LETTER FROM THE CHAIRMAN


From the perspective of the Rent Guidelines Board (RGB), the year ending 30 June 1994 saw New York City's residential real estate market, at best, "hold its own." At worst, various parts of that market are in crisis. As a result of continuing trends, the RGB's Spring, 1994 deliberations often were concerned with taking those actions within the RGB's purview - however limited those actions may have been - to stem the tide of "distressed" housing. To state it bluntly, the majority of RGB members believed that action at many levels of government is needed to assist private housing units that, for a myriad of reasons, have become so uneconomical to operate that their private sector owners increasingly are abandoning them.

Such abandonment serves the interests of no one:

  1. Owners lose their investments;
  2. Other potential owners are discouraged from committing their capital and other resources to such housing ventures.
  3. The city itself loses much-needed revenues when such units leave the tax rolls.
  4. The city's Department of Housing Preservation & Development often is forced to extend its already-strained resources to care for these properties.
  5. Tenant's are faced with the prospect of yet more "once-affordable" housing becoming unhabitable and unavailable.
  6. The neighborhoods in which these units are located become increasingly blighted; and
  7. A malaise afflicts all efforts to systematically address this unfortunate situation.

Factors Leading To Distressed Housing Conditions

Of course, a brief note such as this cannot address all the causes that have helped create this disturbing condition, especially given the complexities of many of these factors and the lack of consensus about others. Having so stated that, the RGB nevertheless believes that among the core factors producing this crisis is that properties that produce little or no profit also tend to be occupied by tenants who have the least ability to pay more in rents (due to such factors as job losses or other income erosion).

Adding to this unfortunate mix is that landlords of these properties have seen their already slim net operating incomes eroded over the years by increased taxes, water and sewer charges, the looming nightmare of lead poisoning and the costs of its abatement, etc.

While the RGB can take these taxes, water and sewer costs and other such factors into account when determining the yearly rent increases, it currently is powerless to address the underlying factors that result in these costs.

Yet another cause that's not limited to the distressed housing sector is growing rent collection losses, which often more than offset the intended beneficial effect of the RGB guideline increases. At its hearings, the RGB heard a host of owners claim that if they could just collect all the rents that lawfully were due, at least they would have a fighting chance of preventing their properties from being distressed. Especially in small buildings, though, the failure of even one or two tenants to pay their rent can make the difference between at least breaking even versus abandonment.

Failure of the New York City Housing Court System

At this juncture, the RGB would be remiss if it failed to voice its concern that the New York City Housing Court purportedly has failed to provide good faith, well-intentioned landlords with the prompt and effective remedies that at least theoretically are available to such landlords. We voice no direct criticism at any particular party, nor do I, as chairman, believe it proper to detail the improvements that several board members noted they would hope to see instituted in that court system.

Still, the RGB could not help but be struck by the widespread dissatisfaction with the current Housing Court realities as expressed by both tenants and landlords, but especially the latter.

Failing Tenant Income

As with all such studies, there is a danger of distortions at the extreme that might produce inaccurate averages. Nevertheless, while the average real incomes of all rent stabilized tenants declined somewhat in the early 1990s, the ability to pay rent of those with low incomes fell the furthest. While the wealthiest quartile of rent stabilized households experienced average income losses of nearly 5% during this period, due to a loosening in the upper end of the market those tenants' rents actually fell by an average of 4%.

Conversely, real incomes among those in the poorest quartile fell by 8.5%, while their rents increased by nearly 4%. As a result, in the city's poorest neighborhoods collection losses rose, and the owners of distressed properties slipped further into tax arrears. Consequently, absent extraordinary measures by other agencies whose actions affect the residential housing market, a sharp rise in tax foreclosures appears inevitable.

Making the RGB's job more difficult was the conflicting evidence concerning this income decline. Some statistics seemed to indicate that there was a general decline in income resulting from the city, regional and national recession of the past few years. Other statistics seemed to indicate that the middle and upper level income strata fared relatively well, while the lower income level was especially harder hit. If accurate, this latter explanation would help underscore the concerns about distressed housing.

Just as there was much discussion among RGB members as to the impact of the SCRIE program (i.e. the "Senior Citizen Rent Increase Exemption"), so too were there suggestions that part of the solution might lie with a so-called "low income SCRIE." The RGB realizes that such a program would require city and state coordination and approval, and certainly would involve significant financial costs to those governing authorities. Rather than endorsing such a concept at this time, the RGB instead hopes that the pertinent authorities would review the feasibility and propriety of such a rent relief program for the truly indigent.

Single Room Occupancy (SRO) Conditions

Perhaps no concern appeared so insolvable or elicited such heart-rending testimony as the issue of what generally is referred to as SRO housing. Frankly, the persons who rent these quarters often are among the most vulnerable and pitiable, and just as often, these SROs are all that stand between a person's sleeping in a relatively warm, dry room versus sleeping on a park bench or street grate.

Unfortunately, the conditions in these facilities often are deplorable. (For instance, shortly after the RGB concluded its 1993-94 duties, the scandal and seizure of the Kenmore Hotel erupted.) Certainly, there are many honorable persons who attempt to maintain SRO buildings, but the RGB heard considerable amounts of testimony regarding unsanitary conditions, rooms that barely approached what most persons would consider a minimal level of habitability, and buildings in which the physical safety of the tenants could not be guaranteed.

Deplorably, it seems that a number of universities have engaged in these practices in buildings in which they have housed students.

As shockingly, far from having "minimal" rents, a good number of buildings apparently had rents that would have afforded the tenant other options. After paying these rents, many tenants often had little money left to meet their other needs.

In fairness to the operators, the RGB heard testimony that SROs essentially were in a "Catch-22" situation: the RGB recently has approved only the most minimal increases (the 2% increase approved for this year was not uncommon), thereby depriving the operators of the funds to upgrade their facilities. (Other testimony, though, questioned whether these operators would invest greater increases in their buildings versus simply pocketing any additional monies.)

The SRO situation is unfortunate for many reasons, not the least of which is that in an ideal situation SROs could provide suitable living for a number of those currently in distressed housing. In many instances, these occupants would be quite content with a warm, safe single room with adequate toilet facilities. Unfortunately, what once was a staple of the New York City housing stock - respectable single room occupancy facilities - appear increasingly to be an endangered species.

The declining number of SROs coupled with the increasing number of homes (over the past ten years) seemingly would indicate that this is a crisis situation that has been ignored for far too long.

"Middle Sector" Housing

Having just described the worrisome conditions of the lower end of the residential housing market, the best that might be said for the middle segment is that it roughly held its own. Again, though, generalized statistics may lead to erroneous conclusions.

Landlords with large numbers of units were better able to buffer themselves by obtaining economically beneficial economies of scale. Still, as a general rule, operating costs increased about 3.5% per year during the past three years, while adjustments in legal rents have averaged about 3%. Thus, while one might conclude that RGB-approved rent increases more or less offset rising costs, it would appear that landlords in even this seemingly sound segment of the market were unable to accumulate any significant cash reserves, either to meet emergencies or else provide for improvement and expansion.

Thus, while these landlords have been able to "hold their own," there appears to be little incentive for large amounts of private capital to flow into new housing projects, except either at the "high rent" end or in conjunction with favorable tax laws to induce such new construction.

One bright spot during the past few years is that the decline of interest rates allowed many prudent landlords to refinance their mortgages, thus lowering their costs significantly. Moreover, in this sector of the rental market landlords tend to face much lower losses arising from nonpayment by tenants.

Unfortunately, recent interest rate increases by the federal reserve banks probably will soon foreclose this option for landlords who have not yet acted.

The Increasing Difficulty of the RGB's Duties

The RGB's mandated duties are to limit any undue effects on New York City's private housing market resulting from the legislatively-determined housing shortage. That is, the RGB is charged with countering the raw market power that private owners otherwise would have in a market in which demand is deemed to be so much in excess of supply.

The RGB performs this duty by making rent adjustments after reviewing a variety of "neutral" criteria, such as changes in operating and financing costs. This process is difficult enough, and the RGB is sensitive to both tenant and landlord complaints that the formula currently used either fails to reflect certain realities or otherwise factors them into the equation in an incomplete fashion.

It also has frustrated RGB members that they must set "across the board" rates, although all board members are painfully aware that a luxury apartment on Central Park South occupied by a high income tenant hardly is interchangeable with an apartment in a depressed part of this city which is occupied by a tenant whose income barely is above the poverty level. Thus, denied the ability to make "scalpel-like" incisions, the RGB instead must conduct this sensitive task with the blunt instrument of uniform guidelines.

Moreover, while this task is difficult enough even in those housing sectors where landlords are relatively solvent and tenants are relatively stable and affluent, it is all but a nightmarish process as regards the lower income and outright distressed sectors. While the RGB must take a generalized approach in setting rates, which perforce must factor into the equation those statistics from the middle and upper rental levels, in fact these generalized conclusions often fail to address the actual problems in the lower end housing market. A few percentage points increase in rent simply can't offset the effect of one or two tenants failing to pay rent in an apartment building of twenty units. Nor, conversely, can many of those other similarly situated tenants afford to pay much more than even the most "modest" of increase. Thus, RGB decisions risk being made as much on "politically sensitive" grounds as on good faith, objective, economic grounds.

As was noted by the RGB's former executive director, Timothy Collins:

"When rent collections are weak because of declining tenant incomes or various other social and institutional factors, the coordinates conventionally used to neutralize the effects of the housing shortage on rent levels lose precision. discussions of where rents should turn then descend into rather murky debates about how to spread economic pain in an even-handed or fair-minded way. in the short run, this may be a practical and unavoidable way to deal with exigent circumstances. after all, the primary purpose of appointing a rent board to study industry conditions and to adopt annual rent adjustments [as opposed to using a mechanical formula] is to inject a humane sense of flexibility into the process. in the long run, however, a regulatory process driven by aberrant pressures runs the risk of losing all sense of purpose and direction."

Summary

Those concerned with the RGB's functions continually should bear two considerations in mind. First, the RGB was meant to counteract the effects of what the state legislature determined was and is a continuing acute housing shortage. Such regulations, however, were never meant to either guarantee any owner a profit (i.e. thereby saving an incompetent owner from his own folly) or serve as an adjunct to the social welfare programs (i.e. protecting poor tenants from economic forces that would be in effect, even if the housing shortage did not exist).

Second, the rent regulations are themselves premised on exigent circumstances. Thus, as a corollary to the first point, piling yet more extraordinary measures on a program that itself is an extraordinary measure over time may result in the program being used for purposes for which it was never intended.

Thus, in sum, raising rents on all tenants to immunize owners from the effects of a recession or, conversely, holding down rents to preserve affordability for tenants who are suffering under the same downturn, would recast the RGB into an agency intent on "social engineering" and reallocating wealth in a highly subjective and often arbitrary manner. Over time, such an approach could only undermine the coherence, usefulness and legitimacy of the system.

The RGB's multi-faceted mandate is to (a) protect tenants from any untoward rent increase resulting from the current housing shortage; (b) guarantee landlords a fair and equitable return on their investments and efforts; and (c) protect and promote New York City's overall housing stock. While many would argue that these goals often are in conflict, the Rent Guidelines Board nevertheless shall endeavor, as it has in the past, to perform these duties to the best of its ability and in accordance with its legislative mandates.

Final Note

In closing, I would like to thank the RGB's staff for another year of outstanding work. What once was an administrative backwater has become one of the premier housing policy resources and authorities in the city, state and nation. In particular, I wish to recognize Doug Hillstrom's continuing leadership in producing the type of outstanding research and scholarship that is found throughout this volume.

I also wish to express my gratitude to all eight other board members who have been so gracious to me during my first year as chair. Although we've all not agreed on every policy or approach - nor were we expected to - I appreciate the contributions of each to the practical work of the board and to their efforts in stimulating those outside the RGB to reevaluate the city's and state's approach to housing policy. I can say without hyperbole their expertise, dedication, and sacrifice is greatly underappreciated by the general public.

Finally, on behalf of the RGB's members and staff I wish to extend our collective best wishes and my personal gratitude to Tim Collins, our very able executive director and legal counsel, who is departing after seven years of outstanding effort. His scholarship was exemplary, his integrity stood unchallenged, his devotion to the RGB's mission was steadfast, and his service to the board members and especially the chair was outstanding. He will be sorely missed.

Edward S. Hochman, Esq.
Chairman
New York City Rent Guidelines Board