RENT DESTABILIZATION STUDY II
An Analysis of the Fairness to Landlords of Rent Increases Granted by the Rent Guidelines Board for Stabilized Apartments

Mark Green, Public Advocate for the City of New York
May 18, 1997
INTRODUCTION

     Last month the Office of the Public Advocate released a study
identifying who would be most affected by destabilization of rent in
New York City. We found that about 564,000 NYC children are living in
rent-regulated housing and that the percentage of renters in
stabilized apartments who already pay 40% or more of their income on
rent has risen to 37%. The higher rents that would result from rent
destabilization could disrupt the lives of these children by forcing
their families to move out of their homes and neighborhoods.

     We also found that approximately 47% of stabilized apartments are
occupied by middle-class people who could move out of NYC if their
rents rise to the high levels predicted in the Rent Stabilization
Association's own analysis of the impact of deregulation. We concluded
that thousands of tenant households -- especially those with two
modest income-earners -- could be affected by plans to expand so-
called "luxury" decontrol. A good job offer easily could lure these
hard-working people away from our City, especially if they would be
penalized by unfairly high rents here if their income goes up.

     Finally, in light of proposals to allow rent stabilization to
lapse when apartments are vacated ("vacancy decontrol"), we examined a
study conducted in 1974 which found that when vacancy decontrol was
tried in New York City it resulted in exorbitant rents and harassment
of tenants -- and failed to promote more housing investment as claimed
by its proponents.

     This study -- the second in our series -- examines the claim,
made by those who attack rent stabilization, that the rent increases
allowed for stabilized apartments are unfairly low and make it
impossible for landlords to earn a reasonable income. The Office of
the Public Advocate obtained the data that the Rent Guidelines Board
("RGB") used as guidance over the past 22 years for granting rent
increases to landlords for stabilized apartments. From these figures,
the Office calculated the cumulative impact of: (1) the rent increases
granted to landlords by the RGB, and (2) the rent increases that would
have been expected based on the actual rise in costs for landlords to
maintain apartments.

     The study concludes that the RGB has nearly always been more
generous to landlords than its calculations of increased costs would
direct. Moreover, according to Rent Guidelines Board calculations, the
rent increases and corresponding income to landlords have kept pace
with inflation while data from the Housing and Vacancy Surveys of 1993
and 1996 reveal that tenant income, adjusted for inflation, dropped by
14.6% from 1990 to 1995 while inflation-adjusted rents rose by more
than 8%.

     These results demonstrate that NYC's rent stabilization system is
meeting the goal of fairness to landlords. Pending proposals to end
rent stabilization, including Governor Pataki's recent proposal for so-
called "vacancy decontrol," would simply allow landlords to exploit
the absence of a competitive market in housing and further reduce
affordable housing for tenants.


BACKGROUND: RENT STABILIZATION IS DESIGNED
TO PROMOTE FAIRNESS IN A NONCOMPETITIVE MARKET

     The overall rental vacancy rate in NYC currently is 4%, and State
law declares a housing emergency when the vacancy rate falls below 5%.[1]
The rate for low rent units is lower; for example, the vacancy rate
for $400-$499 level apartments is only 3.2%. Because the vacancy rate
in the City is so low, landlords do not have to compete aggressively
with each other for tenants as, for example, restaurants must compete
for customers. While prospective tenants may have the illusion of
choice because they can go to many real estate offices and landlords
to seek housing, the scarcity of empty apartments -- especially
affordable ones -- leaves them little choice and virtually no
bargaining power; they essentially have to "take whatever they can
get."

     Since housing is a necessity, not a luxury -- and since
affordable housing is critical to maintain a diverse population and a
healthy economy -- some regulation of rents under these conditions is
reasonable. Rent stabilization, a system which applies to 52% of all
apartments in New York City and 94% of all rent-regulated apartments,[2]
was established to serve this purpose.

     A well-designed and implemented rent stabilization system should
establish rent increases that are fair to both landlords and tenants.
The rent increases should allow landlords to recover the costs of
improvements that they make to apartments or apartment buildings, to
clean and repaint apartments for re-renting when tenants vacate the
premises, and to recover the costs of general maintenance and repairs
while maintaining a reasonable profit margin. Tenants, on the other
hand, should not be forced to pay rents that have been increased
simply based on "what the market will bear" -- when there is no
competitive market.


RENT STABILIZATION IS NOT A SUBSIDY

     Contrary to common misconceptions, the rent stabilization system
does not hold rents at a fixed level, but rather allows landlords
reasonable, regular rent increases that appropriately reflect the
rising costs of maintaining apartments and afford landlords a
reasonable profit margin.[3] Although many people are unaware of this,
the rent stabilization system not only allows regular annual increases
in rent but also grants landlords special rent increases to cover the
costs of improvements that they make to their buildings or individual
apartments and allows them a special rent hike when an apartment is
vacated.

     The results of this study reveal that rent stabilization cannot
properly be characterized as a "subsidy" of tenant rents by landlords.
The Rent Guidelines Board ("RGB") has regularly granted landlords rent
increases that are as high as -- and probably higher than -- needed to
maintain a reasonable profit. While both landlords and tenants have
argued over the specific formulas and data that should be used to
determine those costs and profit margins over the years, this study
finds that, overall, the approach of the current rent stabilization
system has successfully created a more fair landlord-tenant
relationship in NYC's noncompetitive housing market than would exist
without such regulation.


SPECIFIC RESULTS OF ANALYSIS

     One way to assess the fairness of the rent stabilization system
is to evaluate the long-term impact of rent increases granted to
landlords by the RGB in comparison with inflation and increased costs
for maintenance of apartments. The Office of the Public Advocate has
compared the standard commensurate rent increase -- the calculation
used by the RGB to determine the amount of rent increase that would be
required to maintain landlords' current dollar net operating income at
a constant level -- with actual rent increases approved by the Board
for one- and two-year leases over the past 22 years. See Tables I and
II.

   These comparisons reveal the following:

   o   If the RGB had considered only the standard
       Commensurate Rent Increase formula -- which is designed
       to maintain landlord income at a constant level --
       rents for two-year leases (where the first year ended
       in an even year) would have risen 96% from 1975-1997.
       But the RGB instead allowed actual two-year lease rents
       to increase by 131% during this period -- or 37% higher
       than indicated by the standard formula.[4] For two-year
       leases where the first year ended in an odd year, the
       RGB allowed rents to increase by 127%, or 27% higher
       than indicated by the standard formula. About seven of
       every ten leases for rent stabilized apartments are two-
       year leases.

   o   Similarly, if the RGB considered only the standard
       formula, rents for one-year leases would have increased
       by 143% from 1975 to 1997, but the RGB final decision
       allowed actual one-year lease rents to increase by 210%
       during this period -- or 47% higher than indicated by
       the standard formula.

   o   The RGB granted landlords rent increases higher than
       indicated by the standard formula in 18 of the past 22
       years. For two-year leases, 45% of the rent increases
       granted by RGB over this period exceeded the standard
       formula's result by two percentage points or more.

     This means that if a tenant rented an apartment in 1975 for $400
per month -- or $4,800 per year -- and renewed the lease every year,
the cumulative impact of the RGB's decisions would have resulted in
rent payments totalling $3,216 more for lease year ending 1997 than
indicated by the standard Commensurate Rent Increase formula. If the
same tenant had renewed the lease every two years (with the first year
of the lease ending on an even year), the cumulative impact of the
RGB's decisions would have resulted in rent payments totalling $1,680
more for lease year ending 1997 than indicated by the standard
formula, as indicated in the chart below:


Cumulative Impact of Lease Renewal Over 22 Years on
1997 rent for Apartment that Rented at $400 in 1975

             Rent Indicated  Actual      Difference   Difference
             by Standard     Rent Hike   in Monthly   in Annual
             Formula         Authorized  (Monthly)    Rent
             (Monthly)       by RGB

1 Yr Lease:  $972            $1,240      $268         $3,216
2 Yr Lease:  $784            $924        $140         $1,680


     The above results, moreover, do not take into account any
additional rent increases that landlords have obtained for
improvements in individual apartments and building improvements.
Landlords are entitled to rent increases whenever they replace boilers
or elevator systems, renovate apartments, install new appliances or
furniture, or conduct other major capital improvements or individual
apartment improvements. For building-wide "Major Capital Improvements"
("MCIs") and for improvements in an individual rent-controlled
apartment, the landlord must apply to the State Division of Housing
and Community Renewal ("DHCR") for approval of a rent increase, but
the rules are more lax for rent stabilized apartment improvements. If
a rent stabilized apartment is occupied, the tenant must agree to the
increase in writing, but if the apartment is vacated, the landlord is
not even required to apply to the State DHCR for approval of the rent
increase.

     The rent increase granted for building or apartment improvements
becomes part of the apartment's base rent and thus becomes part of the
landlord's income for every subsequent year -- even long after the
cost of the improvement itself has been recovered.

     The results also do not take into consideration the additional
rent increase that is allowed when an apartment is vacated. Fully 39%
of rent stabilized apartments turned over within the past three years,
and 58% turned over within the past six years. The vacancy allowance
has been quite high in some years. It was 12% for leases ending in
1989 and 1990 and 15% in 1982, and usually is at least 5%.[5] Like the
increase for building or apartment improvements, the vacancy allowance
is added to the regular allowable rent increase. It then becomes part
of the apartment's base rent and, consequently, part of the landlord's
income for every year thereafter.


THE STANDARD RENT FORMULA IS IMPERFECT
BUT SERVES AS A REASONABLE MEASURE OF RGB
FAIRNESS TO LANDLORDS OVER TIME

     The standard commensurate rent increase calculated by the RGB is
the amount of rent increase that the RGB estimates is needed to
maintain landlords' current dollar net operating income at a constant
level. Because the amount of rent directed to operating costs
generally has been at or near 66% in recent years, the RGB calculates
that the rent increase should amount to approximately two-thirds of
the corresponding increase in operating costs in order to maintain the
landlords' income from rentals.[6] (While the standard formula does not
consider the impact of inflation on landlords' profits, a formula
recently developed by the RGB does take this into account and a recent
calculation conducted by the RGB for the period between 1989 and 1995
confirms that landlords' reported income has kept pace with inflation.
See discussion below.)

     To determine how much landlords generally should be spending to
maintain their apartment buildings, the RGB produces a "Price Index of
Operating Costs" ("PIOC" or "Price Index"). Like the Consumer Price
Index, the RGB's Price Index measures the change in price for a set of
goods and services. Rather than measuring the change in consumers'
"cost of living," the Price Index describes changes in the costs to
operate and maintain rent stabilized buildings. It considers water and
sewer rates, real estate taxes, insurance rates, utility costs,
contracting prices for plumbers, electricians, painters and other
workers, attorney fees, administrative costs and the prices of
building and maintenance supplies.

     The Commensurate Rent Increase formula may be unfair to tenants
for several reasons:

      o   The RGB reports that in years past the Price
          Index upon which the Commensurate Rent Increase is
          based may have overstated actual cost increases,
          stating, "Expenditures examined in the most recent
          I&E [Income and Expense] study suggest that from
          1989 to 1993 actual costs rose by some 18% while
          the PIOC indicated a 25% rise - perhaps reflecting
          recession induced cost cutting."[7]

      o   The Price Index reflects costs that ideally
          should be incurred by landlords to maintain
          apartments -- but some of these costs may not in
          reality be incurred. A landlord may not supply
          heat at the proper level throughout the heating
          period, conduct repairs to apartments and conduct
          repairs to the building itself -- but will get to
          pocket the money anyway.

      o   The Price Index is greatly affected by fuel
          and utility costs; consequently, an aberrational
          "spike" in such costs in any particular year may
          unfairly cause a permanent increase in base rents
          for calculation of future increases.

      o   As noted above, vacancy allowances and rent
          increases to accommodate building improvements or
          individual apartment improvements become part of
          the base rent and are compounded over the years by
          the Commensurate Rent Increase formula.


     Landlords correctly argue that the standard formula does not
consider that as buildings age, owners must make more repairs, so that
even if the actual cost of a repair service may not have risen, their
use of that service may have increased. The Price Index tracks changes
in cost but not changes in frequency of use. Nevertheless, the Price
Index is only one of several factors that the Board considers in
making a final determination on rent increases; public hearings,
independent studies and political considerations also can play a role.

     As noted above, during the 22-year period examined by the Public
Advocate's Office, the RGB granted landlords a higher one-year and two-
year rent increase than indicated by the standard formula in 18 of the
past 22 years, or in 82% of its decisions. Moreover, as explained
above, landlords are entitled to rent increases based on major capital
improvements to their buildings or individual apartment improvements
which they undertake, and those increases continue to form part of the
base rent for the apartment even after all costs for improvements have
been paid.

     Landlords argue that the formula is not generous enough to them
because it does not consider the mix of one and two year lease
renewals -- since about 70% of leases are two-year, the formula does
not accurately estimate the amount of income needed to compensate
landlords for past operation and maintenance increases. However, it
should be noted that the formula does set a two-year lease figure
based on a projection of the price index for the subsequent year, and
as noted above, that projection has traditionally been more favorable
to the landlord than the tenant. Moreover, in 1996, the RGB opted to
make use of a "Net Revenue" formula which specifically incorporated
information on lease terms to set one and two year lease levels.

     Landlords also assert that the formula does not consider the
erosion in value of landlords' income by inflation -- so that by
maintaining current dollar net operating income at a constant level,
profitability may decline over time. The RGB points out that such a
decline would not necessarily occur, since profit decline depends on
the level of inflation, how much income is debt service and how much
is profit, changes in tax laws and changes in interest rates.[8]
Nevertheless, to address landlord concerns, the RGB recently developed
a "NOI [Net Operating Income] formula that not only considers
information on lease terms but also takes inflation into account. Even
in light of this formula, the RGB still appears to be granting rent
increases to landlords that are fair to them.

   o   For one-year leases ending in 1997 and two year
       leases ending in 1998, the RGB still granted rent
       increases higher than even this formula indicated were
       necessary. The formula indicated that a 4.5% one-year,
       6% two-year and 8.5% vacancy increase would maintain
       landlords' incomes; the RGB decided to allow a 5% one-
       year, 7% two-year and 9% vacancy increase.

   o   The "NOI Adjusted Net Revenue" formula inflates the
       debt service portion of the estimate for net operating
       income, according to the RGB, since interest rates have
       been falling rather than rising over recent years.[9]

   o   Because the "NOI Adjusted Net Revenue" formula
       addresses two major concerns of the landlords about the
       standard formula but does nothing whatsoever to address
       concerns raised by tenants, it is arguably the least
       fair of the RGB's formulas from the perspective of
       tenants.

     Although this new inflation-adjusted formula has only been used
in recent years, a calculation conducted by the RGB for the period
between 1989 and 1995 found that landlords' reported income has kept
pace with inflation. See Exhibit 1, attached. Renters income,
unfortunately, has not. From 1990 to 1995, the median household income
of renters, adjusted for inflation, declined by 14.6%.[10]

     The Standard Commensurate Rent Increase formula certainly is not
perfect -- perhaps no formula will ever be perfect -- but it remains
an important component of the rent guidelines decision-making process
and an important measure of the long-term benefits to landlords of
rent increases granted by the RGB.


                            TABLE I

Comparison of Standard Commensurate Rent Increase for
One Year Lease with Increases Granted by RGB
Compounded over 22 Years


Lease Year Ending  Standard             Actual Rent
September*         Commensurate Rent    Increase Granted
                   Increase (to         by RGB for One-
                   maintain             Year Lease**
                   landlords' net
                   operating income)

      1976                4.0%                7.5%
      1977                5.5%                6.5%
      1978                4.8%                6.5%
      1979                0.4%                4.5%
      1980                6.6%                8.5%
      1981               10.9%               11.0%
      1982                9.9%               10.0%
      1983                2.0%                4.0%
      1984                1.8%                4.0%
      1985                4.3%                6.0%
      1986                3.7%                4.0%
      1987                4.4%                6.0%
      1988                1.5%                3.0%
      1989                4.2%                6.0%
      1990                4.4%                5.5%
      1991                7.3%                4.5%
      1992                3.8%                4.0%
      1993                3.0%                3.0%
      1994                3.3%                3.0%
      1995                1.4%                2.0%
      1996                 0%                 2.0%
      1997                4.0%                5.0%
[Total Increase]         [143%]              [210%]
(Compounded)

* Before the lease year ending September 1981, lease deadlines for the
rent stabilization system ended June 30.

**  See  RGB  Explanatory  Statements Nos.  7-28  for  price  indices,
calculations  of commensurate rent increases and final  determinations
of allowable rent increases.


                               TABLE II

Comparison  of  Two  Year Lease Standard Commensurate  Rent  Increases
(based  on Projected and Actual Price Indices) with Increases  Granted
by RGB Compounded Over 22 Years

First Year of  Standard         What Standard   Actual Rent
Two-Year       Commensurate     Commensurate    Increase
Lease Ending   Rent Increase    Rent Increase   Granted by RGB
September*     for Two Year     Would Have      for Two-year
               Lease (Based     Been Based on   Lease (note:
               on Projected     Actual Price    rent is uniform
               Price Index)     Index           over two
                                                years)**

    1976            7.4%            6.9%             9.5%
    1977            7.7%            7.8%             8.0%
    1978            6.9%            5.0%             8.5%
    1979            2.3%            3.8%             6.5%
    1980            9.4%           12.5%            12.0%
    1981           14.6%           16.3%            14.0%
    1982           13.6%           11.0%            13.0%
    1983            4.1%            3.0%             7.0%
    1984            4.3%            4.0%             7.0%
    1985            6.8%            6.3%             9.0%
    1986            5.7%            6.1%             6.5%
    1987            7.8%            5.2%             9.0%
    1988            3.9%            3.7%             6.5%
    1989            6.5%            6.6%             9.0%
    1990            7.1%            8.3%             9.0%
    1991            9.5%            9.5%             7.0%
    1992            6.1%            5.3%             6.5%
    1993            5.1%            4.9%             5.0%
    1994            4.4%            4.0%             5.0%
    1995            2.6%            1.5%             4.0%
    1996            1.1%             2.2%            4.0%
    1997            5.0%            4.9%             7.0%
[Total             [96%]           [94%]            [131%]
Increase]      (99.8% odd yrs)  (95% odd yrs)   (127% - odd yrs)
(Compounded)

*  Before the lease year ending September 1981, lease deadlines  under
the rent stabilization program ended on June 30.

**  See  RGB Explanatory Statements Nos. 7-28 for projected and actual
price  indices, calculations of commensurate rent increases and  final
determinations of allowable rent increases.

_______________________________

    1 Emergency  Tenant  Protection Act,  8623,  Unconsolidated  Laws;
N.Y.C. Admin. Code,  26-501.

    2 Rent  stabilization generally applies to apartments in  buildings
with  six  or  more  units built before February 1,  1947,  where  the
current tenant moved in on or after July 1, 1971, and to apartments in
buildings  with six or more units built between 1947 and  1973  --  or
after  1974  if  the  units received a 421-a or  J-51  conversion  tax
abatement  and  the tenant moved in before cooperative or  condominium
conversion.

   3 It is important to distinguish between rent stabilization and rent
control. The more stringent "rent control" system applies to only 3.6%
of  all  rental apartments in the City; the number of these units  has
dropped  by  30% since 1993 and will continue to decline  without  any
government  intervention. Most occupants of rent controlled apartments
are  elderly -- the median age of rent-controlled tenants  is  70.  As
they  move  on  to nursing homes and other special care facilities  or
pass  on,  the  newly  vacant apartments are  converted  to  the  rent
stabilization system.

    4 The  standard Commensurate Rent Increase for two-year  leases  is
calculated  based in part on an estimate of the increase in  costs  to
maintain an apartment. A comparison of the projected Price Index  with
the Actual Price Index for each year reveals that the RGB estimate has
slightly favored the landlords over time; as a result, the increase in
rent  for  two-year leases indicated by the Commensurate Rent Increase
formula as necessary to maintain landlord income, compounded over  the
past  22 years, is 2% to 5% higher than would have been calculated  if
the Projected Price Index had been equal to the Actual Price Index.

    5 RGB Orders 15, 20 and 21.

    6 The  RGB staff's Commensurate Rent Increase calculation  for  the
lease  period ending in September 1998, for example, was based on  the
actual  price  index for the April to April year ending 1997  and  the
rent to income ratio derived from landlord reports for 1995.

    7 RGB Explanatory Statement, Order No. 27, p. 15.

    8 Rent Guidelines Board, Housing NYC: Rents, Markets and Trends '96
(1996), p. 38.

    9 RGB, Housing NYC: Rents, Markets and Trends '96, p. 38.

   10 Anthony Blackburn, Housing New York City 1993, p. 86 (gives  the
percent  change in 1992 dollars from 1990 to 1992). Dept.  of  Housing
Preservation and Development, "Selected Findings of the 1996 New  York
City Housing and Vacancy Survey" (February 20, 1997), p. 3 (gives  the
percent  change in 1992 dollars from 1992-1995). Owners of houses  and
condominiums  (including  those  who  live  in  buildings   containing
apartments that they rent out) fared better than renters, with a  more
modest  decline  in  inflation-adjusted income of  1.6%.  Figures  for
renters' and owners' income are provided by the New York City  Housing
and  Vacancy  Surveys,  which are conducted  every  three  years.  The
resulting reports do not present this data for 1989.