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Rent regulation battle moves to State Senate

3:41 pm, April 15, 2011

Stuyvesant Town, Marianne O'Leary/Flickr

By Roland Li

The fate of rent regulations affecting over 1 million New York City apartments is now in the hands of Albany’s Senate.

Last week, the State Assembly passed a bill that would renew the regulations, which limit rent increases, extending them to 2016. It also abolished deregulation due to vacancy, increased the ceiling for deregulation for high-income tenants and decreased rent increases to 10% from 20% for new tenants.

Assemblyman Brian Kavanagh, a Democrat who represents the east side of Manhattan, said the changes were important in order to preserve the city’s rent-regulated housing stock. He said such apartments were dwindling each year due to deregulation, largely driven by newly vacant apartments that are converted to market-rate after rents exceed $2,000 per month.

He also cited so-called luxury decontrol, which currently allowing deregulation when a tenant’s income surpasses $175,000 and the rent is at least $2,000 per month. The Assembly bill would abolish decontrol due to vacancy and increase the income threshold to incomes of $300,000 per year and rents of $3,000 per month.

Kavanagh rejected portrayals of rent-regulated tenants as wealthy Caucasians who were getting unreasonably low housing. He said that the median annual income of families living in rent-regulated housing was $38,000, citing a study by the Community Service Society, adding that many tenants live in the outer boroughs.

“It’s a critical goal for those of us who care about communities to end these loopholes,” said Kavanagh.

He said that there was no oversight for rent decontrol based on vacancy, adding that landlords were supposed to register such apartments, but seldom did. And he blamed speculation, fueled by the lure of converting rent-regulated apartments to market rate, for some of the most spectacular busts of the past recession.

The most infamous example is Tishman Speyer’s policies in Stuyvesant Town and Peter Cooper Village, a neighborhood that Kavanagh represents. A court ruled in 2009 that Tishman illegally deregulating rent-controlled apartments, while receiving the J-51 tax abatement, which decreases real estate taxes for conversions and renovations of multifamily buildings.

Tishman later lost control of the property when it defaulted on its mortgage, but the giant real estate company only lost a pittance of the $5.4 billion paid for the complex, an effort funded by a long list of investors that included pension funds and the Church of England.

Although such enormous bids for multifamily properties have cooled during the downturn, Kavanagh believes that a return to such practices is inevitable, and he feels that it is the responsibility of the state to discourage speculation, and he said landlords already make reasonable profits on housing.

“There’s a moral hazard to having a situation where the worst actors can profit,” said Kavanagh “This is a market where you get a reasonable return for your investment.”

The ultimate ramifications of the judgment against Tishman Speyer are still uncertain, and landlords are pushing for a law that would prevent further lawsuits related to J-51.

“We are going to be asking very strongly that the J-51 issue gets resolved legislatively,” said Steven Spinola, president of the Real Estate Board of New York, who added that 40,000 to 50,000 apartments could be affected by the ruling.

REBNY is proposing that owners be allowed repay the city for tax benefits that were received under J-51, which would prevent them from being targeted by lawsuits and claims. The effort would lead to a $200 million reimbursement for the city, said Spinola.

He also said it was illogical for wealthy people to pay less than $2,000 per month in rent. However, he expects rent regulations to be extended.

“I do expect that we will see a rent regulation bill that is pretty close to what the current law is,” said Spinola.

Other stakeholders agree that the regulations will be extended, but it remains to be seen if the Democrat-controlled Assembly’s changes will be approved by a Republican majority in the Senate.

“We’re committed to addressing the issue,” said Scott Reif, a spokesman for Dean Skelos, the Republican majority leader of the Senate, who represents parts of Long Island. But Reif said details, such as strengthening provisions, were still to be decided.

Earlier this year, there were talks to link the rent regulations with other policies, such as property tax caps, which would largely benefit upstate and suburban property owners, or even the 421a tax abatement, which aids developers of rental properties. But such dealmaking has since subsided.

“We believe these issues should stand on their own,” said Reif.

Advocates of extending and strengthening rent regulation include the Working Families Party, which listed Gov. Cuomo on its own ballot and has been a strong ally. (Cuomo’s office did not return requests for comment.)

“In a time of stagnating wages and job insecurity, the government has an obligation to make sure it doesn’t make a difficult situation even more perilous for struggling families,” said Dan Cantor, executive director of the party, said in a statement.

Maggie Russell-Ciardi, executive director of Tenants & Neighbors, a tenant advocacy group, rejected the notion that developers who took advantage of the J-51 tax abatement should be able to avoid claims by reimbursing the city for the taxes.

“A lot of those owners accepted a tax abatement and then systematically pushed out tenants,” she said. Tenants & Neighbors is currently working to submit claims to the state’s Division of Housing and Community Renewal (DHCR) for tenants of J-51 buildings.

Russell-Ciardi also linked attempts to deregulate apartments through vacancy to deteriorating housing conditions. She said that particularly unscrupulous landlords would allow rent-regulated apartments to become unlivable, thereby forcing tenants to leave. Even without such efforts, she said, overleveraged buildings and resultant foreclosures have exacerbated tenant conditions.

Opponents of rent stabilization reject the idea that landlords have not spent enough to improve tenant conditions, and that low vacancy rates reflect a lack of affordable housing.

“Of course, that’s what they’re going to say, because it fits their agenda,” said Frank Ricci, director of government affairs at the Rent Stabilization Association, a landlord group. He called examples such as the Milbank portfolio in the Bronx, which has a reported 3,577 housing violations, anomalies in New York’s housing stock, which he characterized as in very good condition, citing reports from the city’s Department of Housing Preservation and Development (HPD). He said landlords spent a large portion of their rent rolls to renovate existing housing or build new apartments.

Ricci said vacancy rates were high enough that tenants seeking apartments over $1,500 –near the threshold for deregulation – had “plenty of options.”

He pointed to HPD’s 2008 housing report, which said the vacancy rate of apartments with monthly rents between $1,000 and $1,900 was 4.16%, and the vacancy rate of apartments with rent over $2,000 per month was 5.99% in 2009.

Ricci also had concerns over the ruling for Stuyvesant Town.

“The court did everyone a disservice by not giving specifics in the decision,” he said, supported REBNY’s efforts to have landlords pay back J-51 exemptions, characterizing stenants affected developments as those who had knowingly paid market rate.

“They didn’t think they were buying a lotto ticket when they signed the lease,” said Ricci

Although Stuyvesant Town is the most prominent example, developers have been thwarted elsewhere in attempts to convert rent-regulated apartments to market-rate. At the Riverton Houses in Harlem, Rockpoint Group LLC and Stellar Management defaulted on the 1,230 rent-regulated apartments, after paying $131 million for the property in 2005. Rockpoint and Stellar received financing from Detsche Bank, with the expectation that rents would more than double, but rent revenue never increased to a point that covered the mortgage. CWCapital, the same servicer that controls Stuyvesant Town, took over the property last year.

But the link between foreclosures and rent regulation remains uncertain.

“There is evidence that supports that rent regulation both mitigates and helps the problem” of foreclosures, said Sarah Gerecke, executive director of New York University’s Furman Center for Real Estate and Urban Policy. She said that there was not enough data to support a definitive conclusion, and ultimately, each building’s case was different.

The income levels of tenants in rent-stabilized tenants compared to market rate are also difficult to compare, but Furman’s analysis of HPD and the Census Bureau’s 2008 Housing and Vacancy Survey, the differences in income between rent-stabilized and non-stabilized tenants in multifamily apartments varied by borough.

In the Bronx, Brooklyn, Queens and Staten Island, rent-stabilized tenants had higher median incomes than non-regulated tenants, earning $6,000 to $9,000 more each a year. But in Manhattan, rent-stabilized tenants made a median income of $46,000, lower than the $81,000 annual median income of non-stabilized tenants.

But it is clear that foreclosures for multifamily rentals are on the rise, which has negative implications. The Furman Center released a study this week that reported foreclosures among multifamily rental properties at the highest level in almost two decades. 2,100 multifamily properties have received foreclosures, many in Brooklyn.

“In many measures of the city as a whole, the city is in better shape than it was 10 years ago,” said Gerecke. “But there’s no doubt at all that the time period remains a period of great uncertainty.”

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