- REAL ESTATE EDUCATION
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The Real Estate Board of New York to The Rent Guidelines Board Regarding Rent Increase Guidelines for 2022-2023
April 26, 2022
The Real Estate Board of New York (REBNY) is the City’s leading real estate trade association representing commercial, residential, and institutional property owners, builders, managers, investors, brokers, salespeople, and other organizations and individuals active in New York City real estate. REBNY strongly supports policies that expand the local economy, grow, and improve the City’s housing stock, and create greater opportunities for all New Yorkers. Thank you for the opportunity to provide our perspective regarding rent adjustments for the city’s rent-regulated apartments.
Each year, the Rent Guidelines Board (RGB) is responsible for evaluating the extent to which rents should be increased for apartments under its jurisdiction. In order to make accurate decisions, it is critical that the RGB have timely access to correct information about the cost pressures facing owners and tenants alike, as well as the overall economy.
Unfortunately, the RGB continues to rely on a methodology that utilizes inconsistent data from different time frames based on outdated assumptions. Most notable is the fact that the RGB utilizes information for the income and expense reports based on a limited set of two-year old data that fails to include buildings with fewer than 11 units. These challenges mean that the RGB is making decisions without the benefit of full and complete information at a time when rapidly rising inflation is placing immediate and significant economic pressure on owners.
In this context, it is particularly important to note that since the passage of the Housing Stability and Tenant Protection Act (HSTPA) in 2019, the annual rent increases established by the RGB are the only meaningful avenue by which owners can increase rents for a regulated unit. These rent adjustments are needed so that owners can keep up with costs and keep their buildings in a state of good repair. Indeed, since the passage of this law and following multiple years of rent freezes and nominal increases far below owner expenses, the Furman Center has documented that the quality of the building stock has already been adversely impacted, with a significant drop in alteration filings and the associated improvements to units and buildings.
Given the importance of the board’s decision, and to help the RGB make such decision based on more timely data, REBNY, RSA, CHIP and SPONY commissioned a study led by HR&A Advisors to study more current revenue and expense data and change over the last three years. This study utilized owner-provided TC201 tax forms from 2019, 2020 and 2021 to examine increases to owner expenses on a longitude basis to best make a prospective call on whether costs are going up or not, and whether income is going down or not. Conducted over three weeks, the study includes data for 2021 that was submitted to the City in March of 2021, and, while not definitive, points toward ways in which the RGB approach could be updated in the future.
The findings of the HR&A study underscore the existence of a widening and worrisome divergence between income from residential units and the expenses confronting rent stabilized property owners. For example, income decreased 20% since 2019, while expenses on rent stabilized property owners increased a total of 7%, with the highest individual increase coming from insurance, which has risen 44% since 2019. Additional findings of note include a tax burden of 25% of revenue, with an overall net increase from 2019-2021, and that smaller, fully stabilized buildings carry higher costs per unit.
The core challenge to the board is that up till today, they have been presented with information from different time periods, which impedes the ability to make a rational, prospective guideline based on where costs will be going. It is our intention in this testimony to share meaningful information on the current situation property owners are facing and identify a replicable path by which the RGB can improve its methodology and make decisions based on pertinent, timely data moving forward. Today, that decision can and must consider the regulatory changes from HSTPA, inflation, and the continued upward trend, which this study confirms, of increased costs of operating rent stabilized housing. It is our hope that the board will consider this information and issue a final vote for guidelines that fall within the recommended commensurate rates of 4.5 to 9%. This is the bare minimum to keep NOI constant at the current level, and this is the only path to avoid adversely impacting the quality and financial stability of the rent stabilized housing stock.
Members of SPONY, RSA, CHIP and REBNY collectively submitted 800 TC201 tax forms utilizing data from 2019, 2020 and 2021 for 273 buildings of all sizes, including 14 properties with less than 11 units (but more than 6). In total, the forms cover 25,600 units. 179 buildings comprised of 10,000 units are from 1946 and earlier, and 94 buildings comprised of 15,600 units are from 1947 and later.
The RGB studies currently do not include any smaller properties of less than 11 units. This is unfortunate because those buildings tend to be older and more likely to be fully stabilized. Fortunately, replicating the owner study by the board will be easier next year as a wider universe of TC201 data will be available from DOF beginning in July 2022. As a result, next year RGB could start including this universe of smaller buildings in its data analysis. An important benefit of using this data is that it ensures that the rent stabilized housing stock is more fully represented.
The data obtained by HR&A on behalf of the organizations generally reached the same conclusions as RGB’s reported data on key metrics including income, rent, expenses and overall decreases in NOI. This years’ Income and Expense Study found that from 2019-2020, NOI fell 7.8% in buildings containing rent stabilized units, for the fourth time in the last 30 years. Decreases in NOI were found in 70% of New York City neighborhoods, including those that did not lose significant population during the pandemic. These decreases were born mostly by pre-war buildings, which saw a dramatic decrease in NOI of 9.8%. According to HR&A’s study, NOI continued to go down in 2021, which would represent a fifth decrease.
However, there were key exceptions between the datasets. First, the TC201 data shows buildings pay a higher share of taxes with higher costs to smaller buildings overall when compared with the RGB Income and Expense Study. Second, many of the categories showed significant increases from 2020 to 2021, with taxes, maintenance and fuel costs rising again in 2021 after a dip in 2020. This is an important trend for the board’s considerations.
On taxes, the TC201s show taxes amount to 25% of income, versus 20% as reported by the RGB. Additionally, what our sample shows is that in absolute terms, smaller buildings have higher per unit costs in each category the RGB tracks. This is most pronounced for tax burden as well. The discrepancy between what our sample of property owners reported in property tax payments and what has been reported by the RGB is attributable to two distinctions in methodology. First, the majority of property owners who file TC201 forms are filing them in order to dispute their property tax bills, indicating that some may be paying amounts in excess of what is actually due.
The second reason points to a key difference in methodology between the HR&A and the RGB’s reports. The RGB Income and Expense Study average tax payment data includes properties that participate in the 421-a tax abatement program, and therefore do not pay full property taxes, while HR&A’s sample of property owners does not include properties that do not pay property taxes. For this reason, RGB’s average estimates are likely to skew much lower than what is paid by owners outside of the 421a program. Another reason for this discrepancy could be that HR&A’s dataset over-represents medium and large buildings in Manhattan and Queens, which would tend to have higher labor costs given the requirements under the building code for staff requirements based on building size, than smaller buildings in Brooklyn and Queens, which is most likely why labor and miscellaneous expenses are higher in HR&A’s dataset.
Changes in building maintenance, labor and miscellaneous expenses are also erroneously minimized due to the lag in the data previously presented to the board. While the 2022 Income and Expense Study found that there was a 9.8% decline in owners maintenance expenditure from 2019-2020, by utilizing TC201 data, the study shows there was actually a net increase in costs of 6% from 2019-2021. Additionally, while staff presented an estimate of a 1.7% decrease in fuel costs for next year, the TC201 data clearly shows a trend of increasing fuel costs of 16% since 2019. Given the predictions of the UN Climate Report and NYC Climate panel, which clearly refute the idea of “normal weather” and with the TC201 data trend, we implore the board to reconfigure their assumptions when calculating these estimates to understand fuel costs will continue to increase, not decrease.
The study clearly shows there is an undercounting of the tax burden for many owners. It also demonstrates the higher expenditures overall of smaller, fully stabilized buildings, a key subset of the stabilized stock. These findings are coupled with the abolishment of other income streams due to the passage of HSTPA in 2019 and volatility with inflation. It is clear that rent increases at minimum must remain within the recommended commensurate rates of 4.5 to 9%, and not below, and the board should give itself the broadest flexibility between the preliminary vote and final, as new inflation numbers will be issued during that timeframe. This is the bare minimum to keep NOI constant at the current level, and this is the only path to avoid adversely impacting the quality and financial stability of the rent stabilized housing stock.
There are current challenges with the information typically presented to the board. But these can be addressed. First, the assumptions used to adjust pricing down and inflate NOI up should be discarded. As the HR&A study was able to show, an overreliance on larger buildings and/or post war buildings can skew costs in many ways, most problematically with the tax burden as 421a buildings pay reduced taxes. There is a path forward to include smaller buildings which are older and tend to be fully stabilized. We would therefore encourage the Rent Guidelines Board to include these buildings and adjust their underlying assumptions regarding expenses. They should not be artificially adjusted downward.
Directly related to diminishing NOI is the 2022 Income and Expense Study finding that the number of financially distressed properties containing rent stabilized units has increased each year for the past four years, now to 6.5% of all buildings containing rent stabilized units. It is also important to note that NOI does not include the cost of debt nor does the board’s considerations include debt service. Lenders look for a building to meet two principal metrics – debt yield, which is NOI divided by the loan amount, to exceed 7.5%. This is tethered to interest rates and will be adversely impacted in the coming years. Additionally, loans won’t be made if debt service coverage is not met, or if NOI is not at minimum 1.25x the loan payment. For those buildings with existing loans, significant drops in NOI means distress. For those buildings without loans, drops in NOI mean a decreasing ability to access loans for capital improvements.
Therefore, the increases to the number of distressed properties is not slight. In fact, this pattern is representative of a larger problem with the financial health of buildings containing rent stabilized units, that if not addressed, will diminish the amount of housing available to New Yorkers during an ongoing housing crisis. As part of the REBNY submission in 2019, an analysis on the potential impacts from the HSTPA changes was shared, which showed that the HSTPA changes could dramatically change the economic viability of the operations and maintenance for apartment buildings across the city. This analysis estimated that within five years, approximately 272,000 units could be financially distressed and unable to afford any investment beyond basic maintenance, taxes, and utilities. As inflation, expenses and mortgage rates continue to rise while this Board remains the only outlet for owners to increase rents to pay for these costs, more buildings will experience distress if this board does not take action.
To keep buildings in good physical condition for the people who live in them, this Board must take full responsibility for their role in keeping stabilized housing financially and physically viable, especially given a now three-year old regulatory framework under HSTPA. Decreasing NOI and increasing distressed buildings are clear trend lines the board must address. Inflation must be addressed. These facts, independently, but especially compounded, clearly exhibit why property owners must have the ability to increase rents.
We hope this additional information on the current situation property owners are facing will allow the board to make a rational decision based on criteria from the same timeframes, that is current and timely. Year after year, the RGB has asked our organizations to provide the data we have identified as missing from staff reports, so we are pleased to present this study to you today. This study generally shows inflation, regulatory changes from HSTPA, and the troubling trends of distressed buildings and decreasing NOI continued to challenge the health of the stabilized stock into 2021. Based on three years’ worth of data, we believe these challenges will continue into 2022 and 2023.
Again, it is our hope that the board will consider this information and issue a final vote for guidelines that fall within the recommended commensurate rates of 4.5 to 9%. This is the bare minimum to keep NOI constant at the current level, and this is the only path to avoid adversely impacting the quality and financial stability of the rent stabilized housing stock.
Thank you for considering our testimony.