Commercial Grade

by Cicero, The appraisal philosopher

In that annual rite of spring the new rent stabilization increases have been announced by the Rent Guidelines Board.  This year the increases are fairly modest, only 2% for a 1-year lease and 4% for a 2-year renewal.  The vacancy allowance remains the same.  This is great theater for us real estate nerds, where the landlords are all depicted as greedy villains by the tenants, and the tenants are all depicted as greedy freeloaders by the landlords.  The current increases are the lowest that they’ve been in ten years, and well below the 10-year average of 3.5% and6.53% for one and two-year leases, respectively, as illustrated below:

For Leases                               ————Lease Term——-

Starting Between                                 1 Year              2 year

10/1/02 – 9/30/03                             2 .0%               4 .0%

10/1/03 – 9/30/04                             4.5%                7.5%

10/1/04 – 9/30/05                             3.5%                6.5%

10/1/05 – 9/30/06                             2.75%              5.5%

10/1/06 – 9/30/07                             4.25%              7.25%

10/1/07 – 9/30/08                            3.0%                5.75%

10/1/08 – 9/30/09                            4.5%                8.5%

10/1/09 – 9/30/10                            3.0%                6.0%

10/1/10 – 9/30/11                            2.25%              4.5%

10/1/11-9/30/12                              3.75%              7.25%

10 year average                                 3.50%              6.53%

New York’s Rent Control and Rent Stabilization laws were introduced many decades ago, originally intended as temporary measures. They have proven to be surprising durable, and owing to their longevity have grown to become part of the very fabric of the housing market in New York City. Some people – particularly those who do not happen to live in a regulated unit with a sub-market rent – view these laws as unfair, essentially giving an arbitrary windfall to select individuals while leaving others paying sky-high rents.

Over the years, there have been various challenges to these laws, and the Supreme Court is currently considering a case filed by James Harmon, a Manhattan landlord  who is questioning New York’s rent control laws on the basis that they constitute a unconstitutional taking of property. How the court will decide this case remains to be seen, but given that similar challenges have been struck down in the past, it would be surprising if the challenge is upheld.

On the surface, it would seem that this battle is just about dollars and cents. However, a recent feature in the New York Times suggests that there might be more than financial implications at stake here. The article tells of one Mr. Arnold Warwick, who, thanks to rent control, has the good fortune of occupying a 1,200 SF apartment in Greenwich Village for a the measly sum of $331.76 per month – a small fraction of what it would rent for at market. Mr. Warwick, who has lived in the unit for over 50 years, is quoted as saying “I don’t plan on dying, because I don’t want to give up a rent-controlled apartment.”

So, rent control may be much more than a financial boon. In some cases, it may represent nothing short of a reason to go on living. If New York’s rent control laws are struck down, could this cause some folks to give it all up and go on to a better place?

We’re pacing the hallways eagerly awaiting the release of the 2011 Housing & Vacancy Survey, the triennial study prepared on behalf of HPD that gives a snapshot of New York City’s housing market.  In our appraisals we continue to cite the most recent survey published in 2008, to which we’ve received comments like “isn’t there more recent data available?” and to which I reply “No!”   According to the authors it should be released by the end of March, however, there has been a recent release of Select Initial Findings.  These include:

• The number of housing units in New York City was 3,352,041 in 2011, the largest
  housing stock in the forty-six-year period since the first HVS was conducted in 1965
• Of the City’s 3,352,000 housing units, 997,000 units or 30 percent were located in
  Brooklyn. Smaller numbers were located in Manhattan (841,000 or 25 percent) and
  Queens (828,000 or 25 percent). The remaining fifth was located in the Bronx
  (510,000 or 15 percent) and Staten Island (175,000 or 5 percent)
• There were 987,000 rent-stabilized units (occupied and vacant available), comprising
  45 percent of the rental stock in 2011
• Rent-controlled units numbered 38,000, or 2 percent of the rental stock in 2011

Great stats, right? Haven’t compared this yet with the prior 2008 data, but is it any wonder that we love this stuff?

I’ve been following with great interest the lawsuit brought by James and Jeanne Harmon, owners of a small brownstone building on West 76th Street.   The Harmons have three rent-stabilized tenants and have been fighting to have the rent stabilization laws overturned, on the grounds that it violates due process laws of the 5th and 14th amendments and represents a taking of their property.  Their battle has received a lot of press, most recently this past weekend in a New York Times article, Wars Over Regulation of Rent Only a Sideshow.  How can it not make you angry to read that  one of their tenants is paying a stabilized rent so far below market that she can afford a weekend home on Long Island, which is effectively being subsidized by the Harmons!

According to The Times article, Mr. Harmon has petitioned the US Supreme Court to hear his case.  I have no idea how likely it is that the Court will do so, but I hope they do.  The Harmons’ situation is by no means unique. Landlords throughout the city are effectively subsidizing tenants’ luxuries, while another tenant in an identical apartment across the hall may be paying four times as much in rent, or more.  I am very much in favor of maintaining affordable housing in New York City (I’m even a member of the NYS Affordable Housing Association!), but current rent stabilization laws are not the way to do it.

The tenants and landlords are apparently getting ready for another battle as rent stabilization comes up for renewal.  According to an article in today’s Wall Street Journal, Democrats Focus on Rent Overhaul, State Assembly Speaker Sheldon Silver wants to tie in the renewal of 421a tax benefits with greater rent stabilization protection.  The Senate Republican majority, traditionally representing the interests of the landlords, will fight to weaken regulation.

According to the Rent Guidelines Board 2010 report, Changes to the Rent Stabilized Housing Stock in 2009, there was a net loss of 10,052 rent stabilized apartments in 2009 (aan increase of 22% over 2008 and the highest single year loss since RGB began producing its report.  Subtractions from the rent stabilized building stock may be a function of:

• Luxury/Vacancy decontrol
• Co-op/Condo Conversions
• Expiration of tax benefits (421a and J-51)
• Substantial rehabilitation
• Conversion to commercial use
• Other losses such as demolition and condemnation

This is summed up nicely in the following graph, reproduced from the Journal article:

My guess is that at minimum the threshhold for luxury decontrol will be increased from the current $2,000, which has been unchanged since the Rent Regulation Act was enacted in 1997.  Should all make for some interesting theater in Albany.

by Gleb Lerman, The Affordable Oracle

Mayor Mike Bloomberg’s Affordable Housing Plan has grandiose ambitions to create 165,000 affordable units. So how does an owner of a rent stabilized building benefit from this monumental commitment of tax dollars. Simple, get your low-income, rent stabilized tenants to register for the housing lotteries and hope they win. Your management company should stay on top of housing opportunities and when one becomes available reach out to the tenants and help them fill out an application. If they win you win.

Lets say you have a low-income tenant that is occupying a 4BR apartment for $700 per month. If you turn over that unit you know you can get $2,200/mo for it. In an 8% yield environment that turnover will increase the worth of you building by a quarter of a million dollars, not bad for filling out a lottery application.

Now this is a perfect scenario and in the real world and you have to consider the following things:

• What if you tenant still wants a buy-out to move.
• What if your tenant sublets the affordable unit to a family member illegally?
• You will have to perform a lot of work on the apartment to get the rent up to market?
• What if every landlord starts doing this and the chances of winning the lottery move from 1 out of 1,000 to 1 out of 10,000?

Of the city’s nearly 2.1 million rental units about nearly half are rent stabilized.  This uniquely New York form of rent protection has evolved into one of the most arcane systems of rent regulation in the country.

Rent stabilization don’t just stipulate how much of an increase is permitted annually for a 1 or 2 year lease renewal.  (If you haven’t seen the clips of the hearings with the rent guidelines board and tenant groups negotiating on annual increases on the evening news, you’ve been missing some great theater.  All civil discourse breaks down as each side claims poverty and screams at the other, seeking to portray them as greedy and dishonest.)  Rather the guidelines are an intricate flow chart of “if A then B” rules that have tenants and landlords alike scratching their heads.  For example,

Where a lease for a dwelling unit in effect on May 31, 1968 or where a lease in effect on June 30, 1974 for a dwelling unit which became subject to the Rent Stabilization Law of 1969, by virtue of the Emergency Tenant Protection Act of 1974 and Resolution Number 276 of the New York City Council, contained an escalator clause for the increased costs of operation and such clause is still in effect, the lawful rent on September 30, 2008 over which the fair rent under this Order is computed shall include the increased rental, if any, due under such clause except those charges which accrued within one year of the commencement of the renewal lease.…

Huh?

Advocates of the rent stabilization laws insist that these guidelines are a critical component of the City’s affordable housing stock.  If that were true it might be a somewhat valid argument.  But holding a rent stabilized lease these days is one of the most broken and abused systems that we have and is akin to winning the lottery; rent stabilized tenants could just as easily be hedge fund managers as day laborers.  I know there are many tenants with wildly below market stabilized leases that could, as a consequence, buy weekend homes in the country.  And who could forget Congressman Charlie Rangel’s four rent stabilized apartments in Harlem.

Decoding rent stabilization is one of my favorite past times.  More on this to come in the future.

The Stuyvesant Town acquisition by Tishman Speyer and Blackrock will no doubt be a case study for business and real estate students for years to come.  It’s got drama, intrigue and 80 acres of sexy real estate.  The $5.4 billion acquisition price was the largest residential transaction in US history, and the court ruling that rents were improperly raised to market levels (while receiving J-51 tax benefits) sent shock waves through the industry.  And now, the owners are officially in default of their bond payment.  The saga of Stuy Town is far from over!

At the height of the market investment sales brokers reported that demand for product was so strong that the winning bidder was inevitably the one that would underwrite the most aggressive rental growth.  I can just imagine the kind of cash flow models that the analysts at Tishman and Blackrock generated in order to justify the price tag.  I would have loved to listen in on that presentation to senior management.  (So, Mr. Speyer, all we do is turn over 10% of the rent stabilized units in the first two years and bring them to market…)   With one simple change in the model’s assumptions (7% rental growth in years 2 through 5 instead of 6%?), the impact on value can be dramatic.  Of course, every major asset that is now on the brink of default used similarly optimistic assumption.

When the dust settles, this will no doubt be one for the history books.  Or maybe I’ll just wait for the movie.

Much has been written on the Appeal’s Court recent ruling on Stuy Town and Peter Cooper Village.  Like much of the real estate community I have been asking myself how anyone with $5.4 billion to spend could have blown it like this.  I also asked myself why there was even a question since rent stabilization guidelines have always said that buildings that receive tax benefits are rent stabilized for the duration of those benefits.

In a just released report, Barbara Byrne Denham, Chief Economist of Eastern Consolidated Properties, lays out a clear explanation of the controversy.  In her report The Ruling On Stuyvesant Town and Peter Cooper Village Rent Decontrol: A Synopsis of the Decision and its Implications, Ms. Denham sheds some light on why the Appellate Division overturned the Supreme Court’s initial ruling dismissing the tenants’ complaint.

In short, Ms. Denham explains that

…the RRRA made an exception to luxury decontrol which stated that the deregulating of units “shall not apply to housing accommodations which became or become subject to the Rent Stabilization Laws (RSL) by virtue of receiving tax benefits pursuant to” the J-51 laws (section 489 of the real property tax law).

This had been commonly interpreted to mean that buildings that were stabilized prior to receipt of any tax benefits could de-control units.  However, the Appellate Division ruled

The majority further disputed the meaning of “by virtue of” stating that “by virtue of” does not necessarily mean the same thing as “solely by virtue of.”

To me this sounds eerily reminiscent of that famous line “it depends what your definition of is is”!

Well, I finally get it now!   Many thanks to Barbara Byrne Denham for explaining what this whole mess was really about.