Testimony of the Real Estate Board of New York Before the Rent Guidelines Board Regarding Lease Renewal Guidelines for 2019

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 to the Rent Guidelines Board (RGB) for the opportunity to provide our perspective regarding rent adjustments for the city’s rent regulated apartments.

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 play a critical role — in combination with levers permitted under the Rent Stabilization Law such as Major Capital Improvements (MCIs), Individual Apartment Improvements (IAIs), and Vacancy Allowance — in providing 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 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.

Observations on RGB Methodology

The RGB should be commended for the vast information they provide and the clarity with which they present the many challenges in the data. Those challenges have led to a system ill-equipped to match appropriate rent increases with expenses over time.

The rate of RGB allowed rent increases has not kept up with the rate of annual 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 Net Operating Income (NOI) and arbitrarily reduces expenses.

Data used by RGB staff to calculate NOI is incomplete and inaccurate. An outdated 27 year old analysis by RGB and the Department of Finance (DOF) is used as a basis for adjusting expenses downward 8%. Similarly, costs of building façade maintenance, increased elevator inspections, lead paint abatement, and any other government mandates imposed since the Price Index was last updated 35 years ago are not considered by the Board.  

Additionally, while the RGB studies exclude smaller 1-10 unit buildings, they do include larger buildings with at least one rent stabilized unit. In using this low threshold, it inevitably captures buildings created through programs like 421a that include predominantly unregulated rents. Aggregating these newly-built units whose initial rent is at market with the older rent regulated units whose baseline rent may have been established 50 years ago greatly inflates reported income for “rent stabilized” buildings. As a result, the report is likely to 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.

In spite of a methodology that results in an overstatement of a building’s NOI, this year’s RGB Income and Expense study shows a stagnant 0.4% increase in NOI.

Real Property Tax Inequities

New York City’s real property tax system places an inequitable financial burden on rental apartment buildings in a number of ways. One way is the disproportionate share of the tax levy imposed on these properties compared to their share of the City’s market value. Since 2007, the property tax levy for Class 2 has increased from $5.2 billion to $10.8, a 107 percent increase — an annual average of 8.9 percent.

This increase falls disproportionately on the rental properties in this Class, largely due to a provision in State law that requires that coops and condos be valued based on comparable rental property. As taxes on apartment rentals have increased, some properties are being taxed in excess of 30 percent of their gross income.

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 the vacancy allowance, Major Capital Improvements, Individual Apartment Improvements, luxury decontrol, and preferential rents.

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 that could analyze changes to various building typologies. 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.

Many of these buildings are owned by small landlords. This will create a burden for tenants of smaller landlords who will not be able to reinvest to maintain the quality of their properties. Without a mechanism to recoup capital improvements, owners will undertake less work and housing quality will deteriorate.

As NOI decreases across these buildings the DOF'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.

Rent Guidelines Board Formula

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. This Board has an opportunity to be responsible, to rely on the data presented, and to provide increases that continue to allow for maintenance of quality housing for millions of New Yorkers. It is no secret that this process and historic results are ones that landlords and tenants alike find frustrating. This challenge provides an opportunity for responsible rent reform. 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.

This Board’s determination should be the result of a consistent framework year to year to provide predictability in balancing tenant and landlord needs. 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.

We believe there are merits to a formula system and therefore suggest a formula 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.

Conclusion

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.

The City is experiencing an affordability crisis that impacts hundreds of thousands of New Yorkers both in and out of rent stabilized housing. 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.

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 RGB for considering our analysis.

NOTE: Attached to our testimony is our complete analysis on potential changes to the current rent regulated system.