The plot to kill rent control

April 20, 2011

Don Lash explains what's at stake in the battle over rent control in New York.

LANDLORDS AND real estate developers are out to kill New York's rent control regulations when the law that authorizes them expires at the end of June--but a struggle is brewing to stop them.

The state's rent control and rent stabilization programs are in effect in 51 municipalities--most famously in New York City, where half of the city's 2 million apartments are covered by regulations that limit increases in rent to a formula that allows landlords to cover costs and generate a profit. Another 150,000 apartments in suburban counties adjacent to New York are also covered by these rules.

State lawmakers from New York City, who are dependent on the votes of renters, have promised to work to extend the law--but their zeal is tempered by the fact that real estate interests are the largest source of campaign financing for the city's elected officials in both parties.

A previous attempt to tie the extension of rent regulation, with some modification of the "luxury decontrol" loophole, to the state budget was unsuccessful. That loophole has resulted in the loss of at least 117,000 apartments from regulated stock in the past 16 years.

An apartment for rent in New York City
An apartment for rent in New York City (Tom Simpson)

Members of the Democratic-controlled Assembly are threatening to block a property tax cap sought by Gov. Andrew Cuomo and suburban legislators unless a deal is reached on rent stabilization. But landlords and developers, who have also contributed heavily to the campaigns of upstate legislators where rent regulation isn't in effect, want rent control to be phased out or, at the very least, further weakened by the expansion of existing loopholes and the creation of new ones.

Currently, the Tenants and Neighbors Coalition, among other groups, is spearheading grassroots efforts to pressure the legislature, while its sister organization, the Tenants and Neighbors Information Service, is organizing tenants and educating New Yorkers about how the system works. One goal is to promote recognition of the link between decontrol and "predatory equity"--a term for the wave of speculative investments made during the credit bubble of recent years.

A backroom deal essentially preserving the status quo would allow the erosion of regulated housing stock to continue, however, unless there is action to close the loopholes that allow for using inflated improvement costs to deregulate apartments, as well as what has been described as "tenant harassment as a business model." Rent regulation will also remain vulnerable as long as state law robs New York City of control of its unique housing market.

Finally, it should be clear to everyone concerned about affordable housing for working families that rent stabilization is a safeguard, but not a substitute for a policy that addresses the failure of the market to produce new affordable housing.

THE ARGUMENTS used in favor of rent decontrol are consistent.

One, the "under-utilization" argument, is that rent regulation distorts the housing market by keeping people in apartments they would otherwise leave. The typical example cited is the widow whose children are grown, and who continues to rattle around in a huge apartment with empty bedrooms because rent regulation keeps her rent artificially low. Invariably, this is contrasted with the example of a young family unable to find an adequately sized, affordable apartment.

In 2010, the influential Citizens' Budget Commission (CBC) repeated this argument in a report calling for further "reform" of rent stabilization. The problem with the CBC's argument is that the only data cited to support it relates to the tiny and dwindling percentage of regulated apartments subject to the pre-1969 rent control law, not the current system of rent stabilization. Data in the CBC report for rent-stabilized apartments showed a lower average for rooms per person average in regulated apartments compared to unregulated apartments--meaning the "under-utilization" is all wrong regarding rent stabilization law.

Another argument is that rent regulation prevents investors from building new housing, thus preventing the market from naturally adjusting the price point where supply meets demand.

This argument fails for a number of reasons. One, periods of rapid decontrol in the past have not resulted in increased construction. Two, new construction is already outside of rent stabilization, unless landlords choose to apply for a tax abatement. Opponents often respond that investors will not build unregulated housing stock that must compete with regulated housing stock, but this contradicts another of their arguments, which is that rent stabilization causes higher rents in unregulated apartments, thereby disadvantaging regulated landlords.

Finally, the myth of the self-regulating market is least credible when applied to housing, as there is no flexibility for demand to fall as consumers substitute some other good for housing if it is priced above their ability to pay. Rent regulation exists in many urban setting precisely because of the failure of the market.

Yet another argument is that rent stabilization is a middle-class "subsidy," and that low and moderate income New Yorkers don't benefit. According to housing data from the U.S. Census Bureau, in 2008, 18 percent of households in rent-regulated housing were below the poverty line, and 21 percent were low-income, meaning their income fell between 100 percent and 200 percent of the poverty line.

In 2008, the median rent burden--that is, the percentage of monthly income required for rent--in New York City was 63 percent for regulated households in poverty, compared with 67 percent for non-regulated households in poverty. For low-income households, the comparable figures are 48 percent and 50 percent, and for middle-income households, they are 26 percent and 29 percent.

The primary benefit of rent regulation in its current form is not in making working families in regulated housing dramatically less burdened than their neighbors in unregulated housing. It is, rather, in protecting them from unlimited demands for higher rent, especially in neighborhoods experiencing rapid gentrification.

It's true that rent stabilization does not increase the supply of affordable housing and can't make up for the erosion of a national commitment to the creation of new affordable housing. Rent stabilization, with all its flaws, simply protects tenants from rent-gouging.

THE HISTORY of rent regulation in New York is complicated, but it's useful to look at the broad strokes, because certain themes emerge.

In the tight real estate market of New York City, in which 67 percent of the population lived in rental housing in 2008, rent-gouging by unregulated landlords has invariably created hardship and housing affordability crises. This has led to demand for controls, with landlords generally successful in influencing the process to ensure that rents, although regulated, remain high.

At the same time, the landlord lobby, neoliberal think tanks and established "good government" groups have argued to weaken or phase out regulation, blaming it for creating an artificial housing shortage that prevents the invisible hand of supply and demand from creating more affordable housing. These arguments have been accompanied by a steady flow of cash to fund the election campaigns of politicians of both parties, including those elected by voters outside the urban rental housing market.

From time to time, regulation has been dramatically weakened by decontrol measures. These measures, while increasing hardship for tenants in decontrolled housing, have done nothing to increase the supply of affordable housing. Nevertheless, the same arguments are being trotted out this year to justify "reform" of the rent regulation system.

Rent regulation in New York dates back to 1920, and some form of regulation has been in effect continuously since 1943, when rent-gouging by landlords was determined to be interfering with the war effort. A form of federal rent control was implemented, and because the housing emergency lasted beyond the war, it continued until 1950.

With the end of federal rent control, the state took over rent regulation, with a system of rent control applying to buildings built before 1947. In theory, regulation was still an "emergency" measure, with the presence of a housing emergency being defined as a vacancy rate below 5 percent, but this emergency condition has never ended.

Modifications were made to the state system in the 1950s and 1960s, resulting in the decontrol of some categories of units. In 1962, New York City was given control over its own rent regulation, consistent with the principle of "home rule" over local affairs. In 1969, the city responded to rising rents, due in part to the partial decontrol by the state, by establishing a somewhat different system, rent stabilization, which applied to buildings unregulated previously because they were built after 1947, and to units decontrolled by the state.

The existence of two systems of rent regulation has introduced a level of complexity that is bewildering even to lifelong New Yorkers, because the status of an apartment depends on when it was built and when the tenancy began. But over time, the number of "rent-controlled" apartments (under the pre-1969 system) has dwindled to less than 2 percent of regulated apartments--the remainder are "rent stabilized."

In 1971, the state government attempted to phase out rent stabilization by introducing "vacancy decontrol," taking apartments out of regulated status as soon as they become vacant. At the same time, it passed the "Urstadt Law," which snatched back the power to regulate rents from the city.

Vacancy decontrol was a failure, and in 1974, the state ended it and re-regulated most of the apartments that had been removed through vacancy decontrol. The Urstadt Law, which protected landlords from having to depend on elected officials who were accountable primarily to renters, remains in effect.

UNDER RENT stabilization, landlords can increase rents for renewal leases up to a certain percentage (currently 2.25 percent for one year or 4.5 percent for two years) specified by the New York City Rent Guidelines Board (RGB).

The RGB is hardly a bastion of tenant advocacy; it was originally set up prior to the 1969 legislation as part of an effort to create a system of industry self-regulation. The RGB analyzes cost information submitted by the landlord lobby and builds in a profit calculation based on a formula to ensure that landlords receive a return on their investment.

Technically, only buildings with more than six units built before 1974 are subject to rent stabilization, but owners of new buildings can opt in to regulation in return for property tax abatements. When an apartment becomes vacant, landlords can add a vacancy increase of up to 20 percent. Landlords can also make improvements to vacant apartments and recover the cost of those improvements over 40 months by permanently raising the rent by one-fortieth of the cost.

In 1997, the state enacted the Rent Regulation Reform Act, which made a number of changes, most notably "luxury decontrol" for units with rents higher than $2,000 that were occupied by households with income higher than $175,000. Luxury decontrol was presented as a way of preventing wealthy and upper-middle-class households from benefiting from regulation, but in 2003, the legislature severed the connection between household income and luxury decontrol by providing that any vacant apartment with an allowable rent over $2,000 would be decontrolled.

Vacancy increases have always given landlords an incentive to get tenants out, but the 2003 changes have added the promise of escaping from regulation entirely if rents can be raised above the $2,000 threshold.

In addition to the vacancy increase, landlords can use improvements in an apartment to push up the rent, and there have been many cases documented of landlords inflating the amount they claim to have spent, often to absurd levels, a phenomenon sometimes referred to as "one-fortieth fraud." A landlord will only have to prove the claim if an incoming tenant, who will not have seen the apartment before it was vacant, is aware enough of the rent history and the actual cost of the improvements to challenge the claim through a time-consuming state complaint process.

Sometimes, the vacancy increase alone will push an apartment above $2,000 in rent, and many landlords are extremely aggressive about challenging succession rights of members of the household upon the death of a tenant or claiming that tenants have primary residences elsewhere.

There have been cases of tenants going away to care for a sick family member, only to have their landlord claim they are no longer primarily residing in their apartments. Plus, some tenants have found that landlords are unwilling to make repairs in regulated units, in the hopes of inducing them to leave.

During the real estate bubble that burst in 2008, the incentives to decontrol took an even uglier turn, as speculators began buying multiple dwellings at prices that could not possibly yield a profit without vacancy decontrol of a substantial number of units. The investors--and the lenders (often private equity funds) that provided them with financing--were speculating that they would be able to use vacancies occurring much more frequently than they ordinarily would to inflate the rent.

The Association for Neighborhood and Housing Development has referred to this as "tenant harassment as a business model." UrbanDigs, an industry blog for real estate insiders acknowledged in 2009:

[N]atural attrition (death and major life changes)...would translate to a certain number of people leaving every year and certain regulatory thresholds that deregulate your apartment base over time. It's all good. The only problem is that these types of investments include a perverse incentive to try to accelerate this natural attrition rate, thereby raising your return on investment. This incentive is heightened if the landlord pays a high price for the properties purchased and uses lots of leverage.

I'm not saying any tenants have been prematurely sent to the next life by avaricious landlords trying to get them out, but landlords have incentives to make tenants of rent-controlled or -stabilized tenants less than comfortable, shall we say, thus pulling forward their move-out dates.

Tenants and advocates for affordable housing in New York will be fighting to prevent further rollback of the protections, however compromised, that rent stabilization offers against rent-gouging and loss of tenancy. They will also be attempting to end the steady loss of apartments from regulated stock that the current law encourages.

Finally, while it hasn't been part of the mainstream discussion of this year's rent regulation fight, tenants should not give up on the issue of local control. The real estate industry has been artful in using campaign contributions at both the state and local level to acquire interest. But tenants will enjoy greater security if the decisions are being made by politicians who must appeal to renters to keep their jobs.

Further Reading

From the archives