The Daily Dirt: Rent board protects high earners at developers’ expense

It is widely overlooked that lots of “market-rate” units are rent-stabilized, at least temporarily.

For decades, developers built “80/20” rental housing under the old 421a tax break, with 80 percent of units market-rate and 20 percent income-restricted. But while developers could set their initial market-rate rents as high as the market would bear, annual increases during the 25-year tax abatement are limited to what the Rent Guidelines Board allows.

Why does that matter?

Many developers assumed those increases would be higher than they have turned out to be. Beginning with the de Blasio mayoralty, the rent board has kept rent increases below the inflation rate for owners’ operating expenses. In some years it allowed no increase at all.

The board was protecting low-income tenants, but in the process also protected high earners in 421a and other tax-abated buildings. (Many rent-stabilized households have healthy incomes as well; 30 percent earn more than $100,000.)

A decade of minimal rent increases, a period of pandemic-induced vacancies and the elimination of vacancy decontrol in 2019 have eroded the returns of buildings. “You don’t see the big defaults, but they are limping along and worth much much less,” noted one developer with five properties suffering that fate.

The 421a program, contrary to popular belief, does not wipe out a development’s property taxes. Rather, it freezes the annual tax bill at the pre-development level for 10 to 25 years, followed by a 5- or 10-year phase-out of the tax break.

Losing the break changes a building’s taxes dramatically. Albert Kalimian’s $1.1 million bill shot up to $6.6 million at the Aire, a 310-unit building at 200 West 67th Street, aka 150 Amsterdam Avenue. That works out to $1,748 per unit, per month.

Occupancy, which bottomed out at 70 percent during the pandemic, rebounded to 97 percent last year, yet the Aire still did not generate enough rent to cover its debt payments, according to Trepp. That has been the case since 2017.

The Aire’s senior loan of $193.5 million went to special servicing last June and matured in November. Kalimian also had $25 million in mezzanine debt on the property. Rather than refinance at today’s higher interest rates, he sold the building for $265 million.

It wasn’t a terrible outcome for the investor — he didn’t have to hand back the keys to lenders — but his return for many years appears to have been minimal if not negative. The Rent Guidelines Board played a role in that. Apartment buildings in less desirable neighborhoods are likely to be faring even worse.

What we’re thinking about: Is it a conflict of interest for Linda Rosenthal to preside over rent stabilization legislation as chair the Assembly Housing Committee when she has a $1,573-a-month, rent-stabilized, three-bedroom apartment in an Upper West Side building where a similar unit rents for $5,200? Or does her tenancy provide her a valuable perspective on rent issues? Email eengquist@therealdeal.com.

A thing we’ve learned: Of mortgages offered to Lending Tree customers in New York, 77 percent went to first-time buyers — the highest share in the country. California was second at 73 percent and New Jersey was third at 72 percent. This could be because homebuyers are likely to be one-and-done where homes are more expensive. (Also, California locks in low property taxes, which discourages moving.) First-time buyers had the lowest share of mortgage offers in South Dakota and Alaska: 54 percent.

Elsewhere in New York…

— A wind-turbine project 12 miles off the Long Island coast received final approval from the Biden administration Thursday, Newsday reported. Its power is ticketed for New York City. But there is no guarantee that Empire Wind will be built, as rising costs have disrupted the industry. Equinor, the developer, is re-bidding the project this month. The Norwegian firm mothballed another project off Long Island when the Hochul administration wouldn’t kick in more money.

— Richard Koenigsberg, a private engineer who mistook a structural column for a decorative one at a Bronx building that collapsed Dec. 11, accepted a two-year suspension from facade examinations, Crain’s reported. Mayor Eric Adams announced the agreement, which also calls for a $10,000 fine.

— More than 240,000 applicants are waiting for New York City Housing Authority apartments, of which 5,000 are vacant, The City reported. NYCHA created a special unit to speed the process of filling empty units, but it has had the opposite effect, according to the federal monitor overseeing the troubled agency. NYCHA’s vacancy rate is 3 percent, more than twice that of the city as a whole.

Closing Time

Residential: The priciest residential closing on Thursday was $4.85 million for a single-family home at 142 Saint Marks Avenue in Prospect Heights. 

Commercial: The most expensive commercial closing of the day was $46.9 million for a self-storage facility at 1296 East 14th Street in Brooklyn. The seller was Equity Resource Investments and the buyer was Heitman Capital Management.

New to the Market: The priciest home to hit the market on Thursday was a co-op at 1185 Park Avenue in Carnegie Hill for $14.5 million. Serena Boardman of Sotheby’s has the listing. — Matthew Elo