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Re: How does rent regulation provide landlords a guaranteed return?

Posted by Mike Wolffs on March 25, 1997 at 23:47:12:

In Reply to: Re: How does rent regulation provide landlords a guaranteed return? posted by TenantNet on March 25, 1997 at 09:58:42:

I wanted to answer some of the question posed by Tenant Net

: : To Tenant Net
: : In your replies to several postings, you have stated that rent regulation, as
: : it currently exists, provides landlords with a guaranteed return. I would appreciate
: : it if you could explain the mechanism for this.

: Gladly. This question often brings out the wolves and starts circular
: flame wars on Usenet. We won't allow things to degenerate like that here,
: but it is an honest question and deserves an honest answer.

: : It is my observation that rent regulation is a lose/lose proposition for landlords.
: : In strong markets, it limits landlords upside return.

: That's true. The cost of housing should not flow with the wind, and too
: often, especially in New York, real estate values can double or half
: overnight based on sheer speculation or expectations. That's one of
: several purposes of regulation. It "tempers" the rate of increase of
: rents (it does not stop increases).

: : In weak markets, it provides
: : no protection against falling rents (admittedly a fairly rare occurrence).

: When's the last time you saw a rent stabilized unit go down - at least in
: Manhattan?

It has in my situation. See below.

: I suppose it could happen if the owner chooses to charge less
: than the "legal regulated rent", but there needs to be a combination of forces
: at work that don't come together too often. No matter the condition of the
: speculative market, there exists, at this time, a housing shortage and a
: vacancy rate below 5% and that is considered to be an "emergency". As long
: as there's demand, few owners will lower their costs even in a bad market
: (like the early 1990's). And because regulation encourages long tenancies,
: owners are also less likely to encounter massive vacancies in a building.
: Regulation does not provide a 100% shield from market forces, but tempers
: them just like a baffle.

: : I have
: : experienced both of these situation in my dealings with the NYC rental market. I rented
: : my current apartment at the height (depth?) of the recession. The apartment was sitting
: : empty, and the landlord had to cut the rent by over $100/month from the previous tenant in
: : order to rent it. Currently, based on my knowledge of rents of similar apartments in my
: : building, my apartment is at least $300/month below the current market rent.

: But was that a stabilized unit?

Yes. In a good area of the Upper East Side. And apparently the market rent that was below
the maximum stabilized rent became the base rent that succeeding increases were calculated on.
I doubt this is an oversight, since my landlord is a large corporate real estate concern.

: The stabilized legal regulated rent does not
: change based on a bad (or good) market -- at least not in theory. In those
: instances where it does happen, then it's operating on free market forces.
: In some low-income areas, that does happen -- which is why a) some ethnic
: populations and politicians don't place such a high importance on rent
: regulation, and b) the "abandonment" touted by idiots as the result of
: rent regulation is actually caused by an interplay of many other factors.

: : The only mechanism I can see as providing a guaranteed return to landlords would be that the
: : regulations discourages vacancies, preventing large numbers existing apartments from
: : coming onto the market simultaneously and driving down market rents. In addition, it
: : prevents older, smaller building from being emptied, demolished, and replaced with larger buildings,
: : having more units. This also prevents apartments from coming onto the market. This helps tenants
: : who already have apartments that they want to keep. But it presents a huge barrier to people
: : looking to rent apartments, by keeping supply tight and market rents high.

: It is true that rent regulation tends to keep tenants in place. THAT IS THE
: INTENT of the system. It stabilizes communities where people will put down
: roots, open businesses, pay taxes, support schools, etc. Rent regulation
: (contrary to some of the other tenant advocates) IS NOT ABOUT low rents
: for poor people. It's a way to keep the BROAD middle class in the city.
: Some cities that never took those steps (i.e., Detroit never had rent
: regs) are nothing but burned out shells. Of course not all cities have
: this dynamic. But NY, Boston and other older urban areas needed something
: like this. Washington has the fed govt. which keeps the city alive.

: Rent Regulation does this:

: a. it allows a guranteed increase either through the Rent Guidelines Board
: annual increases on renewals or vacancies. The level of those increase
: vary year by year on many factors, but they have never gone down and have
: outstripped inflation by a large factor.

: b. Rent Control units get a guaranteed 7-1/2% increase every single year
: until that rent (the Maximum Collectible Rent) hits a ceiling (the
: Maximum Base Rent) which is adjusted upwards every two years. The MBR
: is base on a complex formula.

: c. Owners can get MCI increases building-wide for improving the building
: (an incentive) and can get individual unit increases of 1/40th the
: cost of the improvement. Many see this as a windfall as the increases
: stay on forever.

: d. Above all, if an onwer is not getting a 8-1/2% return, he can apply
: for a "hardship" increase that will give him such a return. All he has
: to do is prove he's not making enough.

: It's guaranteed!

If the market allows (which I agree is usually the case)

: : You seem to imply that there is an undercurrent
: : of support from the rent regulation from the real estate lobby.

: That's not what we said or implied, although a smart owner who
: is not Donald Trump and who can be affected by the highs and lows
: of a volatile market might actually wish for a force to temper those
: ups and downs. To many in business, the value of "certainty" cannot
: be underestimated. That's why many investors choose conservative
: mutual funds -- they're safe and not high risk.

: : Any hints at cooperation
: : from the landlords are likely to be just part of a PR campaign to
: : provide both political cover and confusion as the clock ticks down
: : to expiration.

: The rush to find cover is from the democratic politicians who give
: many good speeches, but do little to fix the system.

: : I also feel that the need of people looking to change apartments are not being addressed
: : at all by the current regulatory scheme. At some point in the near future, I would like to
: : find a new apartment, and current market situation is a major problem in that regard.

: Blame that on many factors, but not rent regulation. Although as I state
: above, the intent of rent regulation is to stabilize neighborhoods and to
: keep tenants in place, it should not be an impediment to mobility. First, it's
: a false notion that you can't find a new unit. Of course you can. But second,
: the shortage is due to the lack of new housing and any new contruction (since
: 1974) is not under rent regulation. The impediments to new housing is not
: rent regulation, but complex other factors -- including profitability, financing
: and zoning.

: : Your thought would be appreciated

: To an extent I question the very basis of your question. Although it appears
: to be sincere, you (and others) tend to buy into the notion that this
: debate is about finding relief for owners. That's hogwash. Owners have
: had a free ride for many years (at least since 1984 when Cuomo gave them
: DHCR).

You forgot to mention the Co-op boom of the 80ís. I donít know why, but I was amazed to
discover that Co-oping the most effective way for a landlord to unilaterally implement vacancy
deregualtion in a building.

: The system was gutted and there's no enforcement. It's in essence
: turned into a voluntary system. Second, although I've tried to answer
: your question, such questions put tenant advocates in the corner where we
: find it necessary to defend the current system. I resent that. The current
: system is a give away to owners and the politicans know that. But that's
: fodder for another day.

Whether you resent it or not, regulation will have to be defended, or it will end. This is one of
the friendlier forums in which to do it (as opposed to, say, the State Senate)

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