The Slow Fadeout of Rent-Regulated Apartments [New York City]

CHANGING LANDSCAPES: At Peter Cooper Village, apartments have begun moving out of the system of regulation. Nicole Christie lives in a new building on East 34th Street that limits annual rent increases.

n the last decade, the number of rent-regulated apartments in New York City has been gradually diminishing. Now, statistics indicate, the gradual has become less gradual - the era of rent regulation is ever more rapidly fading.

According to figures provided by landlords to the New York State Division of Housing and Community Renewal, 13,024 apartments were removed from the rolls last year, compared with 8,402 in 2003 and 6,406 in 2002.

For decades, New York City was synonymous with rent regulation, and a regulated apartment, protected by a system of rent control and rent stabilization that kept rents from rising abruptly, was the holy grail. In the early 60's, 77 percent of the city's rental housing stock was covered by the system; now, 51.5 percent of the stock is regulated.

"I'm stunned by the pace of destabilization," said Andrew A. Beveridge, a sociology professor and a demographic statistician at Queens College.

Precise figures for how many apartments have left the system over the years do not exist because various governmental agencies rely on different data sets, and their samples are flawed. They do, however, point in one direction - decreasing units.

The process is quite visible at Stuyvesant Town and Peter Cooper Village, two vast, adjoining apartment complexes along First Avenue between 14th and 23rd Streets that have stood as bulwarks of the city's rent-regulated stock for half a century.

But four years ago, as rents for vacated, renovated apartments at the two complexes reached $2,000 a month, the process of deregulation began. When a tenant moves out or dies and the allowable rent reaches that level, a landlord can choose to take the apartment out of the system. Stuyvesant Town and Peter Cooper Village have many older people in their regulated apartments.

While regulated rents at the complexes range from about $1,400 to $1,800 for a two-bedroom, a deregulated rent for the same space is $3,200. So far, according to representatives of the Metropolitan Life Insurance Company, which owns the complexes, about 20 percent - or 2,240 - of the 11,216 units in 110 buildings have been deregulated.

Rent control applies to rental units in buildings constructed before 1947 that have been continuously occupied by the same tenant or a legal successor tenant since before July 1, 1971. Rent stabilization generally applies to apartments in buildings with six or more units built between 1947 and 1974, to some loft buildings, and to some buildings whose landlords participate in tax-abatement or other government programs.

According to the New York City Housing and Vacancy Survey, conducted by the Census Bureau every three years, there were 1,241,367 regulated apartments in the five boroughs in 1981. Over the next 18 years, by 1999, the total decreased to 1,146,459 - a drop of 94,908 units. And by 2002, just three years later, an additional 73,271 apartments were deregulated. That constituted a net drop of 168,179 units over those two decades.

But, as Ingrid Gould Ellen, deputy director of the Furman Center for Real Estate and Urban Policy at the New York University School of Law, pointed out, there was a significant sampling error in the 1990 census, upon which the Housing and Vacancy Survey is based - an undercount of about 400,000 households in the city. "When you look at changes between the 1990's and the 2002 survey, the samples are not comparable," Dr. Ellen said.

For a number of years, building owners were required to file reports with the state on the number of units deregulated each year. But their participation in that system was voluntary between 1994 and 2000, so those numbers are also not considered ideal as a historical measure.

Nevertheless, all numbers indicate a decrease, and there is, not surprisingly, a debate over whether the change is good or bad for New York.

Many lament it as a shift that will reduce the amount of housing that can accommodate people earning typical incomes. "We're already in the middle of a process through which a large proportion of the city's affordable rentals are slipping out of the stock," said George W. McCarthy, a housing economist at the Ford Foundation.

Others believe that decades of rent regulation have distorted housing prices and discouraged construction and renovation. The shift can't come soon enough for Peter D. Salins, co-author of "Scarcity by Design: The Legacy of New York City's Housing Policies" (Harvard University Press, 1992).

Dr. Salins said rent regulation has created an imbalance in the housing market, limiting the supply and, thereby, ratcheting up the cost of market-rate units. "The entire supply and demand dynamic only acts on a portion of the market," he said. "So astronomical market-rate rents and the price of comparable condos and co-ops indirectly make all housing in the city more expensive."

In the high-rent districts of Manhattan, the impetus to deregulate is particularly strong. The average market-rate rent for apartments of all sizes below 103rd Street is $2,706, said Nancy Packes, president of Halstead Leasing Consultants. The average regulated rent below East 96th Street and West 110th Street, according to the New York City Rent Guidelines Board, was $1,262 in 2002, the latest figure available.

Under state rent laws, the owner of a vacated apartment is entitled to a 20 percent increase. Then, if renovations are made, one-fortieth of the cost can be added to the monthly rent, in perpetuity (a $40,000 renovation would provide a $1,000 increase). And if the vacancy and renovation increases push the rent above $2,000, the apartment can be deregulated.

That situation, said Andrew Scherer, author of "Residential Landlord-Tenant Law in New York" (West Group, 2001), prompts some owners to start eviction proceedings.

"Where a few years ago a landlord might not have even brought a proceeding," he said, "they now go to great lengths to find cause to evict regulated tenants, particularly in gentrifying neighborhoods." There are more eviction proceedings in Manhattan than in any other borough, he said, with landlords frequently claiming that the residents don't live there full time, or that they sublet illegally.

Big complexes that have been home to middle-income residents for many years are just at the beginning of the shift out of regulation, like Lenox Terrace - a development of six 17-story towers between Fifth and Lenox Avenues from 132nd to 135th Streets.

Hanging on a wall of the Lenox Terrace rental office is an Art Deco style poster from 1958, the year the first building opened. The poster, depicting a crisply uniformed doorman with a whistle at his lips, declares, "Harlem's first luxury apartments offer Park Avenue elegance."

These days, rents at Lenox Terrace range from $975 for a studio to $2,100 for the most expensive two-bedroom, although no apartments have so far been rented at the top prices. Whenever a tenant moves out, the owner of Lenox Terrace, the Olnick Organization, renovates the apartment, allowing it to raise the rent.

"We don't look at this process as a mechanism to move out of rent stabilization," said Neil L. Rubler, an executive vice president at the Olnick Organization. "We spend exactly as much on an apartment renovation as we need to deliver a first-class product in keeping with the property's tradition. If we do get the legal rent over $2,000 we, of course, will deregulate the apartment."

Tremors in the rent system are evident even in the depths of the boroughs outside of Manhattan. In East Flatbush, Brooklyn, for example, a somewhat deteriorated development of 59 six-story buildings (where Barbra Streisand grew up) is now undergoing a $17 million capital improvement program designed to attract a middle-income clientele. It may take years before any rents at the complex - formerly called Vanderveer Estates, and now Flatbush Gardens - climb above the transformational $2,000 mark. But they are inching closer.

The new owner, the Los Angeles County Employees Retirement Association, paid $87 million to buy the property out of receivership. It no longer charges what are called preferential rents, meaning less than the legally allowable regulated rent. Over the last 20 years, all five previous owners had charged the lower, preferential rents, because that was what the local market could bear. A year ago, the average rent was $720. Two-bedrooms now start at $950; three-bedrooms at $1,250.

If, over time, the city's entire rental stock were deregulated, there would be minimal increases outside Manhattan, "where there already isn't much difference between regulated and market rents," Dr. Salins said. "And in Manhattan, if everything was deregulated it would be much harder for new buildings to get $5,000 for a two-bedroom apartment when the deregulated comparable units in the building next door had been receiving $1,800. Both will now rent probably for something closer to $3,000."

Dr. Salins called for outright vacancy decontrol, with no $2,000 rent requirement. "It would protect all current tenants, but let apartments reach market levels when they moved out," he said.

But Mr. Scherer points out that rent regulation is not merely meant to protect current tenants. An underlying concept, he said, "was that market forces alone weren't sufficient to keep rents at a level that allows working people and low-income people to stay in the city."

"Manhattan has already become, pretty much, only for the rich," he said, "and neighborhood by neighborhood, other parts of the city are changing in that direction."

Under state law, rent regulation is initiated when vacancy rates drop below 5 percent. According to the Housing and Vacancy Survey, the percentage of vacant apartments in 2002 was 2.9 percent, down from 3.2 percent in 1999 and 4 percent in 1996.

Dr. Ellen at N.Y.U. noted that the city's share of renter households living in severely crowded conditions (defined as 1.5 people per room, not counting kitchens and bathrooms) is 3.9 percent, four times the national rate of 0.94 percent, and that 22.7 percent of renter households spend more than 50 percent of their income on rent.

If there is a discernible face on the future of rent regulation in the city, it is in the construction and rehabilitation of buildings through government subsidy and tax-abatement programs. Under those programs, typically, developers must set aside 20 percent of the apartments in their well-appointed buildings for lower-income tenants, or must finance affordable housing elsewhere in the city. And while the new, so-called 80-20 buildings are registered as regulated, their initial rents are set at market rate - often over the $2,000 mark - with future increases capped according to the rent-stabilization system.

Nicole Christie appreciates her regulated, one-bedroom apartment in a doorman building on 34th Street in Murray Hill - even though her rent is $2,800.

Ms. Christie, a corporate communications consultant, moved from Seattle in November. "I'd never heard of rent stabilization," she said, "but the leasing agent explained that there was a cap on how much the landlord could increase my rent every year." She liked anything, she said, that would "increase the predictability of your cost of living in Manhattan."

In Seattle, Ms. Christie built a 2,400-square-foot home in an upscale neighborhood. "My mortgage was $300 less than the rent I now pay in Manhattan, and my house was four times the size of my apartment," she said. "It's insane, but it's as good a deal as it can be in Manhattan."

For Angela Faulcon, living in West End Towers, an 80-20 building on West End Avenue at 62nd Street, is "an excellent deal."

Ms. Faulcon, a single mother of two, grew up with eight brothers and sisters in Polo Grounds Towers, a housing project in Harlem. The 24-hour doorman building where she now rents a two-bedroom apartment "is pretty fancy," she said. "And I really like my view of the Hudson River."

A traffic court clerk for the New York State Department of Motor Vehicles, Ms. Faulcon earns "in the 30's," she said, qualifying her for an apartment set aside for those with lower incomes. For an apartment that rents to others for $2,400, she pays $532.

West End Towers is one of nine tax-abated buildings, with a total of about 3,000 apartments, developed over the last 20 years by the Brodsky Organization - creating about 600 affordable units.

Daniel Brodsky, the company's president, said that these situations are going to be increasingly common. "The only rental housing that's going to be built is with these subsidies or tax abatements; it's the way of the future," he said. "And with these programs, it's right that the buildings are regulated since the public is helping to create this housing and is entitled to insurances that rents are reasonably controlled."

Dr. McCarthy at the Ford Foundation agreed. "Opportunities for developing many more affordable rental units are generally limited to these kinds of 80-20 deals," he said. "This is the only game in town."

Still, there is a catch - the abatements expire, usually after 20 years, and then the apartments revert to market rents.

Rafael Cestero, deputy commissioner for development at the city's Department of Housing Preservation and Development, said the department is instituting strategies "to maintain the pipeline."

It is working with other city agencies to identify property available for affordable rental development. And under what is called the Inclusionary Housing Program, market-rate developers are granted varying levels of increased density in exchange for setting aside 15 to 30 percent of their apartments at affordable rates. "As long as the building stands, the units will be registered and their increases governed by rent stabilization," Mr. Cestero said. "And if rent regulations were ever to disappear, these units would remain affordable under a use-restriction placed on the title of the property."

Everyone who examines the problem realizes that rent control/stabliization is bad for the housing market.

The problem is to overcome the established base of voters who have cheap apartments. A phase-out like this is the answer.

The Effects of Rent Control

Economists are virtually unanimous in the conclusion that rent controls are destructive. In a late-seventies poll of 211 economists published in the May 1979 issue of American Economic Review, slightly more than 98 percent of U.S. respondents agreed that "a ceiling on rents reduces the quantity and quality of housing available." Similarly, the June 1988 issue of Canadian Public Policy reported that over 95 percent of the Canadian economists polled agreed with the statement. The agreement cuts across the usual political spectrum, ranging all the way from Nobel Prize winners Milton Friedman and Friedrich Hayek on the "right" to their fellow Nobel Laureate Gunnar Myrdal, an important architect of the Swedish Labor Party's welfare state, on the "left." Myrdal stated, "Rent control has in certain Western countries constituted, maybe, the worst example of poor planning by governments lacking courage and vision." Fellow Swedish economist (and socialist) Assar Lindbeck, asserted, "In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing."

Rent Control, by Walter Block, The Concise Encyclopedia of Economics

I recently met a fellow from NYC at a friend's wedding. I told him that I live in Kansas City, and he proceeded to deride the Midwest and asked me why I would want to live in such a place. I asked him why he would want to pay $3000 a month to live in an apartment the size of my garage. He didn't press the issue.

The amount of wealthy people scamming their rent-controlled apartments in NYC is staggering. Years ago I stayed a week with an editor of mine and her college professor husband in their huge, eight-room pre-war apartment two buildings down from Carnegie Hall, right off ultra-exclusive 57th St.

They were paying about what a single person would have payed for a 1-bedroom in a lesser neighborhood. And I'm sure they grandfathered it over to their daughter. These were wealthy people, millionaires, even! Mary Travers of Peter, Paul & Mary was a neighbor on their floor! She was probably scamming too!

"It's always been amazing to me that anti-competitive rules like rent control and rent stabilization find favor in this country."

"Rent control applies to rental units in buildings constructed before 1947 that have been continuously occupied by the same tenant or a legal successor tenant since before July 1, 1971."

SUPREME COURT OF THE UNITED STATES

No. 98—963 JEREMIAH W. (JAY) NIXON, ATTORNEY GENERAL OF MISSOURI, et al., PETITIONERS v. SHRINK MISSOURI GOVERNMENT PAC et al. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

[January 24, 2000]

Justice Stevens, concurring,

"I make one simple point. Money is property;"

Amendment V

"nor shall private property be taken for public use without just compensation."

Rent controls are unconstitutional.

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