Testimony of the Real Estate Board of New York Before the Assembly Standing Committee on Housing Regarding Rent Regulated Housing

REBNY strongly supports policies that expand the local economy, grow and improve the City’s housing stock, and create greater opportunities for middle class New Yorkers. Thank you for the opportunity to provide our perspective regarding rent regulated housing in the City of New York.

New York City is a city of renters. Of the approximately 3.2 million units of housing in New York City, 68% are rental units and 38% of its total housing inventory is rent regulated. The current rent regulated system has allowed for continued capital investment in buildings that have resulted in a historically low dilapidation rate of 0.2% citywide. With 71% of the rent stabilized housing stock built prior to 1947, maintenance and operational costs are expected to rise as these older buildings will require major system overhauls like gas, electricity, water, boiler, elevator, and roof replacements. RGB increases and levers permitted under the Rent Stabilization Law such as Major Capital Improvements (MCIs), Individual Apartment Improvements (IAIs), and Vacancy Allowance provide important funding streams to keep buildings in a state of good repair.

Recently, policy leaders and advocates have proposed drastic and sweeping changes to the rent regulation system without a detailed analysis of the consequences or an appreciation of the interconnectedness of the system. Changes that severely limit or eliminate necessary streams of revenue will lead to deteriorating housing conditions, discourage the creation of new stabilized housing needed to alleviate the housing crisis, and hurt the households most in need of help.

The real estate industry acknowledges that statutory changes are necessary to increase transparency and better protect tenants from a minority of unscrupulous landlords. To be clear, we are not calling for the end of the rent regulated system, as these units serve an important role in providing safe housing to many New Yorkers. What is needed is responsible rent reform that protects tenants while maintaining the quality of our housing stock.

Funding Streams for Maintaining and Operating Buildings

Rent collected pays for expenses like taxes, insurance costs, fuel, labor, utilities, and maintenance. The difference between revenue (rent) and expenses is known as Net Operating Income (NOI). While some has confused NOI for profit, it is important to note that NOI is a measure of a building's ability to meet three criteria: repayment of mortgage or finance costs, reinvestment in the property; and, profit. NOI can be raised by Rent Guidelines Board Increases, MCIs, IAIs, Vacancy Allowances, Preferential Rents, and Vacancy Decontrol.

Rent Guidelines Board

Today, the RGB is a system ill-equipped to match appropriate rent increases with expense growth. Over a 20-year period and across multiple mayoral administrations, RGB increases averaged 2.7%, while expenses for property owners increased more than twice that rate, at 5.5%. This incongruence is a result of a highly politicized process that relies on a flawed methodology that artificially inflates NOI and arbitrarily reduces expenses.

Data used by RGB staff to calculate NOI is incomplete, inaccurate, and outdated. A 27-year old analysis is used as a basis for adjusting expenses downward 8% and a 35-year old Price Index does not account for the costs associated with government mandates like building façade maintenance, increased elevator inspections, and lead paint abatement to name a few.

Additionally, while the RGB studies exclude smaller 1-10 unit buildings that account for half of all rent stabilized buildings, they do include larger buildings with at least one rent stabilized unit. This approach inevitably captures buildings created through programs like 421a that include predominantly unregulated rents and greatly inflates reported income for “rent stabilized” buildings. As a result, RGB reports show a growth in income which does not reflect the reality of buildings which contain predominantly rent stabilized units — especially the over 16,000 fully stabilized buildings throughout the city.

Finally, NOI, as calculated by the RGB staff, omits three significant expenses: capital reserves and expenditures, business taxes, and most importantly debt service.

Rising maintenance costs, an aging building stock, and insufficient increases from the RGB have placed more pressure over time on the levers permitted through state law to make up the difference.

Major Capital Improvements are how landlords recoup investments in major capital components of a building, including work on building components such as roof replacements, hot water heaters, air conditioners, structural steel and fire escapes. These improvements are financed with permanent rent increases that are issued by DHCR upon application by a landlord. In 2017, 983 MCI applications were granted, representing roughly 0.1% of the total stabilized units, according to DHCR. The average MCI rent increase per month was just under $40 for an average apartment.

Individual Apartment Improvements provide incentives for owners to reinvest in and rehabilitate already vacant rent stabilized units. A permanent rent increase is applied for improvements of individual apartments based only on the cost and installation of the improvement. Roughly 1.4% of the stabilized housing units experienced an IAI increase in 2017. The IAI process is self-reported and does not require approval from DHCR; tenants may challenge the rent increase and ask for proof of work. Currently, DHCR does not retain data on the average IAI increase.

Preferential rents provide landlords the flexibility to provide lower rents to tenants so that they can avoid vacancies in their apartments. Upon lease renewal or vacancy, a landlord can raise preferential rents to the legal regulated rent allowed by the law. In 2017, nearly 30% of all rent stabilized units had a preferential rent, with 90% of preferential rents remaining below the legal rent in the following year.

The Vacancy Allowance permits owners to raise the rent of a vacant rent stabilized units by up to 20% for an incoming tenant with a two-year lease, minus the percentage difference between the RGB current guideline increases for one and two-year leases.

High-Rent, High-Income Decontrol allows for the deregulation of apartments based on both the rent level and the income of the tenant. An apartment may be deregulated if the rent has reached the RGB determined "deregulation threshold," and the income of the tenant has been $200,000 or more for the two preceding years. Like high-rent vacancy decontrol, high-rent high-income decontrol was intended to ensure that rent stabilized apartments are occupied by those whose incomes limit their housing choices.

Changes to Current Rent Regulations

Proposed changes to the rent regulation system contemplate the wholesale elimination of increases beyond those provided for by the Rent Guidelines Board – including MCIs, IAIs, vacancy allowance, preferential rents, and high rent decontrol. To better understand the impacts of any changes to the rent regulation system, REBNY commissioned the consulting group of HR&A Advisors, Inc. to develop models based on publicly available data that could analyze changes to various building typologies that collectively represent 84% of the city’s rent stabilized stock.

The results were startling. The legislative proposals would dramatically change the economic viability of the operations and maintenance assumptions for apartment buildings across the city. Within 5 years, approximately 414,000 units could be financially distressed and won’t be able to afford any investment beyond basic maintenance, taxes, and utilities. Without a mechanism to recoup capital improvements, owners will undertake less work and housing quality will deteriorate. This will lead to housing insecurity for those tenants in those units.  Given the vacancy rates at lower rents, those tenants will not have the option to move to another rent stabilized unit if their current unit becomes dilapidated.

As NOI decreases across these buildings the Department of Finance’s property assessments and related tax bills will be adjusted downward. The potential policy changes to rent stabilization could reduce annual property tax revenue by up to $2 billion per year due to steep drops in real estate value as calculated by analysis conducted by HR&A on behalf of REBNY.

Finally, if the proposed funding streams are eliminated, it will place greater pressure on the RGB to raise rents approximately 7.5% annually to make up the difference. This is not the kind of rent reform that helps tenants and owners.

Current legislative proposals that would eliminate all funding streams beyond RGB increases will have negative impacts on NOI and are highly untenable for the city’s housing stock. The New York State Assembly has an opportunity to be responsible, to rely on the data presented, and to provide revenue streams that continue to allow for the maintenance of quality housing for millions of New Yorkers.

Responsible Reforms

RGB Increases

Within the construct of the rent stabilization law, the RGB process itself provides an opportunity for responsible rent reform. It is no secret that this process and historic results are ones that landlords and tenants alike find frustrating. Serious consideration should be given to moving to a new standard model that inputs various indices for generating RGB increases that can operate independent of political machinations. The Board’s determination should be the result of a consistent framework year to year to provide predictability in balancing tenant and landlord needs.

There are merits to a formula system that encompasses the following: CPI and wage growth; property taxes, unfunded regulatory requirements, subsidized regulatory requirements; labor; maintenance; insurance; administrative costs; capital investment needs; debt service; and utilities such as energy, water/sewer, and fuel. Public input is an important part of good government and it should be used to provide data discrepancies, new methodologies or to highlight sudden shifts in the market.

Tenant Rights

Current statutory requirements for tenant rights are in multiple sections of the law and could be consolidated for ease of reference. The statute does not currently contemplate today’s technology for correspondence, nor does current statute contemplate a hostile, tenant-generated living environment, such as patterns of sexual harassment, in the same way that workplace law has been updated. Statute should be updated to protect tenants and give landlords the ability to mitigate against hostile or toxic behavior.

Enforcement and Transparency

REBNY unequivocally supports better enforcement and transparency. It is critical that DHCR be adequately resourced so that they are equipped to improve data collection and more effectively target bad actors. A modern computer system that can process the digital collection and retention of receipts would dramatically improve record keeping.

Additionally, DHCR should release an annual public report on the number of MCIs granted and the number of IAIs filed, the average cost and type of improvement, and the average amount of rent increase.

The current process for self-reporting of IAI’s can also be improved. Compliance could be dramatically enhanced by requiring: an affidavit for work done, certification that contractor is not related to property owner, and a rider to include proof of work submitted to tenants upon lease renewal. In addition, the State should implement treble damages for false certifications or fraudulent paperwork.

Conclusion

The City is experiencing an affordability crisis that impacts hundreds of thousands of New Yorkers both in and out of rent stabilized housing. However, it is important to note that rent stabilized housing is not based on the income of the occupant and is therefore not an affordability program, but rather a tenant protection program. For example, there are over 22,000 rent-stabilized apartments with household incomes over $199,000 and 2,300 were occupied by households making more than $500,000. If current tenant income is warranted as a consideration for rent increases, then the regulatory framework needs to change from stabilization to one based on rent burden. An income-based system must include subsidy to either tenant or landlord to maintain current levels of maintenance and investment. It does not serve the public to solve for housing affordability and not for quality.

Capital investment is the lifeblood of rental housing. Rental housing with a steady and reliable stream of capital thrives, and conversely tenants suffer when revenue is lacking or constrained by unrealistic restrictions on rent growth. Providing stable funding streams is essential to the success of providing safe, quality private rental housing.

New Yorkers deserve responsible policies that support existing high-quality rental stock and encourages the construction of more housing to increase supply and ease vacancy rates at lower rent levels. Thank you to the members of the Assembly Standing Housing Committee for considering our analysis.

NOTE: Attached to our testimony is a complete analysis on potential changes to the current rent regulated system. Also attached is our testimony before the Rent Guidelines Board which details the concerns with their methodology and data.