Rent Regulation could get out of Control

When you listen to most New York politicians speaking about the current economic crisis the City is facing, you always hear a reference to the fact that, although spending and services need to be cut, conditions will not revert back to the way things were in the 1970’s.  I think there is one exception and that is that during the 1970’s the welfare system in New York was out of control. The expectation of entitlement was at an all time high and if the package of bills endorsed by the Assembly gets adopted by the Senate, we could have a 1970’s level of entitlement expectation within our housing system. Forget about “Rent Control” or “Rent Stabilization”, given the pending legislation, why not just call it “Rent Welfare”.

It is not surprising to me that there is a groundswell of momentum to promote a more pro-tenant environment among elected officials. For most politicians, getting re-elected is their main goal and taking an anti-tenant position is political suicide. In private they will tell you that the system is overly protective of tenants but simply cannot take this position publicly. MIT and The Wharton School have completed studies demonstrating that the elimination of rent regulation would result in lower average rents citywide.

Some of the proposed changes include eliminating high rent vacancy decontrol, raising the bar on income decontrol from the current $2,000 to anywhere from $2,700 to $5,000 and the means test level of income from $175,000 to about $240,000 with an indexing provision, eliminating the present method of implementation of preferential rents, reducing the vacancy bonus from 20% to 10% and reducing the increment that can be added to the monthly rent resulting from renovations to an individual unit. Another potential change which would have a profound effect on the system is the proposed repeal of the Urstadt Law which would place oversight of rent regulation in the hands of the city as opposed to the state. This would likely result in the City Council, which is extraordinarily pro-tenant, taking over which would probably vaporize the Rent Guidelines Board and  determine rent increases themselves.

Owner advocates have said that, should the present bills become law, we could see a wave of  foreclosures which would not be good for the landlords or the tenants and that fundamentally changing the rules in the middle of the game is not fair. While foreclosures may indeed increase, this will have a relatively short term impact on the housing stock. Sure the services in the buildings are likely to decrease during the foreclosure process but, ultimately, the lender will resell the property at a lower market value, a new owner will take over and the property’s operation will get back on track.  

The longer term impact is that the proposed changes will lower property values thus eroding the real estate tax base which is needed now, more than ever, to address record level buget deficits. The incentive to upgrade apartments would be greatly diminished causing, what is already an aging housing stock, to rapidly deteriorate. Vacancy decontrol created tremendous incentive for owners to invest heavily in improving the qualityof the housing stock.

There is a great need for affordable housing in New York but for the public sector to ask the private sector to provide it in this fashion is not the solution. Incentives for the creation of new affordable housing units is an easy fix but is politically unpopular. Giving tenants effective ownership of their buildings through a far reaching entitlement program is not a good thing for the city. Let’s hope, in this way, we do not return to the 1970’s.

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9 Responses to “Rent Regulation could get out of Control”


  1. 1 Paul Brick February 4, 2009 at 2:22 pm

    Mr. Knakal’s comments regarding the 60+ year old establishment of rent regulation in New York City certainly raise many valid concerns. However, I would be interested to know why the changes to the rent regulation programs are being proposed. What is the impetus for our local legislators to act in these ways at this time?

    The current set of rules and regulations, while flawed, have not prevented real estate investors from buying and selling property. Many real estate pros have made fortunes, patiently, converting rent regulated properties into profitable market rate coops and condos.

    Likewise, the regulations have addressed the concerns of protecting elderly renters and other renters of modest means while permitting a means of transitioning these apartments out of regulated status.

    Since the DHCR is equally despised by landlord and tenant groups it is a good indication that the regs are doing what they are supposed to by a governmental body outside of the local political process.

    Regardless of one’s position on rent regulation one should be suspicious about this move to bring such a critical hot potato into the local political arena. When we need to trim our local government in the face of declining tax revenue and impending budget cuts who benefits from making this State run function a local burden.

    My 25 years in the real estate industry have taught me that “less is often more” when it comes to shifting governmental functions. Cynicism aside, I would welcome a reply explaining the reasons behind this recent set of proposed changes to NYC rent regulation.

  2. 2 rknakal February 4, 2009 at 3:46 pm

    Hi Paul, changes are presently being proposed because tenant advocacy groups are always pressuring politicians to strengthen laws in their favor. Owner advocates also speak to politicians about strengthening regulations in their favor. These efforts have, for the most part, been offsetting as the Assembly had been controlled by the Democrats and the Senate had been controlled by Republicans and there was a sort of checks and balances system in place. Neither side could get too radical. Now, for the first time in 4 decades, one party controls both sides of the legislature. Unfortunately, there are many more tenant voters than owner voters, thus, the political suicide of endorsing pro-owner positions.

    Under the present system, neither tenants nor owners are satisfied which indicates that the system, while not perfect, is relatively fair. As the economy has shifted over time, we have seen swings of deregulation and reregulation and it seems the pendulum is swinging in the reregulation direction presently.

    Addressing your question of why a particular agency would want control, it is simply because these issues generate great soapbox sound bites for a campaigning politician. Rent regulation effects about 1,000,000 New Yorkers and that is a lot of votes.

    By the way, I totally agree with you that “less is often more”.

  3. 3 Fred Sanders February 5, 2009 at 9:59 am

    Are the rent control laws constitutional? I understand that the law is legislated by NYS, however, have the laws been challenged at the federal level.

  4. 4 rknakal February 5, 2009 at 11:45 pm

    Hi Fred, Constitutionality is a valid point in this case. There was landmark litigation in Massachusetts years ago which tested the constitutionality of rent regulation. Ultimately, the public voted to materially alter regulation in owner’s favor. In this circumstance, it is a very valid argument. I have been informed by Patrick Siconolfi, the Executive Director of the Community Housing Improvement Program (CHIP), that the organization, which endorses owner’s positons on rent regulation issues, is considering a constitutionality challenge if these bills actually become law. Many insiders feel that the bills will not all pass as the Senate will realize that encumbering property value in New York City will erode the tax base of the state and force upstate citizens to, effectively, subsidize New York City residents.

    The City needs affordable housing but tougher regulation is not the way to accomplish this. Incentives for the private sector would be much more efficient and effective. As my friend Andrew Froehlich says, a great way to stimulate the creation of affordable housing is to encourage more 80/20 developments which the state can catalyze by increasing the bond cap which is significantly insufficient.

  5. 5 JM April 21, 2009 at 8:34 am

    Mr Knakal,

    How likely is this new legislation to become law?

    Would it be as horrific as it was in the 70’s where owners simply walked away from their buildings?

    JM

  6. 6 rknakal April 21, 2009 at 9:23 am

    Hi JM, The likelihood that these bills pass has been very volatile on a week by week basis depending on sound bits coming from politicians. We must realize that the positions taken by our elected officials are sometimes based upon a fund raising agenda. We will not know exactly how someone will vote until they have voted.

    If passed, the effects on the housing stock will be very negative and whether things get back to the way they were in the 1970s will largely be dependent upon how long and how deep our recession will be.

  7. 7 Miss the Hair Bob April 21, 2009 at 1:48 pm

    And I only say that because I have none. why anyone who has hair would cut it off is beyond me? havent ever heard of Samson…excuse didnt but didnt the latest crash happen around the same time as your haircut? All jokes aside you have my deepest respect

    As always your comments are insightful and correct or at least my opinion and yours posses a mutual agreement on the correct direction of the rent regulations. Have you considered or are you prepared to comment what affects each change would have individually? I would be very interested to hear what form you see passing? if the vote was tomorrow and they had to pass some of the changes, based your insight how do you see the CHIPS falling (no pun intended)

  8. 8 rknakal April 21, 2009 at 6:42 pm

    My barber would not like your post…..

    I do not want to guess what the ramifications would be if each of the bills pass. I will be happy to when we actually see which do become law. The bottom line is that it will be disaterous for the City if the state does not maintain control of the implementation of the guidelines and anything that provides a disincentive for the private sector to invest in the housing stock will really hurt the City. The present laws provide incentive for the private sector to invest in housing which is a stimulus package that is 100% privately funded. Who in their right mind would want to eliminate that from the market, particulary at a time when it is needed more than ever?

    I will provide feedback after the June vote. If you are interested, please go to http://www.masseyknakal.com and go to the “Reel” which is our in house blog. I wrote a piece yesterday entitled “New York Assembly Votes to put Thousands Our of Work”. It deals with many of the issues discussed above. Thanks for your post.


  1. 1 Booker says all options are on the table… How about repealing rent control? « Newark, NJ Commercial Real Estate Trackback on February 13, 2009 at 8:31 am

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