JLJ Capital
There’s really no better current example of the rippling unintended consequences that result when well-meaning legislators try to fix a societal problem without considering all the potential fallout than the recent radical revision of New York’s rent control laws. Although the stated intent was to protect tenants and increase the supply of affordable housing for working families, in fact the result may be just the opposite.
Under the previous regulations, when tenants vacated a rent-controlled apartment the landlord could create more value for their property by investing in renovations and improvements that would justify a rent increase to bring the apartment closer to fair market value. There was an incentive, which no longer exists, to spend money to make money and multi-unit buildings were improved one apartment at a time. It was an arrangement that allowed property owners to maximize the value of their investments and made sure that tenants had modern, well-maintained living space.
Now it seems that some landlords are taking the opposite tack—hoping that their tenants don’t move out and spending as little as possible to maintain their buildings. In many cases this is because without the prospect of rent increases, they can’t get loans to improve their buildings or if they do, will have a hard time paying them back.
With the removal of incentives to maintain and improve their properties, I wouldn’t be surprised to see more landlords keeping rent control apartments vacant when tenants move out. Those who can afford it are likely to keep apartments vacant in the hopes that sometime soon the legislators will come to their senses and correct the flaws in the current regulations. In the meantime, rather than rent to a tenant who in essence has a lifetime guarantee that their rent will never go up and watch the value of their investment further decline, landlords will want to keep apartments vacant.
I believe that as people leave rent controlled buildings, fewer and fewer of those units are going to wind up back on the market. So rather than increase the stock of affordable housing, which is what revising the rent control regulations were supposed to do, there will actually be a further reduction in the number of rent stabilized units in New York City. And with no incentive to invest in improvements, it’s inevitable that the existing rent-controlled apartments will continue deteriorating.
This legislation that was supposed to create more affordable housing but all it looks like it’s going to do is protect the people already in those apartments.
Sure, there’s still new construction going on, but for how long and how much of it will be affordable remains to be seen. Right now, interest rates remain extremely low, which is one of the only bright spots here, but that’s not likely to continue forever. And when the cost of borrowing money rises, it will be disastrous for the real estate market. There are already fewer traditional lenders willing to work with developers, which means the cost of money and thus the cost of building in New York is going to rise. And that means that free market rents are going to have come up or developers won’t be able to afford to build here, which seems like the most likely scenario.
And although they were shut out by legislators when the new laws were being drafted, landlords are fighting back. A group of seven landlords, joined by the Rent Stabilization Association and the Community Housing Improvement Program have just filed a lawsuit claiming that the new laws are unconstitutional and that the government-mandated caps on rent increase amount to an unlawful taking of property. These petitioners are in it for the long haul and prepared to fight all the way to the Supreme Court.
But lawsuits and appeals take time, often a long time. And while this and other suits work their way through the federal court system, the number of available apartments and the quality of the buildings they are in will continue to decline.
Jonathan Lewis is the founder of JLJ Capital, Pine Brook, N.J.
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I'm not a lawyer, so can someone explain to me how this not a violation of the Equal Protection Clause of the Fourteenth Amendment? … when rent controls artificially create a system of “haves” and “have nots”? And if you’re a “have not” and you want a decent reasonably priced stabilized unit in a nice neighborhood, you won’t get it. Someone with money might get it, since they can agree to renovate their own rental unit on their own dime. Nothing about this system makes sense! All it does is create even more entitled renters who don’t even necessarily need the help.
In Santa Monica, California where we have strict rent control, tenants rarely leave apartments. They know they have a great permanent investment which they can pass down to children they haven't given birth to, or people they can marry (of either sex) in return for a big cash payment. Rather than give permanent homestead rights and the right to sue for millions over nothing, landlords leave rental units vacant. The property actually has more resale value vacant than rented. Many people would also become new landlords and rent out garages, but for the same fears of strict rent control. Although we temporarily have vacancy decontrol where a landlord can charge market rate if a tenant voluntarily leaves, this is being threatened by the government. Additionally, costs of insurance, carpenters, water, etc. are skyrocketing, but annual rent increases in Santa Monica (by law) can only be less than 1% of the year's Cost of Living Index. Additionally, a tenant may be paying only $800.00 a month for a one bedroom at the beach, but should there be a fire, the tenant is entitled to be paid $350.00 a day for up to two years until the rental unit is rebuilt, then the tenant gets to move back in for $800.00 a month (plus less than 1% raises each year for the rest of their life). If a landlord can't pay $350.00 a day, they will not get a permit to rebuild or demolish (and Santa Monica loves to force landowners to wait two years for permits). Santa Monica also has rules about paying tenants $30,000.00 relocation benefits (but usually the landlord isn't allowed to relocate them anyway). Many small landlords can't afford these costs. Santa Monica also goes after small owners with an old house, and landmarks them. This is so the value of the home will be lower and the small homeowner will be forced out with legal fees fighting landmark designation and building citations. Then friends of the city government get the land cheap and get demolition permits and variances the homeowner couldn't get.
What happened to Hardship Increases? Did that go away?