Cash burn driving landlord group CHIP toward insolvency
Blames red ink on winding down fundraising ahead of merger with RSA
When The Real Deal reported in August that two New York City landlord groups were considering merging, the rationale seemed to form a united front for owners of rent-regulated buildings.
But the plan may also be a rescue mission, according to an internal report.
The Rent Stabilization Association and the Community Housing Improvement Program are poised to combine their lobbying efforts and membership. The talks have largely happened behind the scenes, but a report by PKF O’Connor Davies for RSA, pulls back the curtain on the deal’s financial considerations.
For one, the October report concludes that without financial help, CHIP might cease to exist within six months.
The accounting and tax advisory firm’s report, obtained by The Real Deal, found CHIP’s cash burn is driving it toward insolvency. The company spent $10.1 million but only took in $8.4 million in the 30 months ending in June 30.
The income included a $655,000 infusion from RSA, without which, the report notes, CHIP would have been “nearly insolvent.”
CHIP Executive Director Jay Martin acknowledged that the group has always been a small operation that has worked “hand to mouth.” However, he said the group’s lopsided financials are a result of a conscious decision to wind down operations and fundraising.
There is considerable overlap between the organizations’ boards and membership, and getting members to pay two sets of dues was becoming increasingly untenable, he said.
At the same time, CHIP maintained what Martin called “aggressive” lobbying efforts. The $655,000 from RSA was dedicated to CHIP’s campaign to pass a bill that would allow landlords to reset rents in some vacant stabilized apartments.
CHIP does not see the need to join RSA with a stash of cash on hand, its executive director said.
“I wish it would have happened sooner, frankly,” Martin said of the merger. “The industry probably would have been in a better position if this happened before 2019.”
He was referring to a 2019 rent law reform that rocked owners of rent-stabilized buildings.
RSA President Joe Strasburg would not comment on the report, but said merger talks are ongoing. He echoed Martin’s comments, noting that the groups have similar interests and share members.
“I’ve always believed, historically, that there should have been a merger a long time ago,” he said.
Zachary Kerr, president of CHIP, sent a statement on behalf of the group’s board of directors, saying that as many rent stabilized owners face foreclosure or are forced to sell their buildings, combining “ideas and resources into a new unified organization is necessary to organize the industry to survive in the current hostile environment against our businesses.”
He noted that both RSA and CHIP commissioned reports about combining.
“To the surprise of no one involved in the merger, the due diligence reports highlighted that CHIP is the smaller of the two groups financially, and has significantly less financial resources than RSA does,” he said. “Not only do we view a single unified voice advocating on behalf of our members the best financial interest of our membership base, we also view it in the best interest of the rent-stabilized housing community as a whole.”
The report indicates that 80 of CHIP’s 152 dues-paying owner and manager members are also part of RSA. The groups both represent rent-stabilized landlords and teamed up to challenge New York’s rent law by filing a petition with the U.S. Supreme Court. The court declined to hear the case in November.
The report also identifies “weaknesses” in CHIP’s financial reporting practices and says the organization needs to change how it tracks membership dues and who is responsible for accounting tasks. The group’s project manager, according to the report, handles many of these tasks without adequate oversight.
CHIP’s major expenses include a campaign to appeal to the city’s Rent Guidelines Board, which sets the rent increases allowed on stabilized apartments, and another for legislation that would allow a one-time rent reset on a vacant stabilized unit. Neither campaign appeared especially successful: The rent bill was introduced but gained little traction, and rent increases approved by the board disappointed both tenants and landlords.
The group’s revenue comes largely from membership dues and various fundraising events.
Arguments for merging with RSA include the overlap in members and policy initiatives. Combining the organizations would also mean members would not need to choose between the two or pay two sets of dues.
The groups, however, have different leadership styles and approaches to city and state politics, with CHIP being more vocal and RSA staying behind the scenes. It is not clear what a merger would mean for Martin, whose group was founded in 1966 but is much smaller, or for Strasburg, who was hired to lead RSA in January 1994 after 15 years in City Council staff positions.
Both organizations would gain something from the merger. For CHIP, the move would mean larger membership and access to the spending power of RSA, which last year reported $7 million in revenue and $51.6 million in net assets.
CHIP has built up its profile over the past four years under Martin, who has pushed the industry to change its approach, including by adopting the strategies of tenant advocates, such as door-knocking and flooding social media.
If a merger is completed, it would likely occur next year. The report notes that integrating the two groups would take several months.