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Rent Control: Unjust and Ineffective

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Rent Control: Unjust and Ineffective

10 Blocks podcast January 8, 2020
New York
Politics and law

Manhattan Institute’s Michael Hendrix interviews Mayer Brown partner Andrew Pincus, the lead attorney in a lawsuit taking on New York State’s sweeping rent-regulation laws.

In 2019, New York strengthened its already-strict rent regulations, while state legislatures in Oregon and California approved caps on rent increases. Representative Alexandria Ocasio-Cortez and Senator Bernie Sanders have even proposed national rent-control policies. Pincus explains what’s wrong with rent control, from violating due process and property rights to shutting out newcomers attempting to find housing in cities.

If you’re interested in learning more about rent control, check out a new report by Michael Hendrix from Manhattan Institute’s Issues 2020 series.

Audio Transcript

Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal.

Successful cities across the country—but especially those on the coasts—have been facing a major crisis in housing affordability. As our listeners might recall in previous episodes, last summer the progressive-dominated New York State legislature passed one of the toughest rent-regulation laws in the country.

New York isn’t alone, however. Last year, state governments in California and Oregon passed their own strict rules on rent increases. California, for example, limits rent increases to 5 percent plus inflation per year.

If you’re not a landlord in a big city, you might be asking: how does “rent control” really work in practice? This next interview will help answer that question.

Coming up on the show today, Michael Hendrix, a City Journal contributor and director of state & local policy at the Manhattan Institute, talks with attorney Andrew Pincus.

Andy is a partner with the law firm Mayer Brown in New York City, and he’s the lead lawyer in a lawsuit taking on the state’s sweeping rent-regulation laws.

By coincidence, Michael has a new brief report on rent control out this week—it’s part of the Manhattan Institute’s “Issues 2020” series of reports for the upcoming election. You can find a link to that report in the description—as well as the other policy papers we’ve published so far.

That’s it for me. The conversation between Michael Hendrix and Andrew Pincus begins after the music.

Michael Hendrix: Welcome to City Journal's 10 Blocks Podcast. I'm Michael Hendrix, Director of State and Local Policy at the Manhattan Institute, and very pleased to be joined by Andrew Pincus, partner at Mayer Brown and the lead lawyer on a lawsuit taking on New York's rent regulations.

Andy has argued 30 cases in the Supreme Court and he and his legal team may have a similar outcome in this case, claiming that the state's new rent stabilization laws violate the United States constitution.

Now as some listeners may know, earlier this year, New York governor Andrew Cuomo signed into law what he declared as the strongest tenant protections in history. This is a big case and a big issue, so Andy, glad you can join us.

Andrew Pincus: Well, thanks very much for having me.

Michael Hendrix: First, how did this case come to you?

Andrew Pincus: Well, I think landlords in New York have been concerned for a number of years about the steady increase in regulation of rent stabilized apartments. As you probably know, rent stabilization started 50 years ago. The original justification was World War II.

That justification was continued in 1969, and there's been some ups and downs. There was a period where regulation was loosened a little bit. There was vacancy decontrol. There was luxury decontrol. When rents got really high or very wealthy people were living in an apartment, didn't make a lot of sense to keep rent control.

But the last 10 years or so, I've seen a lot of those things whittled away. Culminating, as you said, in the law earlier this year, which really imposed some extremely draconian regulations on property owners.

Michael Hendrix: Now, walk us through the main arguments of your lawsuit. I believe you're making at least three arguments. Is that right?

Andrew Pincus: We're making three basic arguments. First of all, that the law violates due process, the due process guarantee of the federal constitution. Second, that it constitutes a physical taking of property. And third, that it constitutes a regulatory taking of property.

Michael Hendrix: Unpack that for us.

Andrew Pincus: So let me unpack those things. Due process, basically the simple way of understanding it is, there has to be a rational relationship between the regulation and the goals. And here, if you think about what the claim justifications are, there really isn't a rational relationship.

First of all, the justifications have been shifting a little bit, but one of them seems to be we need more housing in New York. The problem is, as we demonstrated in the complaint that we filed, these regulations inhibit the renovation of existing buildings to increase the number of apartments. So actually, there would be 100,000 more units, we estimate, without these controls.

The second argument is, rent control is necessary to help lower and middle income New Yorkers. Again, as everyone in New York knows, rent stabilization is not targeted on anyone, it's a lottery ticket. If you happen to get a rent stabilized apartment, you're lucky for life. And if you don't, you're not. And whether you get it or not has nothing to do with your income level, in fact, 22% of the apartments that are rent stabilized are occupied by people whose incomes are $100,000 or more.

Michael Hendrix: And it's not just you that could benefit. It could potentially be someone you're related to?

Andrew Pincus: Well, it's true. You may remember Friends. Monica was in her grandmother's apartment. I actually thought that was made up by the writers, but it's true. If you move into a relative's apartment, you can essentially inherit the right to keep it, and then someone else can inherit it from you.

In legal terms, it's a tenancy with rights of survivorship, rights of inheritance, which is very, very, very dramatic intrusion on property owners' rights.

Michael Hendrix: So that's the due process side it.

Andrew Pincus: Let me make one other point to that due process, because it's something that's being raised more recently, which is rent stabilization is needed for neighborhood stability. We don't want a lot of people moving in and out of our neighborhoods.

We question whether that's, first of all true, but even whether it's legitimate. Does New York really want to discriminate against newcomers? The city that really has opened the door, traditionally, to the best and the brightest. But this theory is, yes we do, and that only discriminates against newcomers.

The data shows it's discriminatory because not surprisingly, given the time period here, very few members of minority groups are in rent stabilized apartments, relative to members of the majority.

Michael Hendrix: Whenever senior fellows, Ed Glaeser in his annual James Q. Wilson lecture this year, said that much of the housing debate and other big policy debates today are essentially a battle between newcomers versus the entrenched, and so much more so in housing. Rent regulation is one very pernicious part, in his opinion, of that debate.

Andrew Pincus: Absolutely. I mean, that's what the data shows. Once people have an apartment, they hold onto it. It's another reason why rent stabilization contributes to the housing shortage. Even if you don't need that apartment anymore, if you don't need that much room, you're not going to leave it because the rent is low. You may have some son or daughter or other relative or caregiver who wants to inherit it, so it keeps housing bottled up.

Michael Hendrix: Right. You could be someone who become an empty nester and now the apartment is too big. You could also be a young couple who now have a bunch of kids and your apartment is too small. Either way, it's a mismatch between what you actually want and what you're actually getting, but God forbid you get let go of that apartment.

Andrew Pincus: Absolutely. That's exactly the problem.

Michael Hendrix: Now, if I remember correctly, another part of the due process argument is that there's been a declaration that we are in a state of emergency on housing, and to make that point, we have to conduct some sort of debate on whether the housing market is indeed in a state of emergency. Did that happen?

Andrew Pincus: Well, it happens every three years, like clockwork. An emergency is declared every three years, like clockwork, but there's no substantive debate and that's the problem.

What the law says is, the minimum requirement for rent stabilization is a 5% or lower vacancy rate, but then in addition, here the city council, which makes the decision for New York, has to consider the state of the housing market, rent levels, lots of other factors.

Not surprisingly, what happens in New York is there's a hearing, there's a presentation that says housing vacancy rates are 5% or less, and then there's a lot of talk about improvements that should be made in rent stabilization, but there's no serious discussion about the state of the housing market, whether there are some segments of the housing market where rent stabilization is not needed.

The vacancy rate, for example, is not even across the city. There are many neighborhoods where it's much higher than 5%, but there's no effort to say in those neighborhoods, "We really don't need rent stabilization anymore."

This is a rogue determination, and as one of my friends said to me, "If you've declared an emergency every three years for 50 years and the problem is still the same, maybe your solution really isn't working."

Michael Hendrix: Right, now. Now, take us through the takings part. Physical takings, regulatory takings. This is really interesting.

Andrew Pincus: Well, it's very interesting and it's an area where the law is changing in some interesting ways. So a physical taking is, the government has taken my property. It doesn't have to take it permanently. It doesn't have to take all of it, but if there's a physical intrusion...

In a famous case out of New York, in the old days of cable television, it had to do with a law that required property owners to allow cables to be installed on their rooftops. The Supreme Court said in that case, that's a physical intrusion mandated by the government. That's a taking for which there has to be just compensation or else the law is invalid.

So this is exactly the same thing. Once someone rents an apartment, as we were just talking about, the landlord loses control over who's in that apartment. The tenant can stay, absent some ability to use New York's eviction remedies, which have been further circumscribed in dramatic ways by the law.

Michael Hendrix:             So if you're an owner, you're deprived of your rights to do what you want to do with your own property.

Andrew Pincus: You can't control, you can't do what you want to do with it. You can't even control who comes in and out. So if you think about property rights, the right to control who comes into your property is a critical property right. The right to use it for the purposes that you want to use it and the right of the owner to occupy his or her own property, and all three of those rights are essentially eliminated by this law.

We talked about the tenants being there, being able to bequeath their apartments to people, with no intrusion by the landlord. Sublets are also permissible.

Before this year's law, there was a very limited right for owners to occupy apartments for their own use. This law said one apartment in a building and only if you can show an incredibly high standard of need.

So, people can't get their own property. People can't change the use of the property. It has to be used for rental housing unless you're going to demolish it, but there are restrictions on demolition.

It used to be that there might be an option for co-op and condo conversion. That's been effectively eliminated by giving the majority of the tenants the right to decide whether the building can be converted or not. So, that's taken away from the landlord.

You can't convert it to, for example, commercial uses, that's prohibited. And you can't stop renting it unless the value of the building has fallen so much that it would cost more to get it into a rentable state than you could receive from it.

So at every turn, the landlord, the property owner is prohibited from using the property as he or she wants, in very, very dramatic ways. And we think that's a physical taking. That's the definition of it. The property owner can't get physical possession of his or her property once it is in the stabilization world.

Michael Hendrix: For anybody who's not following the rent regulation debate closely, it's important to note that what we're seeing with these new rent regulation laws are a sign of the direction in which potentially more tenant protections in the future could go, if they succeed in Albany to further change under what terms for instance, someone could vacate an apartment, or for instance, if a landlord would have say, "Look, my son or daughter is coming home from college, I want to rent my basement to them no longer would you have necessarily the right to do that." We're heading in more in that direction rather, so fewer freedoms for those who own properties. And-

Andrew Pincus: We're very much in that direction, and in fact there are cases people have elderly parents who need care. They live in the building, they like their elderly parents to be in the building. There's no ability of the property owner to use even a vacant apartment for them to bring their parents so that they can live with them. The other thing that we should talk about are rent levels, because obviously that's another property right. As most new Yorkers know, the rent guidelines board sets the rents. The rent guidelines board has an index of property owners costs and there is a dramatic gap between those costs, which are higher than the permissible rent increases have been said and as you know, there were several years recently where there was a 0% increase allowed. So the ability to recover value from the property is also being significantly constrained.

Michael Hendrix: And this points to the regulatory taking sides.

Andrew Pincus: So that moves you into regulatory. It's relevant also to physical takings, because there's a real question about the ability to get value out of your property, but the third point is regulatory takings and they are, what the Supreme Court has said is there, it's a balancing test, we're going to consider a number of different factors. But even before you get to the balancing test, what a number of justices have said is if you've created a public benefit program that is only funded by burdens on a few rather than on taxpayers as a whole, that's the definition of a taking. Before you even get to the balancing test and the New York court of appeals in a case involving the rent stabilization program a few years ago said, "Yes, it defined rent stabilization as a public benefit program that is paid for not by taxpayers, but by the relatively few property owners who are subject to rent stabilization.

I say relatively few. It's a lot of people, but few in terms of all property owners in New York, let alone all taxpayers.

Michael Hendrix: Of these arguments and just broadly of the case, what would you say are the strengths of your case?

Andrew Pincus: I think just to finish off on the regulatory takings, one of the things there's clear evidence of lower value rents are not surprisingly a small percentage of market rents, values of comparable apartments can be 50% or less of market rate apartments. So that just shows you how much when everything else is controlled, this regulation imposes a burden on property owners. This isn't for example a noxious use. A lot of court cases are, if you have a gravel pit and there's a threat of harm to the community, regulation is permissible, there's nothing like that here. And most important, most housing regulation, most property regulation rests on this principle called reciprocal advantage.

If you think about zoning, your house, your property is zoned and has some limits that limits your value, but most likely your next door neighbor has the same restrictions and that actually increases your property value because you won't have a gravel pit next door, you'll have the same kind of house. Here, rent stabilization doesn't confer any reciprocal advantage whatsoever on the property owner. It's all burden and no benefit and that really distinguishes it from the vast majority of restraint regulations that have been upheld by the courts.

So anyway, to talk about the question you asked, what are the advantages? I think one advantage is the law has changed somewhat since these regulations were last challenge, which was many years ago. And the Supreme Court has said, for example, one of the reasons that courts have upheld rules like this is that they've said, "Well, you bought your property after it was subject to rent stabilization. So you knew that there were these restrictions, so you really can't complain about them."

And in several recent cases, the Supreme Court has said "No, there's no grandfather exception to the takings clause. The government can't avoid its limitations by basically saying you bought too late." And so that argument, which is basically what a lot of the decisions upholding rent regulation relied on the past is gone now. The other thing that's gone because New York is different from other cities is the Supreme Court did uphold California rent regulation scheme for mobile homes, but one of the critical things the court said is the mobile home park owner could change the use of its property. There was no restriction like the ones in New York, but as we've talked about in New York, that's just not possible. So those decisions aren't applicable either.

Michael Hendrix: Now there've been other legal challenges filed since your lawsuit. What's the difference between your case and others?

Andrew Pincus: So our case is different I think in two basic ways. We are mounting and across the board what's called in legal terms a facial challenge. We're saying that the law should be struck down generally because of its impact across the board on rent stabilized property in New York under the three constitutional guarantees that we've been talking about. There are other legal theories. You can say a law is invalid as applied. If you look at my property and my situation, this law is affecting a taking because of some particular facts that I'm able to show. We are not bringing an as applied challenge. Some of these other cases are. We understand that some property owners are in horrible shape as a result of what the law has done and they should try and get as applied relief. That's a much more fact bound case specific decision. We wanted to bring before the courts the broad challenge.

Michael Hendrix: Now are your clients though facing actual harms right now?

Andrew Pincus: They absolutely are. The data that we have recited in our complaint about the loss of property value, the inability to recover the rent guidelines boards own index of property owners costs because of the low rent levels, all of those things are burdening property owners right now. There are property owners as we talk about in the complaint, we have a one property owner who wanted to recover an apartment for personal use and has been prohibited from doing so because of the strictures of this law.

Michael Hendrix: Now I could imagine how this could seem like a too sympathetic portrayal of landlords, which some view as bad actors. I know that when I hear public discussions around landlords, you have one side sometimes it says, "Well, maybe there's a few bad apples, a few bad eggs, but nevertheless, the vast majority of property owners or people like you and me and they're operating and providing housing and shelter and whatever else they're operating the marketplace like you and I in our jobs, in the work that we do." Others say, "Find me one good landlord." Right? And you have both sides making, not even an argument about rent regulation per se, but which side is more sympathetic the landlord or the tenant, and they set up this implicit battle. Why should we care what happens to property owners?

Andrew Pincus: Well, we should care because the future of New York depends on having sufficient affordable housing for New York to continue to grow. And this gets into the broader question about the policy dynamics at work in rent regulation, but as we talked about in the due process argument for the properties of the subject to rent stabilization, there is a zoning envelope there that is unused more build there is the possibility of creating more apartments that isn't happening right now because of rent [inaudible 00:18:51], that means there are people who could have apartments who don't have them right now.

There is also I think a fundamental unfairness, because it is not as if rent stabilization has no impact on market rates as almost every economist will tell you and nobody knows economists like you guys do, the existence of rent control means market rates are going to be higher, that's just necessarily how the market works. And so the impact, although there are people who have rent stabilized apartments who are benefiting from them, the vast majority of apartments, market rate apartments are priced higher because of rent stabilization. That's just not fair.

Michael Hendrix: So, in my mind then it doesn't matter what you think of landlords, if the upshot of rent regulations are potentially say making the rental of apartments generally harder, less housing supplies, substantial decline in housing overall, locking people into apartments that are mismatched for them, that it may also particularly harm disadvantaged groups or at least advantage the advantageous and that even probably targeted that rent control could degrade the quality of the beneficiary's own housing.

Then that actually is what matters. It doesn't matter how you feel about landlords, there's the actual harm potentially to renters and tenants.

Andrew Pincus: Well, I think that is exactly right. I think most landlords want to do the right thing by their tenants. They obviously are in a business, but most landlords will tell you that having longterm tenants, longterm relationships is good for them. That's what they want. They want their buildings to prosper. But I think what you just said about maintaining housing brings up another point that's really quite shocking to me about the 2019 law. Not surprisingly, when someone's been in an apartment for a long time, when a rent stabilized apartment comes vacant, usually it's been occupied for a long time, upgrades are needed. It's only rational for the landlord to invest in those upgrades if he or she can recover them in increased rent, that used to be the case.

The 2019 law says after a long vacancy and an apartment, an apartment needs to be fixed up. Prior law, let the landlord recover those investments over a reasonable period-of-time. The 2019 law says you can only recover $15,000 no matter how much it costs to fix up the apartment and stretches out the period of recovery. That just doesn't make any sense and it is a disincentive for landlords to make those investments.

It's the same is true of another kind of improvement mechanism called major capital improvements and again was designed to encourage landlords to invest in their properties by allowing them to recover those investments over a reasonable term, also hedged with restrictions by the 2019 law. So you are going to see a dramatic downturn just because it's economics 101, if people can't recover their money, it is irrational for them to invest it. You're going to see a huge downturn and that's exactly what's happened. People have been reading the newspapers, talk about the building trades, a huge reduction in work for people in the building trades because as a result of the 2019 law, apartment renovations have plummeted and renovations that were on the table have been pulled off.

Michael Hendrix: That's interesting, because we've talked about the downsides directly to the housing market and maybe to renters and tenants and certainly the property owners, but it seems like there's other downstream impacts, downstream effects, one could be the impact on the building, construction trades. Could the other be say the impact on property tax receipts? So now the government has less revenue to give to poor individuals or unpack a little bit. There's a lot of other impacts.

Andrew Pincus: Absolutely. If you look at what's happened since the 2019 law in terms of transactions and rent stabilized apartments, values have dropped precipitously. That has to be reflected in tax assessments and so you're right, in addition to loss of employment for people in the building trades, you're going to see property tax income from these properties drop. It has to be. As I said, already we have a 50% pre 2019 there was a 50% differential. 2019 because of these additional limitations and restrictions is depressing values even more.

Michael Hendrix: And when a property owner rents a property to someone else, they're operating in their minds, I would assume on a longer time horizon for their property and for potentially the rental relationship. It's not just that they're thinking about this year, they're thinking into the future, and so this potential that you're hinting at of say a economic downturn making the economics of housing even more unworkable under severe rent regulation, that potential future now could become very real in the present for decisions being made by landlords as to whether or not they're even going to participate in the process of renting their properties. Is that right?

Andrew Pincus: Well, the law makes it difficult for you to not rent your property, as I discussed. Certainly a landlord could choose to just let the building degrade to the level where the law does say if the improvements would cost so much to get the building up the housing code, but it's a crazy law that says to landlords, the only way you can get out of regulation is to sort of watch your property destroy itself. That is bad for property. It's bad for new Yorkers. It means less housing and it means a less attractive and viable city so nobody wants that. But I think you're right. If you look at these pre 2019 restrictions and then what's been added on top of it, I think landlords have to say to themselves, "The annual rent increases have dropped significantly below my operating increases. I now can't recover for the expenditures that I would like to make to keep my property at a top notch status." It puts them in a very difficult position.

Michael Hendrix: One of our other senior fellows, Howard Husock has made the argument that with these new rent regulation laws, we're trading a fear of gentrification for actual [inaudible 00:25:22] of properties, and that should worry people in this city. So I wonder too, just to make a slight pivot here, what happens if you win? What happens in New York? What are the potential national implications too?

Andrew Pincus: Well, as you probably know, New York is not alone, although New York probably has the most restrictive rent regulation law in the country. Other municipalities are talking about rent regulation, not withstanding, as I said before, the sort of universal view of economists that this is an irrational response that only makes the problem worse. I think the first step is what happens if we win? No one thinks that there'll be no regulation of rental properties in New York. What we're hoping this court case will do is set the rules of the road. How far can the government go? We think obviously the government has gone way too far here, but whatever the court decides, and we think it will strike down this law, the legislature will have a chance to enact a lawful law, a law that complies with the constitution. So that's the logical next step here, and what we're hoping is that the lawsuit will set the rules and put New York on a course to adopt a fairer and frankly more rational rent regime that will actually lead to what everyone wants, which is more housing that accommodates more people in New York, and that does so in a fair way.

Michael Hendrix: Andy Pincus, thank you for joining us.

Andrew Pincus: Thank you.

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