An important part of the housing ecosystem we represent are the owners and managers of tens of thousands of rent stabilized units. Thank you to the members of the New York City Rent Guidelines Board (RGB) for the opportunity to provide our perspective regarding rent adjustments for the city’s rent-regulated apartments.
The annual rent guidelines established by the RGB are the only meaningful, system wide path for financial solvency, and therefore housing quality, for stabilized apartments. As we have previously noted, since the passage of the Housing Stability and Tenant Protection Act (HSTPA) in 2019 and the elimination of vacancy allowances, these adjustments are also the principal way to change rents at turnover as well. These rent adjustments are critically necessary for owners to keep up with costs and keep their buildings in a state of good repair. Indeed, since the passage of the 2019 law, and multiple years of rent freezes and nominal increases far below owner expenses, there are an increasing number of distressed buildings and housing deficiencies. This reverses decades of positive trend lines of a decline in deficiencies and the number of distressed buildings prior to 2019.
The Federal Reserve conducted a comprehensive study to explore the impact of financial constraints on building maintenance and tenant welfare, which identified a correlation between financial constraints and an increase in code violations for the affected buildings. Furthermore, the study analyzed the effects of statute changes, much like the ones adopted in 2019, that reduced the expenses property owners could recover through improvement costs. As a result, a notable increase in financially constrained buildings and a subsequent rise in violations per building were observed, compared to unaffected buildings in the control group. Restricting rents has contributed to a decline in overall building maintenance.
Therefore, given the importance of the board’s decision, and to help the RGB make such a decision based on the most recent data available, REBNY, RSA, and SPONY commissioned a study led by HR&A Advisors to study more current revenue and expense data and change over the last four years. Conducted over three weeks, the study includes data for 2022 that was submitted via the TC201 form, or “Income and Expense Schedule for Rent Producing Properties” to the NYC Tax Commission in March of 2023.
This study utilized over 1,200 owner provided TC201 tax forms from 2019, 2020, 2021, and 2022, representing over 400 buildings, to examine increases to owner expenses and the impact on income on a longitudinal basis. TC201s were chosen because they share the same fields or categories as the Real Property Income and Expense (RPIE) Statements and because Form TC201 requires certification and financial audit by an independent certified public accountant.
TC201 data can also be accessed via a commercial service known as Genesis. However, this data does not include 2023 filings and relies on the fact that TC201 data is made public only for those owners who ultimately appeal their property tax bills. As such, the commercially available data lags by a year, and may be skewed as it only represents buildings with appeals. While the service is an exciting addition to the data landscape, it is new, and we are still exploring how this data ties to the building typologies used in the PIOC. Importantly, both this information and that of the current survey of 2022 TC201s are additive to the board staff’s own data work.
By collecting TC201 forms from 2022 and earlier, from a cross-section of NYC building typologies, we can provide metrics related to the income and expenses of New York City’s rent regulated housing stock with the most recent data possible, looking beyond the one-year lag in RPIE data available to the Rent Guidelines Board. Last year, we engaged in this same exercise, showing 2021 TC201 data for the 2022 proceedings, where we highlighted exponential increased costs in fuel and insurance, which this year’s RGB staff reports affirmed.
The 2022 TC201 data clearly shows that operating and maintaining rental housing has only gotten more challenging, affirming the expense growth trends, especially in insurance and fuel, and the significant, gross income declines presented to the Rent Guidelines Board by board staff over the last month.
The 2022 TC201 dataset also affirms the income-to-rent ratios across the five boroughs from the Rent Guidelines Board. While higher income and rent numbers were found in Core Manhattan, this is due to a variety of factors: primarily the over representation of larger buildings with more units, and an under representation of smaller buildings which tend to be 100% stabilized. This over representation of larger buildings is influenced by the city’s development history, which encouraged high-density residential development in Core Manhattan. Much of that development occurred after 1961, therefore it is not a surprise to find larger buildings built post-1974 in Core Manhattan; these tend to contain more units overall and have more market rate apartments.
Another factor is a reliance on retail rents, which have yet to recover to pre-pandemic levels. An additional consideration is the self-selection of those who chose to file TC201s and those who are required to file RPIEs, which does not include a requirement for buildings with less than 10 units.
Despite the Core Manhattan numbers, there has been a 38% decline in gross income since 2019. The TC201 data from 2022 also shows that all income categories remain lower than 2019 levels, including regulated and unregulated rents. Market rate rents remain 21% below pre-pandemic levels.
On the expense side, property taxes continue to be the top expense for owners, while fuel and insurance rates are the top drivers for expense growth. Fuel costs have continued to increase into 2022 and have risen on average 40% since 2019. Fuel costs are higher on a per unit basis for buildings with 11-19 units, which have seen costs rise 59%.
Insurance costs continue to increase into 2022, rising on average 53% since 2019. Buildings with 11-19 units had the highest increase in insurance costs with a 78% increase, followed by buildings with 20-99 units that had insurance costs increase 71%. The increases in insurance reflect the risk in operating and maintaining rental housing in New York City, inclusive of unpaid rental arrears, the cost of regulatory compliance, and financing and debt risk.
Debt service and debt risk, or the ability to pay debt service, are additional metrics that should be considered in the determination of any rent increase. First, it is first important to note that after expenses such as property taxes, fuel and insurance, the Net Operating Income (NOI) must still pay for debt service, capital improvements, and the personal income taxes of the property owner. When it comes to establishing debt risk, the Congressional Research Service (CRS) states that lenders typically require a minimum debt service coverage ratio (DSCR) of 1.25 of higher. They also report the Loan to Value Ratio (LTV) reflects the initial amount of equity a developer has invested in a property. LTV and DSCR are key factors to predicting defaults or debt risk. That’s because when the current property value declines far below the outstanding loan balance amount, mortgages become under water. DSCR is susceptible to fluctuations during unexpected periods of high vacancy, or non-payment.
For building owners with mortgage payments, the survey and RGB data shows that building income has been constrained at the same time that mortgage payments have gone up. This means these buildings don’t meet lender metrics for debt service coverage and their loan to value is trending in the wrong direction in that the loan value is higher than what the building is worth.
Over the last several years NYC’s multifamily rent stabilized housing stock has experienced multiple “shocks” which are adversely impacting revenue and building value, and in turn, increasing the risk for default. These shocks include extended periods of non-payment, as tracked by the National Multifamily Housing Council, and over a year of volatility with inflation and increasing interest rates. A Congressional Research Service (CRS) report outlines that multi-family mortgages typically have shorter maturities, prepayment penalties and adjustable, floating rates. Unfortunately, those rates have rapidly increased over a period where income has significantly decreased.
What this means is that factors such as rising interest rates have increased debt service or amount owed to the banks at the same time as DSCR and LTV have dropped. Therefore, debt risk has increased as Net Operating Income (NOI) has decreased.
To keep buildings in good physical condition for the people who live in them, we encourage this Board to therefore consider the decreasing NOI and decreasing income of the stabilized stock, coupled with the increasing expenses and increasing numbers of distressed buildings in its deliberations for the 2023 guidelines.
Thank you for the opportunity to present the 2022 TC201 survey.