Overview of Small Rent Stabilized Buildings, 1995


Introduction

The Rent Guidelines Board has heard considerable testimony from both landlords and tenants, as well as from housing industry experts, regarding the condition of small buildings. Many argue that small buildings are fundamentally different from large buildings in important respects. For example, small buildings are more vulnerable to unusual circumstances such as large amounts of unrecovered rent, breakdown of major building systems, and economic recession. Conversely, larger buildings can take advantage of economies of scale by spreading their fixed costs, as well as any unusual expenses, across more apartments. Large buildings may also have a greater pool of reserves to cover property or economic hardships.

Others claim that it is not so much the buildings that differ, but the owners of the buildings. The argument is that owners of large buildings have more housing experience and are frequently "professional" property managers or investors. Owners of large buildings also have more access to financing for improvements or enjoy better financing terms. Some have argued that the residents of small buildings are much more distressed than the general population living in rent regulated housing in New York City.

The analysis that follows draws heavily on the research that the RGB Staff has conducted in the past. Although prior reports have found that small and large buildings differ, this is the first attempt by RGB Research Staff to use two important data sources - the triennial Housing and Vacancy Survey (HVS) and the annual Real Property Income and Expense (RPIE) statements filed with the Department of Finance - to specifically evaluate the circumstances of small buildings.

Summary

Last year, the Rent Guidelines Board (RGB) established separate guidelines for small buildings.[1] Specifically, the RGB granted a $15 low-rent supplement on top of the lease renewal for apartments that rent for less than $400 per month in buildings with 30 or fewer units. The Board also established a separate vacancy allowance for low-rent (< $400 per month) apartments in small buildings - owners are allowed to increase their rents by 10% upon vacancy, as opposed to 5% for other apartments. This year we decided to undertake a study of small buildings to help the RGB decide if it should continue to establish separate guidelines for apartments in small buildings.

While this report is a preliminary overview of small buildings[2], the numerical data we present does not fully explain the unusual financial problems many small buildings encounter. Although small buildings are not vastly different from larger buildings in most respects, small buildings are slightly worse off than large buildings according to every variable we reviewed. Perhaps the cumulative effect of these myriad factors, rather than one or two significant ones, are causing small buildings to operate closer to the margin. Or, perhaps the buildings in tax arrears are a subset of all buildings and have lower net operating incomes due to reasons we cannot pinpoint using HVS and I&E data.

The following is a summary of notable differences we found while conducting this study.

Income and Expenses

Building Characteristics

Owner Characteristics

Resident Characteristics

Rent and Income

In examining the finances of small and large buildings, we first compared their average income. According to the Income and Expense (I&E) data, small buildings earn an average of $585 per unit each month, or only $18 less than the average income for large buildings. The Housing and Vacancy Survey (HVS) data from 1993 shows that there is a larger discrepancy in rents for small and large buildings. The average stabilized contract rents are $541 and $606 for units in small and larger buildings, respectively or a 12% difference. Further, over one-fourth of apartments in small buildings rent for $400 or less, while more than one-fifth of units in large buildings rent for this amount.

See Comparison of Units in Small and Large Buildings

Rents are lower in small buildings, in part, because they are somewhat older than large buildings. Almost 9 out of 10 of the apartments in small buildings were built before 1947, while this figure is 2 out of 3 for units in large buildings. A second reason apartment rents in small buildings are lower is that they are mainly located in Brooklyn. More than 40% of units in small buildings are in Brooklyn, while almost the same percent of apartments in large buildings are located in Manhattan where apartment rents are substantially higher.[3]

We thought that apartments in larger buildings may have more bedrooms, but this is not the case. The median number of bedrooms is 3 and 2 for dwellings in small and large buildings respectively. So, apartments in large buildings have higher rents even though these apartments tend to be smaller.

Small rent stabilized buildings also contain a larger proportion of rent-controlled dwellings, which tend to have much lower rents. Thus, small buildings are taking in less income from both types of rent regulated apartments. Again this could be a function of small buildings being slightly older than large buildings. More than 15% of all regulated apartments in small, pre-war buildings are rent-controlled, compared with approximately 11% of the regulated units in large, pre-war buildings. Controlled rents in smaller buildings are also lower - averaging $335, or roughly $85 less than the average for large buildings. An apartment rent of $335 may not be sufficient to cover the costs of operating the dwelling unit.[4]

The income that small buildings earn is further reduced by their unusually high vacancy and collection losses. The HVS data shows that the vacancy rate for small buildings (4.8%) is substantially higher than for large buildings (2.9%). To estimate the total vacancy and collection losses, we calculated the difference between the average contract rent from the 1993 HVS and the average rent from the I&E statements - much of this difference reflects vacancy and collection losses. For small buildings vacancy and collection losses average 17%, which is almost twice as high as for larger buildings. It can be argued that rental losses adversely affect the finances of small buildings to a greater degree, because they operate on slimmer margins (see O&M-to-income ratios in the chart I&E Data Shows Some Differences Between Small and Large Rent Stabilized Buildings).

We thought perhaps the high vacancy rate in small buildings is because the asking prices of vacant units are too high to attract potential renters given the services and amenities offered in these buildings. For example, few small buildings employ the doormen or concierges commonly employed in large buildings. According to the 1993 HVS, the mean asking rent of vacant, for-rent units is $654 for units in small buildings and $687 for large-buildings units. Because both figures seemed high, we reviewed the duration of vacancy to see if the asking price for vacant units may be too high. Though the duration of vacancy was slightly longer in small buildings, [5]neither experienced unusually long vacancy periods which suggests that tenants are willing to pay the asking rents. Nor would the difference in duration of vacancy explain the entire discrepancy in the vacancy rate between small and large buildings.

Expenses

While rents in small buildings are below average, expenses are slightly higher than average. Income and Expense data provided by the Department of Finance shows that small buildings have average operating and maintenance costs of $413, while the O&M costs average $408 in large buildings.[6]

Based on the above average income and cost data, it is apparent that the income generated in most buildings is adequate to cover their O&M costs, but it is difficult to determine if the income is also sufficient to cover the mortgage and capital costs the building incurs. Because a third of apartments in small buildings rent for $400 or less, many small buildings have negative operating incomes. Nearly 16% (511) of the small buildings in the I&E sample had O&M costs which exceeded gross income. Only 10% of large buildings in the sample have O&M-to-cost ratios over 100%, because they have higher rental income.

Regardless, it seems curious that small buildings have higher average costs given that small-building owners typically perform many of the necessary repairs themselves and maintain their own accounting and expense records. One likely reason small buildings have higher per-unit costs is because they are older and require more maintenance.[7] As reported above, almost 90% of apartments in small buildings are pre-war compared with less than 70% for larger buildings.

A second explanation for higher O&M costs is that a larger percent of small buildings have commercial space. Almost half of all small-building owners augment their rental income by leasing commercial units[8], whereas only a quarter of large buildings have such space. Small buildings that have income producing commercial space appear to be in better financial condition (O&M-to-income ratio of 69% compared with the average O&M-to-income ratio of 71% for all small buildings), but these buildings would not produce a profit if the commercial space were vacant.

A discussion of costs is not complete without mentioning the plan by the City of New York to fully implement water and sewer metering by the end of the decade. According to the findings of the water and sewer study conducted by Speedwell, Inc.[9], the costs of metering will disproportionately fall on smaller buildings. The study concludes that the cost impacts of metering are inversely related to rent levels. Since apartments in small buildings typically have lower rents, they will experience higher cost increases. The study further stated that "[a]mong buildings with average rents of less than $400 per month, approximately 60 percent will have increases in their water and sewer bills of some amount as a result of metering, and over 21 percent will have increases of $200 or more."[10] Thus, we can expect that converting from flat-rate billing to water metering will negatively affect small buildings more so than large buildings.

See Income and Expenses of Rent Stabilized Buildings

Tax Arrears

Since small buildings generate lower income and have slightly higher expenses, they have less net operating income ($172 and $195 for small and large buildings, respectively) and are, therefore, potentially more vulnerable to downturns in the economy. During the recession of the early 1990s, the number of small buildings in tax arrears, as well as the level of arrears, soared. Almost three-quarters of all buildings in tax arrears have fewer than 20 units.

The typical building in tax arrears is a pre-war building with 12-15 units and has less commercial income than average. Almost half of small buildings have commercial space, the income from which is more than one-fifth of their total income. Buildings in tax arrears earn only 7% of their income from commercial enterprises. Thus, we can conjecture that the small buildings that have fallen into tax arrears are a subset of the population of all small, rent stabilized buildings and may have very different characteristics such as lower apartment rent, less commercial space, as well as a higher commercial vacancy rate. The table Comparison of Small Buildings and Buildings in Tax Arrears shows some additional differences.

Changes in Income and Costs

We reviewed changes in income and expenses to determine if small buildings have experienced a higher increase in costs and/or a lower increase in income than bigger buildings in recent years. The percent change in expenses was about the same as the percent change in gross income for both small and all rent stabilized buildings from 1990 to 1993. The average increase in gross income and expenses were 9% and 8% respectively for small buildings, while all rent stabilized buildings experienced a 6% increase in both expenses and gross income.

We then examined the current tax burdens and changes in real estate taxes for both building sizes, because many have argued that small buildings are "overtaxed". Our analysis indicates that small buildings do pay slightly higher real estate taxes per month relative to their income than larger buildings. The ratio of real estate tax to monthly income is 18% for small buildings and 16% for large buildings. Specifically, small buildings pay an average of $106 per apartment each month, while the average for all buildings is $97, though small buildings earn approximately $18 less per unit on average. Even though these differences do not appear extreme, we cannot determine if certain small buildings are bearing a greater tax burden than these averages suggest.

When looking at the changes in real estate taxes from 1990 to 1993, it is apparent that taxes increased by roughly twice as much as income in both small and all buildings. Taxes increased by a factor of 2.2 more than income on average in small buildings and by 1.8 on average in bigger buildings. We can, therefore, conclude that small buildings have taken on a somewhat greater share of the tax burden between 1990 and 1993. (See Small Buildings Have Taken on More of the Tax Burden Since 1990)

Owners of Buildings

The RGB has heard considerable testimony that small building owners are fundamentally different from owners of large buildings. It is argued that small owners typically have less capital to reinvest in their buildings, partly because their buildings generate lower profits, and they have less "professional" housing experience.

Although there is insufficient "hard" data available for the RGB to confirm or deny these claims, it seems valid that larger buildings have more resources to reinvest in their buildings and to use as collateral for improvement loans. Additionally, small buildings may be inhibited from undertaking renovations because of delays in Major Capital Improvement (MCI) approvals. These approvals typically take a year or more, during which time owners are not able to recoup the cost of the improvements from their tenants. Larger buildings would seem to have more reserves which they could use to cover the renovation costs until they can implement the MCI increases.

In addition, small-building owners tend to have different motivations for purchasing a building. For example, many small-building owners purchase a building to live in one apartment and to rent out the others to cover the cost of the mortgage. Rarely do owners of large buildings live in the buildings they own. Also, because the cost of purchasing a large apartment building can be enormous, frequently corporations, rather than sole proprietors, are the owners of buildings with 20 or more units.

Tenants

We also studied how residents of small and large buildings differ. Perhaps the most noteworthy finding is that residents of small buildings have slightly lower household income, but are quite similar to tenants in large buildings in terms of their household composition and length of occupancy.

Residents of apartments in smaller buildings have average incomes of about $27,000, while residents of larger buildings earn just under $31,000.[11] In addition, nearly half of apartments in small buildings are in Brooklyn where average household income is less than $23,000, while almost half of large-building apartments are in Manhattan where the mean income is nearly $35,000. Roughly one-fifth of households in both building sizes receive some form of public assistance which averages just over $5,500 per year. It is worth mentioning that a moderately higher percentage of households in small buildings receive public assistance though their benefit levels are nearly identical to residents of larger buildings.[12] In addition, less than one-tenth of households in both building sizes receive rent subsidies.

Regarding household attributes, residents of small and large buildings are very similar. The median number of persons per household (2) and median number of persons per room (.7) are the same for residents of small and large buildings; the only notable difference is that residents of small buildings are typically younger. (See chart Characteristics of Residents)

Since contract rents are, to a large extent, associated with length of occupancy of sitting tenants, it is important to understand whether occupancy patterns vary according to building size. Almost a quarter of residents of small buildings moved into their present rent stabilized apartments within the previous two years, while less than one-fifth of residents of larger buildings moved in within this time period. The trend continues for longer occupancy patterns as well. Only 8% of households in small buildings have not moved in 20 years, while 12% of households in large buildings remained in the same apartment for 20 years or more. Occupancy patterns also vary by borough. For example, residents of the Bronx consistently moved less recently and residents of Brooklyn uniformly moved more recently in small buildings. This may account for some of the difference in rents between small and large buildings and among boroughs.


Notes

  1. Buildings with 30 or fewer dwelling units.

  2. For this report, we defined a small building as having fewer than 20 units, mainly because these buildings are the majority of the buildings in tax arrears. There are over 220,000 occupied apartments in small and 758,000 apartments in large rent stabilized buildings in New York City

  3. The average contract rent for apartments are $482 and $636 for Brooklyn and Manhattan, respectively.

  4. The average monthly O&M cost according to the I&E is $413 for a rent stabilized building with 11-19 units. We do not expect that rent controlled units have significantly different operating costs.

  5. The average duration of vacancy for small buildings is 3.7 months versus 2.9 months for large buildings.

  6. There are potential problems with using the I&E data for a study of small buildings. First, it does not include expenses such as mortgage and capital costs which may differ considerably for small and large buildings; second, it only includes buildings with fewer than 11 units if the building has commercial space; and third, the 1992 audit of expenses found that expenses are overstated by approximately 8% in all buildings and 13% for small buildings filing RPIE statements. We use unadjusted cost figures in this study because we cannot compute the statistical reliability of the audit figures.

  7. Although the I&E Study showed that buildings with 11-19 units spend about the same per unit for maintenance as buildings in the 20-99 and 100+ categories, again, small building owners probably perform much of their own maintenance, which partially explains why their labor costs are considerably lower.

  8. As mentioned in footnote number 6, buildings that have fewer than 11 units are included in the I&E data set only if they have commercial space. Therefore, the I&E likely overstates the percent of small buildings that have commercial units.

  9. "The Impact of Metered Billing for Water and Sewer on Multifamily Housing in New York", September, 1994.

  10. Ibid, page 36.

  11. The share of income that residents pay for rent is 24% in small buildings and 23% in large buildings.

  12. The HVS data shows that 25% of households in small buildings receive public assistance or welfare compared with 22% of households in large buildings.