Monday, September 8, 2014

Preparing for NEXT year's Rent Guidelines Board . . .

The Rent Guidelines Board vote for 2014 is over - and rent stabilized tenants won the smallest increase in decades.  But there annual pressure from the landlord lobby to raise rent stabilized rents. In response to that pressure, Tom Waters, Senior Housing Analyst of the Community Service Society, wrote this excellent piece. Click on "read more" below.

“Small landlords” and the RGB

In Rent Guidelines Board testimony each year, landlords argue that “small landlords,” pictured as the owners of one or two small buildings, are burdened by low rent-stabilized rents and need high guidelines to be able to operate their buildings. Many people find this argument persuasive, so it is worth trying to evaluate its premises and conclusions. This is often difficult because of the lack of definitive information sources.

How many rent-stabilized apartments belong to small landlords?

We do not know how many rent-stabilized apartments belong to small landlords. Almost all apartment buildings belong to limited partnerships or other corporate entities that conceal the identities of the true individual owners. If one landlord owns a dozen buildings, public records will probably show them as belonging to a dozen different corporate entities.

Landlord advocates often say that small landlords make up a large share of the total number landlords, but this uncheckable assertion does not imply that they own a large share of the apartments. Suppose there are 10 landlords who own 10,000 apartments each and 100 landlords who own 100 apartments each. The 10 big landlords would thus own 100,000 apartments and the 100 small would own 10,000. The small landlords would be more than 90 percent of the total number of landlords but would own less than 10 percent of the apartments. Those numbers are made up, and in reality there are also medium-sized landlords, but the principle still holds.

Small landlords probably own a very small share of the total rent-stabilized apartments.

Who lives in small rent-stabilized buildings?

Although we can’t say much about small landlords, we can look at small buildings and their residents by using information from the U.S. Census Bureau’s New York City Housing and Vacancy Survey and various analyses conducted by the staff of the New York City Rent Guidelines Board.

Buildings with fewer than 20 apartments represent a large share of the rent-stabilized housing stock, with 250,000 apartments or 26 percent of the total. The tenants in these buildings are quite similar to other rent-stabilized tenants, with a poverty rate of 18.2 percent, compared to 18.3 percent for rent-stabilized tenants as a whole. Rents in small buildings are also about the same, with a median of $1,100 a month, compared to $1,050 for rent-stabilized apartments as a whole, according to the New York City Housing and Vacancy Survey.

How profitable are small rent-stabilized buildings?

Rents in small buildings are about the same as in larger ones, but costs are slightly higher, resulting in somewhat lower net operating income for small buildings. However, small buildings remain quite profitable to own.

Using information that landlords must provide to the city Department of Finance, the Rent Guidelines Board staff found that in 2012 landlords spent an average of $885 per apartment on operating costs in buildings of 11 to 19 apartments, compared to an overall average of $813 – a difference of 9 percent. (If we exclude Manhattan below Harlem, those figures are only $760 and $721, a difference of 5 percent.) The lower cost of operating apartments in larger buildings is probably due to economies of scale such as employing fewer building service workers per apartment in a larger building or being able to invest in a more efficient heating system. The difference is not huge, however.

The Rent Guidelines Board staff found that the average net operating income for a small building remains positive – about 30 percent of income or $346 per apartment per month for buildings from 11 to 19 apartments citywide. Owning a small apartment building in New York City is typically quite profitable, and this is reflected in the fact that these buildings sell for quite high prices today. The RGB staff also found that in 2013, the median sales price for a rent-stabilized building with 11 to 19 apartments was $2.9 million or about $200,000 per apartment, up 14 percent from the previous year.

What would be the effect of an extra rent increase for small buildings?

The lack of public information about the true ownership of apartment buildings would also make it impossible for the Rent Guidelines Board to set a special allowable rent increase for small landlords. The closest they could come would be to allow a different increase for small buildings.
Higher rent increases for these buildings would result in increased housing hardships for a group of tenants that is economically very similar to the city’s tenants overall. It would increase net operating incomes to a group of landlords who on the whole are receiving high net operating incomes already, and who can already sell their buildings at a high price if they are not satisfied with the return.

Not every landlord makes money, to be sure, but most cases of financial distress for landlords are caused by two problems which would not be helped by higher allowable rent increases for small buildings.

The first of these causes of financial distress is overleveraging, which occurs when a landlord borrows more money to pay for (or refinance) an apartment building than can be supported by the building’s net operating income. If the Rent Guidelines Board were to allow higher rents in small buildings, this practice would not come to an end. Net operating incomes would go up, but so would sales prices and refinancings.

The second cause is the downward spiral that occurs when an owner allows conditions to deteriorate to the point that tenants who can afford to move out all do so, leaving behind a group of tenants who cannot afford to pay enough rent to operate the building properly, resulting in further deterioration of the building. In cases like this, the legal stabilized rent is not the limiting factor for the landlord’s income. In fact, legal rents rise as the apartments turn over. But tenants who can pay those rents won’t move in because of the bad condition of the building. Tenants’ ability to pay becomes the limiting factor, so higher allowable increases won’t help.

Allowing higher rent increases for small apartments will not help most cases of real financial distress for landlords.

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