Thursday, February 23, 2006

Only in New York

This afternoon I was out and about in the city helping Superfly. On my way over to meet her, I was driven by a garrulous taxi driver named Francesco. Frank was like a Hollywood version of what most people think a New York City cabbie should be like (well, the non-Travis Bickle kind, anyway). He's in his late 60s, was born in Italy and speaks with a combination Italian/New York accent. He curses freely and offers advice unsolicited.

As we were driving around, he told me how he gave up his rent controlled apartment on Carmine and Bedford about 20 years ago and had regretted it ever since. His rent then was $32/month. The friend to whom he ceded the apartment now pays $225. This is true rent control, not rent stabilization, which is much different and provides for reasonable increases every year. I confirmed this with him and he was, unsurprisingly, very knowledgeable about the difference between the two programs. As recompense for this incredible gift, his friend buys him dinner once a month. That's one hell of a deal.

Frank's next story, however, is so classic New York that I have been thinking about it and savoring its absurdity all day. Another friend of his had a rent controlled apartment on Sullivan, just south of Houston. She had inherited it from her mother. When she died, she passed it on to her son. The son got a 5 room apartment in SoHo for $165/month.

Now here's the best part: The son then took the landlord to court because there had been a miscalculation somewhere along the way and his correct rent was actually $145. And he won!

Total annual savings - $240.

Having testicles the size of Central Park - priceless.

12 comments:

Tony Alva said...

That story would make Roger Waters proud. How do landlords and building owners make enough to pay taxes in NYC with rent control?

Dave Cavalier said...

Rent control is extremely rare. It was a short-lived program meant to alleviate the housing shortage after WWII.

Rent stabilization is a different animal. It allows for annual increases based on a vote by the Stabilization Board. Also, landlords can amortize the cost of capital improvements into the rent. Finally, the law was changed a few years back so that apartments became de-stabilized if their rent went about $2,000/month or the occupant had income above a certain amount. They also tightened the rules on who could take over controlled leases.

New Yorkers often mistakenly talk about rent control when they mean rent stabilization, but it was rent control that lead to the legendary stories of New Yorkers reading the obituaries to see where controlled apartments had become available.

The answer to your question is all around you in New York. Control and, to a different extent, stabilization absolutely ruined New York's housing stock. Why would a landlord bother to repair anything? It was a total disaster.

Chrispy said...

Tony,

Landlords in NY are in no way subject to any kind of socialist regime. They make PLENTY of money to pay their taxes.

Have you seen Donald Trump or Leona Helmsley lately? Do these people look like they have trouble making ends meet?

Any excuse to take a shot at Roger...

Dave Cavalier said...

Chrispy -

Actually, you just proved the point. What does Trump develop? Only ultra-high-end properties. Why? Because there was no incentive to get involved with the lower-end of the market when the prices are controlled. So they develop out of the range of controls. How does that help the horrible NYC housing stock situation? It doesn't.

I don't think you can possibly be defending rent stabilization.

Tony Alva said...

Chris,

I was just stirring the pot with the Roger shot don't mind me. My knowledge of this issue was limited to anecdotal rent control stories. I assumed that rent control was still universally in place throughout the five boroughs. It would seem to me that if it was, Roger Waters (if he was a landlord), and Donald Trump would have a hard time meeting the tax bill if rent control was still widespread.

Dave, thanks for answering my questions and fulfilled my suspicions about both programs.

So, landlords have to get involved with income verification and all that crap if their rents are below the $2K bogie? Seems like a situation that’s ripe for fraud. It does appear to be a non-incentive to landlords to build affordable units. Is the rundown residual effect of this policy still widespread? Do you guys have problems getting sups to make repairs and/or cap improvements?

That’s what kills me about the idea of renting in NYC. It would seem that the living opportunities are divided between buying (those who can afford it), or living in a marginal unit. Or, EGADS, living a Metro North/NJT/LIR existence.

I’m very curious about all this. My current job ends in late Nov. and I’m looking for work in several areas including the NYC metro area.

Anonymous said...

Don't government agencies get involved in these situations like HUD where the property owner / landlord gets government money to provide housing for the less fortunate?
In situations that I have heard, they make more from the government on a per init basis than they would in an open market scenario.

Dave Cavalier said...

Anonymous -

Could you provide some examples of this kind of dealing?

Tony Alva said...

Section 8 housing works like this: Folks who qualify can ask for gov't assistance for their rent (all or partial). Instead of the gov't handing the applicant a check, they write them directly to landlords. Landlords have to qualify their properties. HUD goes out and inspects each unit requesting section 8 status.

I know a few folks who rent section 8 units in GA and I can tell you that, while corruption I'm sure exists somewhere, most section 8 housing is "priced right". From a landlord’s perspective, the benefit of qualifying a unit as section 8 provides some certainty that rent will be paid since it's coming directly from the gov't vs individuals. The unfortunate truth is that without the direct payment certainty the program provides, nobody would be renting to low income folks down here. The default rate and the cost to evict make low income renting a hard game to be in.

The upside for renters is the program also provides a resource to renters to make sure section 8 landlords take care of maintenance when needed to avoid getting rent withheld.

Dave Cavalier said...

I can tell you from years of real estate investing that no landlord is getting fat off of Section 8.

Chrispy said...

Certainely not defending rent stabilization. Even after living in a rent stabilized apartment my first 6 years in NY I don't have enough of an intuitive grasp on what it REALLY means to have an opinion.

I think the market should be able to take care of itself...

It seems like there's not much rent stablization out there, but I honestly have no idea. What're the numbers like, Dave?

I know you're very knowledgable in real estate. Is there any incentive to develop properties at the low end of the market, since the low end would be defined as the same sort of prices that "stabilized" prices are (not the actual numbers, but the idea that they're going to be cheaper)?

In other words, are they a bad investment? As an investor, can you envision them as a good investment, or wouldn't you naturally make more money by working only with people who can pay more money? Or is it deeper, in that profits could be better regardless of where the apartments sit in the market iy uou manage them correctly?

I feel that that (and this is definitely a bias) the average landlord in NY is greedy. It's certainly not the Trumps (I'll bet you get what you pay for from him) but the regular folks, who maybe inherited a building from their parents, who see it purely as a cash cow, don't really care about improvements and will charge whatever the market will bear. Sure, this is how capitalism should and does work, but the problem is, as always, that greediness (eg no "altruism") has a selective advantage.

Housing is a rough thing, 'cause it seems like a basic human "right" (whatever that means) as well as a legit business.

stinkrock said...

About 45-50% of the rental housing stock is rent stabilized (about 1 million out of 2.3 million). There are under 50,000 rent controlled apartments.

Since a building must be built before 1974 to qualify, that means there's a lot of dilapidated housing out there.

There isn't enough new residential stock being built each year, and what is being built tends to cater to the high-end market. New York's vacancy rate is also extremely low.

It's of course difficult to disincentivize landlords from charging the market rate for what's available. It doesn't help that NYC landlords as a group contain some of the scummiest assholes on the face of the planet (hi, Larry Silverstein!)

Dave Cavalier said...

Mike put it very succinctly.

The housing crunch in New York is, in many ways, the result of just what Mike describes - years of neglect under rent stabilization have left New York so far in the hole as far as rental stock that we don't even come near to providing for demand.

I'm sure Rent Stabilization sounded like a great, caring idea at the time, but it's another example of the Law of Unintended Consequences. Landlords may suck ass, but they are the people who build new units and provide housing. When you take away the economic incentive for them to develop, you end up screwing the people you were trying to help.

There have been numerous programs that have attempted to incentivize owners to develop moderate and low-priced units. One example is the so-called 80/20 program, where developers were exempted from paying real estate taxes for many years (10, I think) if they allocated a certain percentage of units to people in the neighborhood making a certain percentage of the median income. Unfortunately, one major result of this in Manhattan was the march of soulless, luxury apartment towers up Third, Second and First Avenues. The median income in the neighborhood is so high, the programs were almost pointless.