In another ominous note, the size of buildings at least three quarters in arrears has been increasing steadily for the past four years. In 1989, the average size of a building in arrears was 13.4 units. In 1993 the average size was 17.6 units.
Last year's report on tax arrears succeeded in characterizing buildings with tax arrears but was unable to answer several questions concerning mortgage debt and foreclosure actions, the current physical conditions of the buildings, and various characteristics of the owners of these buildings. Towards these ends, in the past year staff has: (1) conducted further research on mortgaged properties, (2) surveyed the external condition of over 300 properties, and (3) mailed out 2500 surveys to owners of buildings with tax arrears.
Much of last year's report focused on mortgage debt and found buildings with tax arrears to be overmortgaged as a group, yet did not know to what extent these buildings are facing foreclosure actions. This year, staff determined that 1 out of 5 buildings with arrears face mortgage foreclosure actions. However, relatively few of the foreclosure actions have yet resulted in property seizures. Furthermore, statistical analysis found that mortgage debt, while certainly not the sole causal factor of arrears, probably does play a significant and independent role, thus reiterating the findings of the previous report.
Are buildings with tax arrears in worse physical condition? A survey of the external condition of these buildings found them to be in slightly worse physical condition than buildings citywide. Few buildings had walls or windows in poor condition and nearly all of the buildings were fully occupied. However, buildings with tax arrears had significantly less commercial space than their citywide counterparts.
The survey of owners of buildings with tax arrears has shown that a 'typical' owner of a building in tax arrears owns the building selected for the survey and one or two other small buildings (perhaps a private residence). Few of these owners employ outside management companies. The typical building in tax arrears is a pre-war 12-15 unit building with about one rent controlled unit and a vacancy rate roughly equal to the citywide norm.
The owner survey revealed vacancy and collection losses to be a severe problem facing buildings with tax arrears. According to the respondents, nearly 20% of the potential monthly rent roll is typically uncollected, 6% due to vacancy and 13.5% due to collection losses. Unrecovered rent of more than $2500 from a single tenant was a widespread dilemma affecting nearly 70% of owners. Owners also have relatively little income from commercial units with which to buffer a shortfall in the collection of residential rents.
When asked what one single RGB initiative would improve the economic viability of their building, two-thirds of the owners favored some type of supplemental increase. Specifically, 41% of respondents favored a supplemental increase for low rent apartments or a supplemental increase for long term tenants, and 26% favored a supplemental increase for small buildings. In contrast, only one-third of the owners favored increased general guideline allowances - 28% favored higher lease renewal allowances and 5% favored higher vacancy allowances.
The City Planning arrears file was matched with the RGB's list of rent stabilized properties, resulting in a database consisting of stabilized buildings with tax arrears in one or more years from 1988 to 1993. All of these buildings were registered with the State Division of Housing and Community Renewal. Buildings less than three quarters in arrears were excluded from the sample; the amount owed by many of these buildings was insignificant.
In 1993 both the number of buildings in arrears and the level of arrears grew worse. The number of rent stabilized buildings at least three quarters in arrears has been increasing steadily since 1989 and did not lose any steam in 1993. Of the 38,000 registered buildings, 4291 (11%) were at least three quarters in arrears in January 1994. This figure is a sizable increase over 1992 and more than 50% higher than 1988.
See Tax Arrears per Unit and Number of Rent Stabilized Buildings in Arrears, 1988-93
The average amount of arrears per unit in buildings at least three quarters in arrears has also increased since 1992, though at a slightly slower rate of 8%. The mean level of arrears has increased 91% since 1988, from $800 per unit to $1530.(1)
The fact that mean arrears levels have not increased as much as in previous years does not necessarily mean that growth in arrears is slowing. In fact, in 1993 there was an influx of slightly larger buildings to the arrears group that had not been in arrears in the previous five years. These buildings, which made up almost 20% of all buildings in arrears in 1993, had mean arrears levels of $680, substantially lower than the mean level for all buildings in tax arrears. For buildings that had been in arrears in both 1992 and 1993, the mean level of arrears has increased 33%, from $1530 to $2030 per unit. This group of buildings comprises 70% of the sample and for these buildings, 1993 has witnessed their on-going deterioration.
Although the number of buildings at least three quarters in arrears increased only 12% since the previous year, the number of units in arrears increased twice as fast, from 60,900 in 1992 to 75,500 in 1993. In fact, the size of buildings at least three quarters in arrears has been increasing gradually but steadily since 1989. In 1989, the average size of a building in arrears was 13.4 units and in 1993 it was 17.6 units. The new additions to the arrears group in 1993 average 26 units, substantially higher than the overall mean building size. As the long-running recession continues, larger and larger buildings have begun to accumulate arrears.
See Total Number of Units and Average Size of Buildings in Arrears, 1988-993
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|Year of Filing||% of Buildings Redeemed|
Nevertheless, a precipitous drop in the redemption rate of properties filed for vesting (see table above) foreshadows larger numbers of buildings vested in the near future. The redemption rate, calculated as the percentage of properties withdrawn from the vesting process by December 31st of the year following the year of initial filing, decreased from 68% for buildings filed in 1991 to 29% for buildings in 1992. With far fewer properties being redeemed by owners, the number of buildings taken by the city should increase dramatically.
The analysis reveals a statistically significant and positive relation between mortgage debt and arrears.(3) However, factors such as building location, lis penden status(4) , and date of observation (i.e., if the building was in arrears in the recession years of 1990 or 1991, or in the pre-recession years of 1988 or 1989) also significantly and positively affect the level of arrears.(5)
Although the analysis has indicated a statistically significant relationship between debt and arrears, it also suggests that in times of recession there are equally, or more, important causes of tax arrears than mortgage debt. The measured association between debt and arrears is strongest in 1988 and grows continually weaker in later periods. In fact the measured association is not even statistically significant in 1991 - recessionary forces have overwhelmed any effect debt may have.
To insure that these results were accurate, further analysis attempted to control for any variability in arrears due to differences in average rent by creating a ratio of arrears to rent levels for each particular building. This ratio variable was found to be significantly and positively related to mortgage levels in three of the four years of observation, thus supporting the hypothesis that mortgage debt affects arrears independently of other variables.(6)
The analysis has shown that the level of mortgage debt positively affects the level of tax arrears. Yet there are other qualities, such as building location and year of observation, which also positively affect the level of tax arrears. It would be difficult to draw the conclusion that high debt levels are solely responsible for the level of tax arrears, particularly in times of recession. Yet the analysis supports the notion that high debt levels are at least one significant factor in determining a building's tax arrears.
Sixty three buildings had at least one pending mortgage claim on their property, or 19% of the 333 building sample. Nearly one out of every three buildings in Manhattan had an outstanding claim.(7) The incidence of lis penden status is lower in the other boroughs, from one out of every five buildings in Queens to one out of ten in Brooklyn.
A distinct trend emerges when comparing buildings with mortgage claims to those without. In 1988 lis penden and non lis penden buildings had comparatively equal arrears levels per unit. But after 1988 arrearage in the lis penden buildings grew much faster. Mean arrears levels increased 330% for lis penden buildings, from $225 per unit in 1988 to $970 per unit in 1991. Arrears in buildings without mortgage claims rose only 68%, from $235 to $400.
Coupled with this rise in arrears is a corresponding rise in debt levels. The mean debt level of a lis penden building rose 97%, from $20,650 per unit in 1988 to $40,620 in 1991. Debt burdens for buildings without mortgage claims rose 55% in the same period, from $12,000 to $18,620 per unit. In each year of observation, lis penden buildings had roughly twice as much of a mortgage burden as non lis penden buildings. It appears that the relatively large debt burdens of lis penden buildings significantly affected their ability to pay taxes.
See Average Mortgage Debt per Unit, Lis Penden Buildings vs. Non-Lis Penden Buildings
Another striking finding in the examination of the lis penden subsample is that mortgages issued by banks constituted only a small proportion of the loans in default. Of the 45 loans reviewed, 28 were issued by private mortgage lending companies, 10 by private individuals, and 7 by banks. It is difficult to determine the cause for the prevalence of non-bank lenders. However, after comparing the terms and interest rates in this subsample with the findings of the RGB's annual mortgage survey, one can definitely exclude the possibility that non-bank lenders were offering more attractive lending terms. In fact 41% of the mortgages reviewed had terms less than five years- the minimum term offered by banks in the annual mortgage survey.
It is difficult to determine the precise resolution for all the foreclosure actions. In only ten instances (24% of the buildings with available information) did an action force the indebted owner to sell the property. There was no apparent resolution for the majority of cases reviewed and in most instances the defendant still holds the deed. This lack of information suggests a loan modification or other agreement was reached between the lender and the owner but there are no guarantees that this is the case.
In sum, mortgage debt was found to be one significant cause of tax arrears among stabilized buildings. There are other significant causes as well, indeed, some buildings in the tax arrears sample had no mortgage debt whatsoever. Nevertheless, large debt burdens were an important factor, particularly for buildings facing mortgage foreclosure actions. In these buildings, concentrated mostly in Manhattan, high mortgages and the recession of the early nineties formed a powerful combination which left them unable to make both tax and mortgage payments.
The survey found that, on the whole, the external conditions of the surveyed buildings were only slightly worse than the citywide norm. Nearly all of the buildings surveyed were occupied and few had walls or windows in poor condition. In fact several buildings appeared to have been recently renovated. Perhaps the most pronounced difference concerned the scarcity of commercial units - buildings with tax arrears had significantly less commercial space than their citywide counterparts.
Almost all of the buildings are fully occupied and most of the units are in exclusively residential buildings. Only 20% of the units are in buildings which also have commercial space, a figure significantly lower than the 32% of units citywide as determined by Income and Expense data.
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|All Buildings 1991 HVS||RGB Survey
||Condition of External Walls||A.||Missing bricks, siding, or other wall material||1.9%||1.5%
||B.||Sloping or bulging of outside walls||0.5%||0.4%
||C.||Major cracks in outside walls||1.2%||1.4%
||D.||Loose/hanging cornice, roofing, or other material||0.9%||6.4%
||E.||None of these problems with the walls||95.8%||91.2%
||F.||Unable to observe walls||0.4%||0.1%
||Condition of Windows||A.||Broken or missing windows||2.6%||5.7%
||B.||Boarded up windows||2.1%||1.7%
||C.||Loose window frames||0.6%||9.6%
||D.||None of these problems with windows||95.3%||85.9%
||E.||Unable to observe windows||0.1%||0.0%
||Condition of Entrances and Exits*||A.||Broken or missing front door|| -- ||1.0%
||B.||Broken or missing fire escapes|| -- ||0.0%
||C.||Entrances are not locked or secure|| -- ||9.6%
||D.||Broken or crumbling stoop|| -- ||6.0%
||E.||None of these problems with entrances or exits|| -- ||85.9%
||F.||Unable to observe entrances or exits|| -- ||3.6%
Source: 1991 Housing and Vacancy Survey and 1993 RGB External Survey
* No HVS information available for this category.
The overall condition of windows appears to be slightly worse among buildings with tax arrears. Nearly 10% of the units have loose window frames as compared with 1% of the city wide average, and 6% have broken or missing glass panes compared with 3%. Yet surprisingly there is a high incidence of modern windows as well; in over 40% of the units, it appears, the original windows have been replaced.
As expected, the condition of the surrounding buildings is worse in the poorest sections of New York: northern Manhattan, the southern Bronx, and northern and eastern Brooklyn. Units located on blocks with vacant or boarded up buildings and vacant lots are almost entirely located in these areas. Nearly 70% of all units in the survey are located on blocks with no vacant lots or other problems mentioned, a finding similar to the citywide average.
In sum, buildings with tax arrears are, to a small extent, in worse physical condition than buildings citywide. They have slightly more problems with walls and windows than other buildings. However the relative lack of commercial space emerges as the most pronounced difference between buildings with tax arrears and their more financially sound counterparts.
The staff's initial concern was whether the survey response was representative of the entire arrears sample. In building size and location, the response group largely mirrored the overall tax arrears sample. The median building size of the survey respondents is 11.5 units and the median size in the whole arrears group is a similar 11 units. The borough distribution of the survey responses were also fairly similar to the arrears group as a whole. However, the mean and median arrears levels for the survey respondents are lower than the citywide totals. Although the arrears values in the survey response exhibit the same trends that the citywide values do- constantly increasing, particularly after 1990- the values are also consistently lower.
This difference in arrears levels between the respondents and the arrears group in general has certain implications for the interpretation of the survey. Because the survey respondents are in less dire financial straits than the general arrears group, the results of the survey may actually understate problems such as vacancy and collection losses, the inability to raise rents, the unavailability of financing, and so on. On the other hand, certain policy preferences expressed by the respondents may not reflect the choices of owners whose buildings are in even higher tax arrears- owners of buildings with very high tax arrears may believe their buildings warrant completely different policies than owners of buildings with little arrears.
One out of five owners was past the retirement age of 65. Only 6% of the owners employed an outside management company to run the building.(10) This percentage, although small, is not unusual- 8% of the respondents to the staff's annual Price Index Survey employed outside management companies.
The typical building is a pre-war 12-15 unit building. Often the superintendent or owner occupies one of the units and, on average, 8% of the units are rent controlled. The proportion of controlled units in these buildings is rather normal- in community districts with high levels of arrears, 8% of all units are rent controlled as well.
The vacancy rate in these buildings was 4.6%, slightly higher than the citywide vacancy rate as determined by the 1993 HVS but roughly comparable. The length of unit vacancy was much shorter, however, in the surveyed buildings as opposed to the HVS data. In the RGB survey, 32% of vacant units had been on the market for less than one month as opposed to 12% of the vacant units in the 1993 HVS. Thus if these results are to be believed, buildings with arrears are less affected by long term vacancy than the citywide whole.
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|Breakdown of a major building system, such as the boiler or roof, requiring repairs or replacement costing $2500 or more||70%|
|Unrecovered rent of $2500 or more from a single tenant||68%|
|Legal fees or other unusual administrative cost in excess of $2500||40%|
|Vandalism of common areas or apartments resulting in damage of $2500 or more||34%|
|Fire damage to common areas or apartments resulting in damage of $2500 or more||15%|
Buildings with tax arrears have fewer commercial units than the citywide average and derive less income from them. About 28% of the units are in buildings with commercial space. Although this figure is greater than the 20% determined by the RGB's external conditions survey, it is still less than the 32% figure for the city as a whole.
The commercial vacancy rate among the respondents was 22%- there is no comparable figure for all stabilized buildings but this seems unusually high. Only 6% of building income was attributable to rent from commercial units, less than the 11% of income that the 1994 Income and Expense report determined for the citywide total.
Refinancing activity in the past year was virtually non-existent for the surveyed buildings. Only 4% of the buildings reported that they were able to reduce their mortgage debt through refinancing and another 1% were able to renegotiate terms with their mortgage lender. This result is in stark contrast with the 1994 RGB Mortgage Survey which found that 23% of fixed rate mortgages were refinanced last year.
See City Policy Options Preferred by Owners of Buildings in Arrears
Two-thirds of owners with buildings in tax arrears believe that a targeted RGB initiative would improve the profitability of their buildings more than an increase in the general guideline allowances. Specifically, 41% of respondents favored a supplemental increase for low rent apartments or a supplemental increase for long term tenants, and 26% favored a supplemental increase for small buildings (defined as 20 units or less). The other one-third of the owners favored general, non-targeted increases found in higher renewal and vacancy allowances- 28% of respondents favored higher lease renewal allowances and 5% favored higher vacancy allowances.
See RGB Policy Options Preferred by Owners of Buildings in Arrears
Redemption Rate for Rent Stabilized Buildings Year of % of Buildings Filing Redeemed ======= ============== 1989 90.8% 1990 73.1% 1991 68.1% 1992 29.4% Note: The 1991 figure is based on a weighted average and the 1992 figure includes a projection for December 1993. Source: Department of Finance, Annual Reports on the NYC Real Property Tax.To return, click here
External Building Conditions, Buildings in Arrears vs. Citywide Norms All Buildings RGB 1991 HVS Survey Condition of External Walls A. Missing bricks, siding, or other wall material 1.9% 1.5% B. Sloping or bulging of outside walls 0.5% 0.4% C. Major cracks in outside walls 1.2% 1.4% D. Loose/hanging cornice, roofing, or other material 0.9% 6.4% E. None of these problems with the walls 95.8% 91.2% F. Unable to observe walls 0.4% 0.1% Condition of Windows A. Broken or missing windows 2.6% 5.7% B. Boarded up windows 2.1% 1.7% C. Loose window frames 0.6% 9.6% D. None of these problems with windows 95.3% 85.9% E. Unable to observe windows 0.1% 0.0% Condition of Entrances and Exits* A. Broken or missing front door --- 1.0% B. Broken or missing fire escapes --- 0.0% C. Entrances are not locked or secure --- 9.6% D. Broken or crumbling stoop --- 6.0% E. None of these problems with entrances or exits --- 85.9% F. Unable to observe entrances or exits --- 3.6% Note: Figures are percentage of units in buildings with observed conditions. A building may have more than one detrimental condition and thus categories may sum to more than 100%. Source: 1991 Housing and Vacancy Survey and 1993 RGB External Survey * No HVS information available for this category.To return, click here
Percentage of Buildings Reporting Costly and Unusual Events in the Period 1988-93: Breakdown of a major building system, such as the boiler or roof, requiring repairs or replacement costing $2500 or more 70% Unrecovered rent of $2500 or more from a single tenant 68% Legal fees or other unusual administrative cost in excess of $2500 40% Vandalism of common areas or apartments resulting in damage of $2500 or more 34% Fire damage to common areas or apartments resulting in damage of $2500 or more 15% Source: RGB Survey of Rent Stabilized Owners, 1994.To return, click here