The return of “key money”—under-the-table payments that prospective renters make to secure rent-stabilized apartments—has gained attention in New York City housing-policy circles. It shouldn’t be a surprise. City rent controls, which have lately become much stricter, have the same effects that economists predict for any price controls: they lead to shortages and black markets.
These payments are unavoidable outcomes of the 2019 legislative amendments to the New York Rent Stabilization Law. The amendments were designed to eliminate the remaining ways by which rent-stabilized apartment rents could approach market levels. Apartments would still become vacant from time to time, but the legislation provided no mechanism to allocate below-market-rent apartments among applicants. The natural inclination of landlords is to do so in the old-fashioned way—that is, through pricing—irrespective of the legislature’s decree that price will no longer have anything to do with who gets an apartment. As I wrote in 2019: “If landlords can, they will find a way to realize market value through under-the-table payments.”
Key money in the crude sense—handing a landlord an envelope full of cash, in exchange for the apartment keys—is illegal, of course. What is legal, and what has people talking, are ever-increasing brokers’ payments. Brokers’ fees must be paid for the broker’s services; the broker can’t kick back the fees to the landlord and can’t have a financial interest in the apartment being rented. Many informed observers suspect, however, that given the size of recent broker fees for rent-stabilized apartments in high-demand neighborhoods, money is passing from brokers to landlords.
That’s nothing new. When I rented a rent-stabilized apartment in Park Slope in 1980, when the city’s rent rules were similar to those that exist today, I paid a large fee to the broker, who, as it happened, was also the landlord. I viewed that as a fair price to get a bargain apartment and didn’t think of complaining to the authorities.
So it is today. A rent-stabilized apartment is like an annuity paid out in monthly installments: you effectively get cash back on your apartment for life if you want to remain there. Plenty of people would pay a bribe to a landlord to access that stream of payments. The brokerage-fee system provides a price-finding mechanism that reveals just how much that privilege is worth.
What are alternatives to under-the-table payments? An equally strong financial incentive exists for payments to landlords who control below-market-rent vacant units that received affordable-housing benefits from the city. To forestall this type of corruption, the city has set up NYC Housing Connect, an online portal from which landlords must draw their prospective tenants. It’s possible to do this because these landlords have secured public benefits and have signed regulatory agreements that specify the use of NYC Housing Connect. Rent-stabilized landlords have secured no benefits—rent stabilization has nothing but downside for them—and it’s hard to see how the legislature could force them into selecting their tenants from an online portal. In any event, the rent law does no such thing.
Another option for the state’s ostensibly pro-tenant politicians could be to set up an extremely intrusive enforcement mechanism that examines individual brokers’ fees, as well as the financial relationships between brokers and landlords, which may be well disguised by clever accountants. But such a system would be labor-intensive and expensive, and the city currently possesses neither the resources nor the will to set it up.
All that remains, then, is the threat of arbitrary enforcement at some point in the future. It’s a dilemma familiar to people in the New York real-estate industry, where the city passes laws that prohibit seemingly sensible business transactions but makes no effort to enforce them. I’ve written, for example, about the city’s 50-year-old scheme that limits housing in Soho and Noho in Manhattan to artists but then turns a blind eye to non-artists who live there.
Working in real estate in such a system requires a certain brazen courage. Under rent stabilization, rental housing inevitably winds up largely in the hands of those who care little about the letter of the law. New York City is home to many people with ancestral links to countries where the government is viewed as a rapacious adversary that needs to be evaded with clever disdain. They’re going to conduct their business, notwithstanding local politicians pursuing a fantasy of bringing capitalism to its knees.