only 26 percent of his income in rent, a figure that has always been regarded as an acceptable proportion.

Finally, there is no reason to believe that the politically favored operators and nonprofits who are replacing the small landlords, at great cost to the city’s taxpayers, are going to do any better. The new landlords will survive (if they do) not because they are more competent or efficient, but because they will be receiving all kinds of government grants, subsidies, “rent restructurings,” and tax exemptions to help them stay in business.

Under the Mayor’s $5.1 billion program, the new owners will be paying only a few hundred dollars for their buildings, since the buildings have already been confiscated by the city government. As Catie Marshall, former deputy commissioner for public affairs at HPD and now with the Mayor’s office, puts it: “The main reason the nonprofits’ rents will be lower is because they won’t be making any mortgage payments.” Second, they will not have to pay for rehab costs —that is what most of the $5 billion will be spent on. Both the profitmaking and nonprofit landlords are being granted J-51 maximum exemptions, which in many cases will keep them from paying full property taxes for the next 32 years.

The 215,000 units thus removed from the tax rolls could house the entire city of Buffalo. In fact, the rush to get off the property-tax rolls is turning into a stampede. When public housing, Mitchell-Lamas, current 4-21 and J-51 exemptions and abatements, plus the new exemptions and abatements from the Mayor’s program are added together, one out of five residential properties in New York City will not be paying full property taxes. In addition, with no statutory limitation on the number of new J-51s, 80,000 more residential units are receiving at least partial tax abatements each year. At that rate, by the mid 1990s, 40 percent of the households in New York (one million units) will be partially or totally exempted from property taxes. The housing solutions of today are only creating the budget crises of tomorrow.

Is there any alternative to this ruinous system? There certainly is. New York should phase out rent regulation as quickly as possible.

How could this be done in such a politically charged atmosphere? One intriguing suggestion has been made by Arthur Zabarkes, former principal planner with Mayor Lindsay’s Office for Midtown Planning and Development. Zabarkes suggests that rent control should be repealed on a borough-by-borough basis over a three- to five-year period. In the initial years, regulations would be removed in the outer boroughs, where they have less impact anyway. The minimal effects there would diffuse public anxieties and also give builders and renovators enough confidence to start creating new housing. By the time deregulation reached Manhattan’s pricier neighborhoods—the Upper East and West Sides and Greenwich Village, where they are having the most effect—the floor of new housing investment would make the transition go smoothly.

“There’s an apocalyptic mentality that says if you get rid of rent regulations, there would be complete chaos in the city’s housing markets,” said Zabarkes. “This just is not true. People are on different lease schedules and everyone is being affected differently. Most people in regulated apartments wouldn’t pay much more anyway because they already have rents at or near the market. Others would pay more, but these would tend to be the people who could afford it—affluent people who are now receiving the biggest share of benefits from rent control. There would probably be some juggling of apartments as people switched to things they could afford, or to apartments more appropriate to their needs, but the overall effect would not be mass evictions or mass dislocation.”

By the time the process was through, New York would have a normal housing market and the city government would not have to spend billions trying to make up for lost private investment.

With New York’s economy sagging and housing prices falling for the first time since World War II, there could hardly be a more opportune moment to put such a plan into effect. It would solve the city’s budget crisis and create a normal housing market at one stroke. The “deregulation dividend” might even leave enough money for parks, playgrounds, police, schools, bridges, health care, and all the other things upon which normal cities spend their tax money.

The current policy, on the other hand, not only makes the housing market hazardous for both tenants and landlords. It is also leading New York down the road to municipal bankruptcy.

 

 

 
New York City's war on small landlords did more than tighten the housing crunch and hurt poor tenants. It also busted the city budget.
City Journal Autumn 1990.
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