The Real Deal New York

The Long View: The fix that could create thousands of affordable housing units overnight

Why means-testing for regulated units is a good idea
By Konrad Putzier | December 21, 2016 08:00AM

UPDATED, 1:53 p.m., Dec. 21: Bruce Colley, the playboy owner of former Chelsea bar Man Ray, is a multimillionaire. He’s played polo with Prince Harry. He is – or at least was – family friends with Gov. Andrew Cuomo. His father is one of the biggest McDonald’s franchisees in the country. And he lived in a rent-stabilized apartment near Central Park between 2008 and 2012.

A case like Colley’s may be rare, but it is symptomatic of a broader problem: New York is wasting affordable apartments on people who don’t need them. 

There are 168,000 New Yorkers  who live in rent regulated apartments and make more than $100,000 per year (including 66,000 who make more than $150,000), according to 2014 census data. At the same time, there are 176,000 New Yorkers who make less than $25,000 per year but pay market-rent, according to the census figures. In other words: for every upper-middle-class person that can use the money it saves on rent to fly to take a winter trip, there is one low-income New Yorker that is perpetually in fear of being displaced by unaffordable rents.

The case for means testing

Means testing involves determining whether a person is financially eligible to receive government assistance. In the past, there was a compelling reason why it wasn’t implemented when it came to housing. Taken together, rent-control laws of the 1940s and rent-stabilization laws in the late 1960s and early 1970s applied to the vast majority of rental apartments in the city, regardless of a tenant’s income.But over the years, vacancy and luxury deregulation have shrunk the pool of rent-stabilized, rent-controlled apartments and apartments in other regulation programs to the point where they now, according to 2014 census figures, make up around 1.3 million of the city’s roughly 2.1 million occupied rental units. At the same time, gentrification and population growth have pushed up market rents and swelled the city’s homeless shelters.

It is strange, then to argue – as some tenant advocates still do – that there is no problem with a lawyer who makes $180,000 a year living in a rent-stabilized apartment. Rent-regulated units are now a scarce and valuable resource, and like all scarce and valuable resources, they should be put to best use.

Rent regulation has become a de-facto public subsidy, one that is contributed to by all those market-rate tenants whose rent is higher because regulated units keep a lid on market-rate supply. If we are talking about a public subsidy, there’s nothing wrong with attaching conditions to it.

In its Mandatory Inclusionary Housing plan, the city has already embraced the principle that rent-regulated units should go to those who need them. The plan requires developers in rezoned neighborhoods to set aside affordable units for households in specified income brackets if they want to build tall. Applying the same principle to older stabilized units would better allocate those units to low-and middle-income New Yorkers.

For means-testing to work, there are two important prerequisites. The first: the state will have to change vacancy and luxury deregulation rules to make sure units don’t lose their regulated status after high-income tenants are evicted. (Current, rarely-enforced luxury deregulation rules stipulate that a unit loses its stabilized status if a tenant makes more than $200,000 two years in a row and the rent is more than $2,700 a month – a fate that ultimately befell Coley’s regulated apartment.)

The second: there needs to be an effective mechanism to test tenants’ incomes on an annual basis, swiftly resolve disputes and get low- and middle-income tenants into units once they are vacated.

The Mitchell-Lama program offers an idea of how this can be done: its units are tied to income levels, and tenants have to submit tax returns every year. Those who fail to submit returns will be evicted and those who exceed certain income levels have an increase in rent as a result of the increased income, said Adam Leitman Bailey, a real estate attorney who has represented Mitchell-Lama, HDFC and other lower income property programs. Replace rent increases with evictions, and you have a blueprint. The city already has a lottery system  in place for affordable units in new 421a developments. It could simply extend the system to existing regulated units that become vacant.

The bureaucratic hurdles are real, but means-testing would still be far easier and cheaper than what the city already does under its affordable housing plan. After all, the de Blasio administration dishes out hefty subsidies to developers for each newly created or preserved affordable housing unit.

“The administration has set as its goal creating and preserving 200,000 affordable housing units,” said Seth Pinsky, a top executive at RXR Realty and former head of the city’s economic development corporation. “We’re spending billions, when overnight we could free up tens of thousands of units at no cost.”

Common sense or social engineering?

So if means-testing would be a cheap way to put low- and middle-income families into affordable units, why was it never implemented?

There are some policy arguments against it, but they hardly hold up. Opponents of means testing argue that it would be cruel to kick people out of apartments they may have lived in for years or even decades. That’s true. But the state should weigh the suffering of a household making $150,000 a year being forced to move into more expensive accommodation against the suffering of a household making $25,000 a year being forced into a homeless shelter.

“We have a crisis of affordability,” Pinsky said, “and when you have a crisis you have to prioritize solving it over lesser issues.”

Michael McKee, of tenants advocacy group Tenants PAC called means testing a “disastrous and very bad policy” and compared it to “social engineering” under communist regimes. He argued that means testing would simply open up more opportunities for landlords to game the system and deregulate units. That’s a valid concern, and New York certainly has its share of shady landlords. But it shouldn’t stop us from at least trying to implement a system that allocates these apartments more fairly.

Another argument against means-testing is that it may, in some cases, discourage people from taking higher-paying jobs. This echoes a common libertarian argument claiming (usually without evidence) that other means-testing-based programs like food stamps or Medicaid discourage work. Again, that’s a valid concern, but I find it hard to believe that too many New Yorkers would chose a cheap apartment over a career.

If the policy arguments against means testing are flimsy, the political arguments aren’t. Regulated tenants are a large and organized voting block, making means testing a tough proposition for any politician.

“How could this possibly be worthwhile when you can stand in front of a building and scream ‘don’t raise these rents’ and get everyone to vote for you,” said one urban economist, speaking on condition of anonymity due to the sensitivity of the subject.

There are clear parallels to the gun debate here: those who want to preserve the status quo care way more about the issue than those who want to change it. It’s easier to mobilize voters by telling them they might get kicked out of their cheap apartment next year than it is to mobilize voters by telling them they might one day have a better shot at landing a cheap apartment through a citywide lottery.

And there’s another, more primal reason why means testing as a political issue never really picked up serious steam. “People in this country,” the urban economist said, “don’t want to tax rich people, because maybe they’ll be rich one day.”

(Read more of The Long View here.)

Clarification: This story was updated to reflect that the 1.3 million figure refers to all units that are not free-market; i.e. units that are under any form of rent regulation.