Nine rent regulation bills pending in Albany won’t solve New York City’s housing crisis and will ultimately hurt the tenants they are trying to protect, according to panelists speaking at Understanding the NYS Legislative Agenda for Multi-Family Properties, a recent event presented by the Real Estate Services Alliance (RESA) and co-sponsored by Avison Young.
If the proposed laws are passed on June 15 owners will not have the funds necessary to maintain and improve their properties because building expenses outpace the rents for stabilized units, said Jay Martin, Executive Director of the Community Housing Improvement Program (CHIP), an organization that represents small building owners.
Building Expenses Outpace Rents for Stabilized Units
Legislators are seeking to eliminate the Major Capital Improvement (MCI) allowance, which enables owners to increase rents to pay for improvements that benefit the entire building such as replacing a boiler or windows, and Individual Apartment Improvements (IAIs), which enables owners to install new kitchens and bathrooms in units.
Moderator Christina Smyth, Owner/ Founder of Smyth Law P.C. and a rent regulation specialist, said while the city refers to IAI’s as a “loophole” which favors owners, in reality IAI’s incentivize owners to improve apartments and deliver higher quality living standards for renters. In the DHCR audits her firm conducts as part of the due diligence process for purchasers of rent regulated buildings, she rarely encounters misuse of the system, and concludes that the measures to weed out the few bad actors are presently sufficient to protect tenants, she said.
Proposed Rent Regulation Laws Protect High Earners
The proposed laws also would protect high earners, by preventing owners from decontrolling apartments that rent for over $2,733 and are occupied by tenants with annual incomes of $200,000 or more for two consecutive years. Owners say to maintain their buildings, the higher rents received from decontrolled apartments are needed to subsidize the below market rent stabilized units.
Of the city’s approximately 2 million rental units, 44.3 percent are rent stabilized, 42.9 percent are private non-regulated units and the remainder include public housing and Section 8 units.
Because there isn’t a means test for rent stabilized units, these apartments are scarce and young people, newcomers to the city, and growing families are penalized, forced to compete for the city’s limited supply of free market apartments, which drives up free market rents. Martin cautioned, however, that some elected officials are advocating regulating all rental units statewide.
Panelist Terri Gumula, a Director at Avison Young, said the housing crisis, according to NYU’s Furman Institute, has several causes including income stagnation since the 1980s as well as a lack of supply, which elected officials aren’t addressing in their proposals.
New York City Needs 500,000 New Units of
Housing to Keep Pace with Population Growth
Since 1980, the population of the New York City has grown by nearly 1.5 million, which means the city needed about one million new units of housing built to accommodate the growth. Instead, only a little over 500,000 units have been created, causing an acute shortage of housing. Many residents feel rent burdened so higher income residents are moving into traditionally lower income neighborhoods in search of less expensive housing, which has pushed up rents in those communities, Gumula said.
Gumula added that there are many barriers to creating new housing in New York City including local residents who block new housing developments in their neighborhoods, the cost of land and construction, and onerous zoning laws, especially along the commuter train lines in the suburbs that prohibit the construction of multifamily housing. Affordable housing can face all these challenges plus the scarcity of government funding.
Subsidized Housing is the Responsibility
of Government, Not Private Owners
The crisis also has coincided with the government shifting responsibility for affordable housing to private owners, a trend that will continue because of budget constraints on the local, state and federal level, the panelists said.
Martin agrees with the activists that housing is a human right but argues that subsidized housing should be the responsibility of government. He cited the example of food stamps, which the government subsidizes to ensure that families have enough to eat but doesn’t force food suppliers to reduce their prices.
James Nelson, head of Avison Young’s Tri-State Investment Sales group, said the proposed laws are already having a chilling effect on the multifamily market, noting that only two buildings traded in Northern Manhattan in Q1 2019.
Nelson said there is a flight to quality in the multifamily market today. Value add, rent regulated buildings aren’t selling because investors are waiting for the outcome of the pending legislation in Albany, but unregulated, newly constructed buildings are trading at a premium.
Owner Ari Shalam highlighted another factor politicians are likely overlooking when he said that in the past strong retail rents subsidized rent stabilized units, which helped owners pay for building improvements and bear their ‘below cost’ rents. However, retail today is suffering tremendously, real estate taxes are continuing to rise to fund growing city budgets and now the legislature wants to freeze rent regulated apartments. The result is many real estate investors are simply moving their capital out of the city.
Shalam said his firm hasn’t bought a rental building in New York City since 2015, but recently bought 600 rental units in Austin, Texas, which has more attractive tax and rental laws, not to mention better demographic fundamentals.
Real Estate Taxes Fund Over
50 Percent of New York City’s Tax Base
Capital flight and the pending legislation will adversely affect New York City’s property values and corresponding tax base, which depends on real estate taxes to fund over 50 percent of the taxes needed to fund the city’s rapidly growing $92 billion budget, the panelists said.
Prior to the panel, Nelson interviewed Bradley Tusk, founder and CEO of Tusk Ventures, a venture capital fund that has advised Uber and Fan Duel, among others, and is now representing CHIP on rent regulation. Tusk said that the real estate industry needs to be more proactive and vote for candidates who represent their interests, noting that many City Council members won their primary elections by only 10,000 votes.
Tusk said that beating up on the real estate industry is good politics in New York City, so property owners must reach out to elected officials and have their voices heard. Nelson suggested that the industry hold phone-a-thons and call elected officials to express their views.
Tusk said New York City is still an incredible place to do business because of its outstanding talent pool, but the optics are bad right now, and the city’s leadership must show that the city is open for business.
Tusk was Nelson’s guest on his recent podcast on the Nelson Report, which can be found by clicking here.