Rethinking Rent Regulation

By Robert Knakal

One of the most prominent needs in the New York City real estate market is affordable housing.With the expected growth in our population over the next couple of decades, it is imperative that work-force housing exist. This is housing for police officers, firemen, teachers and the scores of other workers who make this city run. An insufficient supply of affordable housing for these folks is a critical issue for the economic well-being of the city that future local administrations will have to address.

Most of our elected officials continually, and inaccurately, refer to our rent-regulation system an “affordable housing” program. Rent control and rent stabilization do not create affordable units as options for our current work force.

In fact, rent regulation actually does just the opposite, as it reduces the number of options for new residents coming into the marketplace. There are 3.3 million dwelling units in NYC, but someone new coming into town looking for an apartment really has only 2.3 million “choices,” as 1 million units remain stuck in the rent-regulation system.

This constraint on supply means that market-level rents are artificially high due to the artificially low rents paid by folks who have been in apartments for a long time. Study after study shows that in the absence of price controls, market prices are lowered. Getting rid of rent regulation would mean more choice and lower rents for the overwhelming majority of New Yorkers. It would also mean lower property taxes for those in free-market properties, as currently regulated properties would begin to contribute an appropriate level of taxes.

No I haven’t lost my mind—I don’t expect rent regulation to go away anytime soon. But the program’s existence undeniably exacerbates the housing problems we have here. Until the nonregulated residents of New York realize that they are paying higher rents and higher property taxes than they should be because they are the ones subsidizing rent-regulated tenants, and they become vocal about it to local politicians, rent regulation isn’t going anywhere.

Another negative aspect of rent regulation is that the benefits of subsidized rent levels create motivation for occupants of these units not to move, regardless of whether the unit’s size is appropriate for them or not. Therefore, we have little old ladies living in three-bedroom apartments by themselves and families of four or five living in one- or two-bedroom apartments. This misallocation of our housing stock is not good for the city.

Furthermore, the fact that these rent subsidies are given out based on inertia rather than need, as there is no means testing on rent regulation, means that this program does not address the affordability issue.

So how does the city create the affordable work-force housing that is so desperately needed?

One idea would be to bring back the 421a program in its original form to create needed affordable units. Changes to this program were precipitated by elected officials who don’t fully understand the program.

Another idea is to create a citywide 421g-type program to incentivize the private sector to convert obsolete office buildings into affordable housing. There is an oversupply of office space presently, and removing some excess space would simultaneously strengthen the office-space market and create affordable housing.

Lastly, the city could stimulate the creation of additional affordable housing units by providing FAR bonuses. Giving FAR bonuses in ratios of 3 to 1, or 4 to 1, to developers doesn’t cost the city a dime. It just takes the political will to address those who will inevitably complain that larger buildings are blocking out the sun or are creating negative impacts on the quality of life.

If these no-cost incentives are created properly, it is very likely that affordable units will be created by the private sector, eliminating the need for the government to try to figure out how to provide these units and creating a more livable city.
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Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties with a market value in excess of $9 billion.

Source: Commercial Observer

 

 

Beware the Comeback of Rent Control

The U.S. rental housing market has come under increasing strain recently. As homeowners with unsustainable mortgages have to leave their homes and fewer home buyers are able to qualify for new mortgages, more people are looking for places to rent. As a result, rental vacancy rates have fallen from 11.1 percent in the third quarter of 2009 to 8.6 percent in the third quarter of 2012. With affordable housing already in short supply, there is growing concern that stronger protections are needed to prevent rents from rising too fast, pricing more low-income and vulnerable renters out of the market.

One idea to protect renters that may be getting renewed interest is rent control. Rent control policies have been tried in a number of cities, first during World War II and later again in the 1960s and 1970s. Relatively few places have rent control today though and most states have laws prohibiting the practice. Given the challenges in today’s rental market, does rent control deserve a second look?

 

A scan of the research literature revealed very little evidence that rent control is a good policy. Arguments against rent control go back as far as the 1970s and the RAND housing allowance experiments in New York City. More recently, a MIT study of the 1995 repeal of rent control in Cambridge, Massachusetts, found that investment in housing increased after rent control ended, leading to “major gains in housing quality.” A National Bureau of Economic Research paper also examined the Cambridge experience and concluded that “elimination of rent control added about $1.8 billion to the value of Cambridge’s housing stock between 1994 and 2004, equal to nearly a quarter of total Cambridge residential price appreciation in this period.” These findings have been used to argue for removal of rent control in New York and other places.

In a comprehensive overview of the research literature, Blair Jenkins examined studies of different aspects of first-generation rent control (strict price ceilings) and second-generation (limits on increases, also referred to as rent stabilization). The upshot is that, at best, rent control does little harm but probably not much good and, at worst, it has negative impacts on landlords and tenants. There is near universal agreement that strict price ceilings, such as the kind imposed in New York City in the 1940s, are always bad because they severely inhibit housing production and investment. Even those most sympathetic to rent control seem to agree with this.

 

 

 

 

That leaves the softer, rent stabilization policies, like those currently in place in New York City and Washington, D.C. These regulations place limits on how much landlords can raise rents on sitting tenants, but generally allow much larger rent increases for new tenants. They also often allow exceptions for landlords to pass along certain costs to tenants, such as capital improvement costs or utility charges.

On rent stabilization, the strongest finding in Jenkins’s overview appears to be that tenants in noncontrolled units pay higher rents than they would without the presence of rent control; one reason being that landlords need to make up the difference for lower rents in controlled units. Interestingly, one study found that New York City tenants in controlled units also had higher rents initially, because they were willing to pay more to get into a rent-controlled unit with the understanding that they would have smaller rent increases in the future. The net effect, however, is that tenants don’t save much in the long run—they simply trade higher rents now for lower rents later.

The conclusion seems to be that rent stabilization doesn’t do a good job of protecting its intended beneficiaries—poor or vulnerable renters—because the targeting of the benefits is very haphazard. A study of rent stabilization in Cambridge, for example, concluded that “the poor, the elderly, and families—the three major groups targeted for benefits of rent control—were no more likely to be found in controlled than uncontrolled units.” And, as noted earlier, those in uncontrolled units tend to pay higher rents, so they are actually hurt by rent control.

Given the current research, there seems to be little one can say in favor of rent control. What, then, should be done to help renters obtain affordable, decent housing? A better approach may be adopting policies that encourage the production of more diverse types of housing (different densities, tenure types, unit sizes, etc.), implementing strong regulations and practices to ensure housing quality and to protect tenants from abuses; and providing targeted, direct subsidies to people who need help paying their rents.

 

Source: The Atlantic Cities

A Landlord’s Uphill Fight to Ease Rent Regulations: The “Madison Group”

By Craig Mordoh, Esq.

On July 11, 2012, representatives from various residential rental property owner groups from across the nation met at the distinguished Cato Institute to begin the process of formulating a strategy to place a constitutional challenge to rent control land – rent stabilization laws before the United States Supreme Court.

This effort is the brainchild of James Harmon, a former prosecuting attorney who gained some recent notoriety in the landlord community by mounting a one-man challenge to the New York Rent Stabilization Law that almost made it to the U.S. Supreme Court.

After an unsuccessful two-year battle to evict a tenant, who could well afford to live anywhere, Jim decided to challenge the constitutionality of the rent law itself. Making a sympathetic plaintiff, Jim received much favorable press coverage and the assistance of many prominent amici curiae; however, after a number of good signs that the Supreme Court might decide to hear his case, the court ultimately chose not to.

Beaten, but not defeated, Jim decided to try and find a way to challenge not just the New York Law, but rent control laws everywhere.  Currently rent control in some form exists in relatively few places, New York, New Jersey, Maryland, Washington D.C. and California. Many other states have laws or court’s rulings prohibiting rent control. In one famous instance, the voters of the State of Massachusetts voted to eliminate rent control throughout the state. Amazingly, the elimination of rent control in that state created no upheaval in the tenant community and improved the housing stock in those cities that now had a newly-created free market.

The first step in Jim’s plan was to find the commonalities in each of the laws. For instance, not every law has a state-wide enabling legislation, but every law limits the right to evict tenants.

Other potential areas of inquiry include:

What does a new-construction exemption say about the need for rent control and its effect on the housing market?

Does the emergency situation which formed the rationale for every rent control law still exist after all these years?

If yes, does it still create a lawful basis for rent control and what does its existence say about the efficiency of rent control?

Must an owner have the right to   recapture their property?

Once the commonalities are identified, chose the one susceptible to the strongest legal challenge and the file that single-issue Federal lawsuit in each of the rent control localities. This would result in rent control challenge in five different federal circuits. It is anticipated that the appellate level would require a review by the Supreme Court.

I attended this meeting on behalf of the California Apartment Law Information Foundation as well as the Apartment Associations of Greater Los Angeles. In addition, there were representatives of the National Apartment Association, the Institute for Justice, New York University School of Law and representatives from local owner’s groups from all of the affected jurisdictions.

The attendees were dunned the “Madison Group” in honor of James Madison, our fourth President, who stated “commercial shackles are generally unjust, oppressive, and impolitic.” This may be the most concise, yet accurate, description of rent control ever.

Following the meeting, the enthusiasm of the participants was high and a follow-up national teleconference was scheduled for September. CALIF and AAGLA will continue to participate in this effort and provide periodic reports to this magazine.

Mordoh is Senior Attorney of the California Apartment Law Information Foundation (CALIF). Since its inception, CALIF has pursued its dual goals of providing an informational base for landlords and tenants on the workings of landlord-tenant law in California and challenging state and local municipalities when they take actions that infringe upon the constitutionally guaranteed property and civil rights of California residents. CALIF is qualified to receive tax-deductible contributions under IRC Section 501(c)(3).

 

Source:  Apartment Association of Greater Los Angeles

It’s Not Over Till It’s Over: Rent Control Supporters Vow to Continue the Fight

 

by Al Sullivan

Although voters rejected an effort to maintain rent control by 121 votes, supporters of rent control said they are reviewing their options and will seek to put the question back on the ballot if legal options do not prevail.

With nearly all of the votes counted from Nov. 6, the effort to retain rent control was narrowly defeated with 51 percent to 49 percent of the vote.

County elections officials certified the vote on Nov. 17, and this allows the city to gradually phase out rent control in Bayonne.

The council approved changes to rent control in November 2011 that would allow landlords to opt out of rent control once current tenants move out.

Rent control supporters tried twice earlier this year to have the matter put up as a referendum, and then when those attempts failed, they used another approached the imitative which successfully allowed the matter to be put on the Nov. 6 ballot.

Ed Gilligan, spokesperson for the Bayonne Tenants’ Association, said he was disappointed by the result, but that the group has not given up.

“We’re reviewing our legal options,” he said. “If we have to, we will go out and get more signatures and put it on the ballot again. In Hoboken, they did it twice. The first time they were swamped, but they got organized and won. We weren’t organized and we only got 49 percent of the vote.”

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“I think maintaining rent control is where the sympathies of Bayonne people lie.” – Ed Gilligan
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Course of action

The Bayonne Tenants’ Association was seeking to preserve rent control in the city after the council voted to do away with it in November 2011, as part of an effort to spur redevelopment in the city.

“I think we were fair in what we did,” said Councilman Ray Greaves. “I didn’t like the first ordinance that we saw [in July 2011], which didn’t protect the people living there. But the changes we voted for do, I think are fair to both landlords and tenants and will help landlords reinvest in their properties, knowing that they will get a fair return on their property.”

The vote results from Nov. 6, which were delayed because of Hurricane Sandy, lets the city council changes remain. These would allow properties to drop rent control once the residents living in them currently leave.

“I don’t think this lost because of the hurricane,” Gilligan said. “Outside groups and the city spent a lot of money to defeat our ordinance that would have kept the old rent control in place. We spent very little and we still got 49 percent of the vote. I think maintaining rent control is where the sympathies of Bayonne people lie. They do not sympathize with out-of-town political operatives who came in here to get rid of it.”

Unlike traditional referendums which would have not allowed the Bayonne Tenants’ Organization to seek another election on the measure for three years, the method they used has no limitation.

“We can put it back on the ballot as soon as we get enough signatures again,” he said.

Gillian said he and his group will likely start a public education campaign ahead of the next round in this battle to preserve rent control.

“I think the next time we can win this,” he said.

Source: Hudson Reporter

Voluntary Rent Controls—Now There’s a Concept!

City Council Updates Voluntary Rent Guidelines

Resolution works as a policy statement from the city governing the rents of current tenants.

By Drew Hansen

Alexandria City Council approved a resolution Tuesday establishing the city’s voluntary rent guidelines at an increase of not more than 5 percent in situations where a tenant pays utilities and not more than 7 percent where a landlord pays utilities.

The guidelines were the recommendation of the city’s Landlord-Tenant Relations Board, which analyzed rent data, market forecasts and vacancy surveys.

The resolution works as a policy statement from the city governing the rents of current tenants, Vice Mayor Kerry Donley said. Virginia does not allow rent control and he doesn’t think it ever will.

The rent increase guidelines are largely followed by landlords in the city, officials said. The resolution has been annually revised for about 30 years.

“It is an historic practice in this city,” Donley said. “We actually reduced them a bit this year. It was 5.5 percent and 7.5 percent, respectively, last year and we brought them down a bit this year in hopes Alexandria will remain affordable for existing renters.”

The guidelines don’t cover units coming on the market or units being built.

Donley said the city is seeing a “very vibrant” rental market. Councilman Frank Fannon said about half the city is made up of renters.

“These guidelines offer some hope that existing tenants don’t receive tremendous increases,” Donley said.

Melodie Seau, division chief with the city’s Office of Housing, said her office received just 14 complaints in fiscal year 2012 of rent increases exceeding the guidelines. Seau said the city received more than 30 complaints the year prior.

The new guidelines will be sent to 102 landlords in the city who own medium- to large-sized apartments, Seau said.

 

Source: West End Alexandria Patch

Attempts to Re-Establish Rent Controls In Boston Never Died

Rents North of Boston Up 9 Percent in 5 Years; Rent Control Needed?

By John List, Esq. on August 31, 2012 3:08 PM

If there’s one thing that a recession does, especially when there is a housing crisis, it’s to increase rent. In the communities north of Boston, rents increased by 8.9% to an average of $1,427, while vacancy rates dropped from 7.8% to 4% in the same amount of time, according to the Boston Globe.

These factors have led to a shortage of housing for low- to moderate-income renters, reports the Globe. If this trend continues, should Boston or other locales reconsider rent control or rent stabilization?

Rent control is a law or regulation that controls the amount of rent that can be chargedand limits how much rent can increase over time. Some states specifically forbid rent control, while others allow municipalities to enact rent control laws at their option.

In 2003 and 2004, the Boston City Council considered a rent control law. The proposed Rent Stabilization legislation would have applied to all buildings with four or more units, as well as non-owner-occupied three-unit dwellings. The main goal was to limit the times when rent could be increased and the amount that it could be increased.

But the legislation fell through, and so Boston is still without any rent control laws. However, it is unlikely that the law would have kept rent from rising less than it did over the past five years. The law would have allowed for a maximum 5% increase per year for low- to moderate-income, elderly and disabled tenants, and a maximum rent increase of 10% per year for everyone else.

While rent control laws are meant to help people keep lower rents, from this recent report it does not seem like there has been any abuse of renters, at least in the communities north of Boston. Perhaps rent control will come up again in the future if evidence of massive abuse comes to light.

 

Source: Boston Real Estate Law News

Grand Jury criticizes Berkeley Rent Stabilization Board

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June 26, 2012 9:27 am by Frances Dinkelspiel

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Berkeley voters passed a rent stabilization law in 1980, and the law now covers 19,000 rental units in the city. Photo: Tracey Taylor

 

A highly critical report by the Alameda County Grand Jury has found that the Berkeley Rent Stabilization Board is a “self-sustaining bureaucracy that operates without effective oversight and accountability.”

This rent board pays Jay Kelekian, its director, $183,000 a year to oversee a $4 million budget and manage just 21 employees – which is more than the city Berkeley pays its director of public works, who oversees 326 employees and has a $90 million annual budget, according to the report.

“The executive director makes an exorbitant salary that comprises nearly 5% of the entire budget of the agency,” according to the report. “The Grand Jury finds this unacceptable and concludes the board needs to reprioritize services and to reduce costs, not only in its administration but in services to the citizens of Berkeley.”

The rent board also pays its board members an “excessive” $500 a month and provides health benefits, according to the report. BRSB also spends $50,000 a year on a Sacramento lobbyist.

The Berkeley Rent Stabilization Board is able to pay its administrators so handsomely because it imposes some of the highest rental registration fees in the state, according to the report. Berkeley assesses landlords $194 per rental unit, compared to Oakland’s assessment of $30 per unit, and San Francisco’s $25 per unit assessment. While Santa Monica assesses landlords $156 per rental unit, it also permits landlords to recoup those costs from tenants by levying a $13 monthly fee. Berkeley, in contrast, does not allow landlords to recoup their costs, according to the report. Property owners can only assess tenants $4 a month for a total of $48. Continue reading

New York Gets To Keep Its Broken Housing Market

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By  May 18, 2012, 8:00 AM

New York City has, without a doubt, the most dysfunctional housing market of any large city in America. A lot of New Yorkers like it that way – and it looks like they will be able to keep their broken system for the foreseeable future.

If you live someplace where normal forces of supply and demand govern housing, you may be surprised to learn that New York tenant advocates were quite pleased when Mayor Michael Bloomberg recently declared that his city is experiencing a housing emergency. This “emergency,” defined in this case as a vacancy rate in rental housing of less than 5 percent, has existed continuously since 1969.

In most other places, such a tight housing market would have long ago been brought into balance by some combination of rent increases and new construction. The two are related. Rent increases would prod some tenants to look for cheaper housing outside the five boroughs, and it would encourage more development of new housing stock by boosting economic returns for landlords.

But under New York’s 1969 Rent Stabilization Law, so long as the city continues to face a housing emergency, it can set maximum permissible rent increases for about 1 million apartments, according to The New York Times.

The Supreme Court recently declined to hear a case that challenged the constitutionality of the rent stabilization law. The court had, somewhat unexpectedly, asked for some additional information before ultimately deciding not to proceed with the case. This led to some brief speculation that the longstanding rent controls might be in danger. Continue reading