Since the calendar flipped to 2019, RSA’s goal has been to educate the public and develop productive dialogue with State Legislators so that drastic changes that could severely hurt rental property owners and their buildings are not made this spring.
Unfortunately, tenant advocates have created a poor perception of building owners and that has created negative coverage in the media by multiple news outlets. There are several myths that have been created about the various rent laws that are on the books. Here are the realities of those myths:
Myth: All apartments should be regulated regardless of the amount of rent.
Reality: There is no means-testing for rent regulated apartments. Deregulation, which has existed for more than 25 years, establishes some correlation between the rent protections afforded by regulation and a tenant’s ability to pay. Rent regulation is based upon a housing emergency which is defined as a 5% vacancy threshold. The vacancy rate for apartments with rents above $2,000 per month is 7.42%. The current deregulation threshold is almost $2,800 per month, which means that laws regulate the rents for tenants who can afford to pay almost $34,000 a year in rent; at the same time, the vacancy rate for apartments with rents above $2,500 is 8.74%. According to DHCR, there are almost 208,000 rent stabilized apartments with rents over $2,000 and, of that number, 106,000 stabilized apartments have rents over $2,733.75 (the prior deregulation threshold).
Myth: Owners use increases on preferential rents to create apartment turnover.
Reality: Around 30% of all rent registrations filed in 2017 for occupied apartments (approximately 255,000) indicated a preferential rent. Preferential rents are used when: the market rent in a building or neighborhood is less than the legal rent and/or the owner and tenant negotiate a rental amount which is mutually agreeable based upon the tenant’s ability to pay. The data establishes that:
1. 90% of preferential rents in a given year remain preferential the following year;
2. the median increase for renewal leases for tenants with preferential rents is just 1.8%, bringing the median rent to $1,440;
3. for vacancy leases for previously preferential rent apartments, the increase was just 7%, bringing the median rent to $1,850, and;
4. the median rent for all preferential rent apartments in 2017 was $1,499. In 2015, the rent laws were amended so that the amount of a vacancy allowance increase that could be charged after a preferential rent was phased in to discourage turnover.
Major Capital Improvement (MCI) Rent Increases
Myth: MCIs should be limited or eliminated because they are not necessary.
Reality: MCIs are the lifeblood of the regulated housing stock, the vast majority of which is more than 75 years old. The increases resulting from these improvements were never intended to be covered by the Rent Guidelines Board (RGB) process. Rather, a separate process, highly regulated by DHCR, governs the mechanism by which rent increases can result from these improvements. In a typical year, DHCR approves MCI increases for about 1,000 buildings with approved costs of approximately $200 million. The rent increase formula provides for an amortization period of eight years for buildings with less than 36 units and nine years for buildings with 36 or more units; the rent increase is capped further to minimize further the impact on the existing tenants. According to DHCR, the average rent increase is approximately $13.00 per room. Significantly, 135,000 lower-income households which receive SCRIE, DRIE and Section 8 are protected from these rent increases.
Individual Apartment Improvement (IAI)
Myth: IAIs should be limited or eliminated because they are not necessary.
Reality: Individual apartment improvements (IAIs) are the primary mechanism by which owners can keep their apartments habitable and marketable in an increasingly competitive environment. Given the age of the average stabilized building- more than 75 years- and the average length of a stabilized tenancy- more than 13 years- these improvements are critical to the preservation and maintenance of these buildings. Typically, the rent increase is borne by the next tenant, who will be living in an improved apartment. The law authorizes an increase of 1/40th of the cost for buildings with less than 36 units and 1/60th of the cost for buildings with 36 or more units. IAIs, along with MCIs, help explain why the United States Census Bureau reports that the housing stock is in the best overall condition since the Bureau started to track this data decades ago.
Statutory Vacancy Allowance
Myth: The statutory vacancy allowance is an unnecessary mechanism for increasing rents.
Reality: The statutory vacancy allowance, adopted by the Legislature, in 1997, reflects the reality that (a) renewal lease increases authorized by the RGB historically have failed to compensate regulated owners for their actual increases in operating costs and (b) the vacancy increase would be borne not by the current tenant but by the next tenant in occupancy, who would be in the best position to determine whether the new rental amount was affordable to them. The necessity for the statutory vacancy allowance has never been greater, as the RGB effectively frozen renewal lease increases. In 2011, the Legislature limited vacancy allowances to one per calendar year and, in 2015, required vacancy increases to be phased in where the prior tenant was charged a preferential rent.
Economic Importance to the City’s Economy
Myth: MCIs and IAIs have a negligible impact upon the City’s overall economy.
Reality: The economic importance of the improvements made by regulated building owners is vital to the City’s economy and these various components of the rent regulatory system all work in concert to contribute to the enormous economic impact. In 2018, for example, property owners spent $13.3 billion to maintain and improve rent stabilized properties resulting in a total economic impact of $22.4 billion. This includes $3.7 billion in real estate taxes paid directly to the City to hire police, firefighters and teachers. Overall, owners of rent stabilized properties supported more than 180,000 jobs in 2018 with an average salary of $62,300, which generated nearly $12 billion in total income.