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It Won’t End Well

from the magazine

It Won’t End Well

New York’s new rent-regulation law treats a symptom of the city’s housing shortage without considering the shortage itself. Summer 2019
Politics and law
New York

The agreement, announced June 11, between New York State Assembly and Senate leaders on “the strongest tenant protections in history” and subsequently enacted into law, will prevent many tenants’ rents from rising as much as they did in the past. However, legislative leaders, having made this their sole priority, seem oblivious to other issues that will store up difficulties for the future and prove costly.

Removing most of the mechanisms by which regulated rents were permitted to rise at rates closer to market rents, the pending new law would essentially undo the changes that former governor George Pataki, a Republican, enacted during a period (1995–2007) when his party controlled the state senate and Democrat Sheldon Silver was assembly speaker. The leaders agreed on a series of changes to rent regulation, labeled “reforms” by supporters and a disaster by those who favor the present legislation.

Rent regulation in New York State is governed by the Emergency Tenant Protection Act of 1974, which, up to now, applied in New York City and could be adopted by any city, town, or village in Nassau, Westchester, or Rockland Counties. It generally caps rents in buildings completed before January 1, 1974, with six or more units. The Rent Guidelines Board establishes permitted rent increases upon lease renewal.

In 1993, lawmakers introduced vacancy decontrol, for rent-stabilized apartments renting for over $2,000 a month, and “luxury” decontrol, for apartments with rents over $2,000 a month occupied by persons with a combined income over $250,000 a year. In 1997, vacancy allowances, vacancy decontrol, and luxury decontrol became more generous to owners. In 2003, the law was revised to permit landlords to impose rent hikes on tenants paying “preferential rents”—rents lower than the maximum permitted rent-stabilized rent—above the Rent Guidelines Board–approved percentages, provided that the legal maximum rent was not exceeded.

The upshot of these reforms was that a landlord could engineer an apartment’s deregulation through vacancy allowances and rent increases permitted for apartment or building improvements. Owners argued that this helped ensure that buildings were properly maintained and received capital investment. But landlords also routinely gamed the system, creating openings for critics who wanted to do away with these provisions.

Rent regulation has always been a political football, with policy less a matter of rational analysis than of brute political force. It has long been expected that once the Democrats controlled both houses of the legislature and the governorship, as they now do, the system would become significantly more restrictive to owners—and that is the case with the new legislation, which does away with vacancy allowances, vacancy decontrol, and luxury decontrol. It makes preferential rents the base rent for rent increases during the life of a tenancy, while greatly reducing rent increases for Major Capital Improvements (MCIs) and Individual Apartment Improvements (IAIs).

Furthermore, the law curtails co-op and condominium conversions of rental housing by requiring that even in noneviction plans, where rent-stabilized tenants who choose not to purchase their apartments can remain in place, at least 51 percent of tenants must approve of the conversion. (The threshold had previously been 15 percent and could include investors purchasing vacant units.) The prospect of profiting from future conversions had been an important motivator for landlords to make capital investments.

The new changes represent a judgment that Rent Guidelines Board rent increases, along with the reduced MCIs and IAIs stipulated in the agreement, give rental landlords enough financial incentive to ensure long-term capital maintenance of rent-stabilized apartment buildings. Perpetuity, however, is a long time, and the city’s rental housing stock is old. These limited allowances will probably not meet the needs of many buildings. As the buildings deteriorate, tenants and the city’s enforcement arms will try to force improvements, but landlords can’t be forced to make investments that don’t yield returns. The pre-Pataki era of rent regulation in the 1980s and early 1990s saw the city making repairs at its own expense, appointing administrators to run failing buildings, and extending low-cost loans and tax breaks to apartment owners. Rents were restructured to make even subsidized financing workable. We’re likely to see a broad return of these practices. While the governor and legislature seem indifferent, the city’s housing bureaucracy will spring into action to prevent the return of housing abandonment. This represents a substantial hidden financial burden for the city’s taxpayers.

The legislation is also silent on how below-market vacancies are to be allocated. If landlords can, they will find a way to realize market value through under-the-table payments. Newcomers and current residents needing to move, without the resources or savvy to work through this system, will lose out.

The legislation puts enormous rental pressure on any neighborhood where rental units are unregulated. Many parts of the city are characterized by small homes with one or more rental units. With rent-stabilized neighborhoods largely closed off to newcomers, such neighborhoods will see an influx of higher rent-paying residents. This effect will be most pronounced along subway lines and adjoining neighborhoods, where a transition to higher incomes is already taking place.

New York’s lawmakers are treating a symptom of the city’s housing shortage without considering the shortage itself. Rent-stabilized rents could be raised so much in the past because the city’s economic growth brought in new well-paid workers, who bid up the price of existing units. But how will a growing workforce be accommodated, when existing tenants receive enhanced protection? The prospect of perpetual rent regulation is sure to discourage private investment in rental housing, and even ownership housing is constrained by restrictive zoning. Without pro-housing land-use policies, whether enacted locally or at the state level, the city will likely face labor shortages and slowing growth.

With the new changes locked in, the periodic expirations that Pataki used to force deregulation of rental housing are no longer available, even to a governor inclined to pursue such goals. This framework could thus be with us for a long time. New Yorkers who want a more rational system—one based on good housing policy rather than opportunistic politics—need to monitor the consequences and costs and keep emphasizing that New York City’s housing shortage and the financial instability of rental housing represent ongoing, self-inflicted calamities.

Photo: deberarr/iStock

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