- REAL ESTATE EDUCATION
- GIVING BACK
Testimony of The Real Estate Board of New York Before the Rent Guidelines Board Regarding Rent Increase Guidelines For 2020-2021
May 5, 2020
The Real Estate Board of New York (REBNY) is the City’s leading real estate trade association representing commercial, residential and institutional property owners, builders, managers, investors, brokers, salespeople and other organizations and individuals active in New York City real estate. REBNY strongly supports policies that expand the local economy, grow and improve the City’s housing stock and create greater opportunities for all New Yorkers. Thank you to the Rent Guidelines Board (RGB) for the opportunity to provide our perspective regarding rent adjustments for the city’s rent regulated apartments.
New York has been acutely affected by the unprecedented COVID-19 crisis, not only from devastation to public health but also an upending of virtually every aspect of society. New Yorkers worry about their jobs and financial health – their ability to keep a home and food on the table. REBNY recognizes the affordability and homelessness challenges of this City and recognizes that the impact of COVID-19 will only exacerbate both for many months. That is why REBNY members were the first to pledge a 90-day moratorium on evictions, enter into voluntary rent repayment plans, and have tenant assistance programs for those with verified hardship. Individual pain requires a compassionate, individualized response.
The scope and scale of this crisis is one that can only be adequately addressed by federal resources. REBNY has been an aggressive advocate for New York City at the federal level pushing for business interruption programs, State and local aid, reforms to expand the Paycheck Protection Program and an emergency rental assistance program. An expansion of a rental voucher program is of critical importance as it is the most direct way to appropriately relieve housing cost burden for New York’s most vulnerable populations.
Observations on RGB Methodology
The RGB should be commended for the vast information they provide and the clarity with which they present the many challenges in the data. Those challenges have led to a system ill-equipped to match appropriate rent increases with expenses over time.
The rate of RGB-allowed rent increases has not kept up with the rate of annual expense growth. Over a 20-year period and across multiple mayoral administrations, RGB increases averaged 2.6%, while expenses for property owners increased more than twice that rate, at 5.6%. This incongruence is a result of a highly politicized process that relies on a flawed methodology that artificially inflates Net Operating Income (NOI) and arbitrarily reduces expenses.
Data used by RGB staff to calculate NOI is incomplete and inaccurate. An outdated 28-year-old analysis by RGB and the Department of Finance (DOF) is used as a basis for adjusting expenses downward 8%. Similarly, costs of building façade maintenance, increased elevator inspections, lead paint abatement, and any other government mandates imposed since the Price Index was last updated 36 years ago are not considered by the Board.
Further inflating reported NOI is the universe of buildings that the RGB studies. The RGB excludes data on smaller one to 10-unit buildings that leaves nearly 16,000 fully stabilized buildings unaccounted for, while simultaneously including predominantly market rate buildings with abated property taxes through programs such as Affordable New York.
Finally, the data collected to determine rent increases has a 2-year lag and does not include dramatic policy changes that substantially changed the economics of operating apartment buildings.
Housing Stability and Tenant Protection Act of 2019
The changes enacted last June as part of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) included the effective wholesale elimination of increases beyond those provided for by the Rent Guidelines Board at lease renewal – including the vacancy allowance, Rent Guidelines Board increases at vacancy, Major Capital Improvements (MCI), Individual Apartment Improvements (IAI), luxury decontrol and preferential rents. As a result, the burden to maintain quality housing amid escalating costs falls solely on the RGB via annual rent increases.
As we shared with the Board last year, an analysis by HR&A Advisors, Inc. suggested that the HSTPA could dramatically change the economic viability of the operations and maintenance for apartment buildings across the city. Their analysis estimated that within five years, approximately 272,000 units could be financially distressed and unable to afford any investment beyond basic maintenance, taxes and utilities. Unfortunately, the RGB’s research does not account for the sweeping legislative changes of the HSTPA. However, preliminary research suggests there are some early warning signals that owners are undertaking substantially less work and investing less in the City’s regulated housing stock.
A Wall Street Journal study of City Department of Buildings permits found that property owners started 535 fewer renovations in rent regulated buildings between July and November of last year—a 44% decline and a $71 million fall in renovation spending.[i] Additionally, REBNY’s Investment Sales Report for the second half of 2019 found a significant decrease in investment of rent stabilized buildings, with total dollar volume declining 73% year over year, from $5.7 billion to $1.6 billion.
Income and Expenses
With 71% of the rent stabilized housing stock built prior to 1947, maintenance and operational costs are a fact of business, with a regular cycle of necessary major system overhauls like gas, electricity, water, boiler, elevator and roof replacements. According to the RGB’s Income and Expense report, owner expenses increased 5.8%.
Property taxes comprise the largest share of owner expenses, averaging 30.4% of all costs among rent stabilized buildings. From 2017 to 2018, the average monthly expense per dwelling unit paid toward taxes increased 7.9% and have more than doubled since 2007.
In spite of a methodology that results in an overstatement of a building’s NOI, this year’s RGB Income and Expense study shows a 0.6% decrease in NOI for the first time since 2003.
Rent Guidelines Board Formula
The legislative changes enacted last year effectively eliminated all funding streams beyond RGB increases, which resulted in and will continue to result in negative impacts on NOI that are highly untenable for the city’s rent stabilized housing stock. This Board has an opportunity this year to be responsible, to rely on the data presented and to provide increases that allow for maintenance of quality housing for millions of New Yorkers. It is no secret that this process and historic results are ones that landlords and tenants alike find frustrating. The rapid adverse changes COVID-19 wrought on the market and housing landscape lend additional credence to serious consideration for moving to a new standard formula that inputs various indices for generating RGB increases that can operate independent of political machinations.
This Board’s determination should be the result of a consistent, predictable and transparent framework year to year to provide predictability in balancing tenant and landlord needs. Public input is an important part of good government and it should be used to provide data discrepancies, new methodologies, or to highlight sudden shifts in the market. A 2-year lag in data is unacceptable most years, and more so today.
We continue to believe there are merits to a formula system and therefore suggest a formula that encompasses the following: Consumer Price Index (CPI) and wage growth; property taxes, unfunded regulatory requirements and subsidized regulatory requirements; labor; maintenance; insurance; administrative costs; capital investment needs; debt service; and utilities such as energy, water/sewer and fuel.
Rental income and capital investment are the lifeblood of rental housing. Rental housing with a steady and reliable stream of income is sustainable, and conversely tenants suffer by decreased building quality and services when revenue is lacking or constrained by unrealistic restrictions on rent growth that are not sufficient to accommodate increasing expenses.
For multiple years, this Board under this administration has weighted tenant needs over rising expenses—with the biggest driver of those expenses being increases to city property taxes. This deficit was previously balanced by other statutorily available revenue streams beyond RGB annual increases. Now that the State has eliminated those revenue streams with the passage of the HSTPA, the role of the RGB is more critical to maintaining the economic viability of the city’s rent stabilized apartment stock.
The 2020 Rent Guidelines Board PIOC study found that increases between 2.5% - 3.5% for 1-year leases and 3.3% - 6.75% for 2-year leases are required to maintain owners’ current dollar NOI. REBNY recommends a minimum of a 2.4% increase for 1-year leases, commensurate with the weighted increase of expenses dedicated to property taxes.
It is fair to consider the difference between one-year and 2-year leases, however the Board’s guidelines must apply to both renewal and initial leases moving forward. Rightfully, there are a number of regulatory provisions related to health and safety that must occur at turnover, including lead abatement and painting that are not permitted as an IAI expense. The majority of apartments do not utilize preferential rent and absent a guideline applying to initial leases will not have a chance till 2021 to even recoup a portion of those required costs, which may now include heightened cleaning procedures related to COVID-19.
The City has been experiencing an affordability crisis that impacts hundreds of thousands of New Yorkers both in and out of rent stabilized housing for decades. We will not know the full impact of COVID-19 for some time, but the numbers are deeply personal. During this time of crisis, property owners have gone above and beyond in meeting their responsibility of providing quality and safe housing for their residents. They continue to and must find ways to cover the increased costs for utilities and maintenance, along with the other already burdensome financial obligations they have including property taxes. Additionally, at a time in which many of us are at home, building owners have worked to ensure buildings are safe, clean and responsive to the COVID-19 pandemic, often at significant expense.
New Yorkers deserve responsible policies that support existing high-quality rental stock and allow for property owners to meet their financial obligations in order to maintain a functioning housing ecosystem. We must collectively ensure property taxes are paid to the City for vital programs. Now is not the time to absolve responsibility for meeting statutory requirements – all must share in the responsibility of keeping the housing market stable.
Thank you to the members of the RGB for considering our testimony.
Senior Vice President
Real Estate Board of New York (REBNY)