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DISPELLING DISINFORMATION ABOUT RENT CONTROLS (part 2 of 2)

by Timothy L. Collins
    (see below for information on the author)

This memorandum was drafted to assist those involved in the
current debate over the extension of New York's rent laws. The
analysis is based upon a personal review of hundreds of studies,
reports and surveys generated by government, industry, tenant and
academic experts over the past thirty years.

    (see part 1 for the first part of this article)

DOES RENT REGULATION HURT OWNERS?

According to data analyzed by the New York City Rent Guidelines
Board in 1993, rent increases have kept pace with the cost of
operation for over three decades. About seven in ten regulated
apartments are located in pre-war buildings. In 1967 it cost a
typical landlord approximately 65 to 70 cents of each rent dollar
to run a rent regulated pre-war building, leaving 30 to 35 cents
of each dollar for mortgage payments, improvements and profit. By
1991 that operating cost figure remained largely the same at 64
to 70 cents. The changing composition of the post-war stock (with
over one in three post war units having been converted to co-ops)
makes a similar comparison difficult. Nonetheless, there is no
evidence that these newer units lost any income as a result of
rent regulation. In the years since that 1993 study was
undertaken landlords have seen their net operating incomes rise
substantially. In short, the rental increases afforded by rent
regulation have been sufficient to preserve landlord profits and
landlords are better off today than when rent stabilization first
began.

Notwithstanding the availability of rent increases, many
buildings in low income areas have experienced very significant
problems meeting operating costs. The root cause of this housing
distress is well documented: rising property taxes along with
rent collection losses resulting from steadily declining tenant
incomes and inadequate shelter allowances. If tenants cannot
afford existing rents - even at controlled levels - owners cannot
pay their bills. The decline in the value of shelter allowances
given to public assistance recipients has greatly compounded this
problem. Today a family of four is entitled to only $312 for
monthly rent. If low income tenants could afford the rents
landlords are already allowed to charge, housing distress in New
York City would virtually disappear. Landlord's are well aware of
this.

The results of a survey of over 300 landlords conducted by the
Rent Guidelines Board in 1994 is highly instructive. When asked
"what single city initiative would most improve building
profitability" 40% favored lower property taxes and lower water
and sewer charges; 30% favored establishing a more efficient
housing court; and only 25% favored higher rents.

DO RENT REGULATIONS PIT TENANTS AGAINST ONE ANOTHER 
AND AGAINST CO-OP SHAREHOLDERS?

A common criticism of rent regulation is that it increases rent
inequities among tenants leading to a sense of unfairness. In
fact, such inequities exist in both rent regulated and
unregulated buildings. Several studies show that rent "skewing"
occurs wherever long term tenancies exist. Naturally landlords
often give preferable treatment to long term stable rent payers
over more transient tenants. There is strong evidence that rent
regulation promotes long term tenancies and this explains most of
the rent skewing that occurs in rent regulated buildings. One
study by the Rent Guidelines Board in 1994 found that the annual
"discount" given for long term tenants is virtually identical in
both rent regulated and unregulated buildings. Only the fact that
rent protected households typically occupy units about three to
four years longer than unregulated households accounts for the
deeper overall discount they receive. In short, except for
promoting long term tenancies, New York's rent regulation system
mimics open market patterns of longevity discounts quite
effectively.

Deregulation will not cure these inequities in a way that
satisfies those who now feel that they pay more than their
neighbors. If rent regulation ends rents are likely to go up for
nearly everyone. The fact that your neighbor's rent goes up 25%
while your rent goes up only 10% is not likely to provide much
comfort.

Critics of rent regulation have referred to the lengthy tenure of
rent regulated tenants as "housing gridlock". Tenant advocates
see long term tenancies as providing neighborhood stability. In a
City where more than 2 in 3 households are renters and families
have fewer home ownership options, the presence of long term
tenancies is not surprising nor particularly undesirable.

Shareholders in co-ops often resent the fact that some - though
hardly a majority - of rent regulated tenants in their buildings
pay less rent than they pay in maintenance charges. The
comparison between rents and maintenance can be misleading.
First, most co-ops have sizable underlying mortgages which
reflects the ownership interest of the shareholders. That
mortgage is paid off by rents and maintenance charges. While the
co-op corporation gains a larger equity interest in the property
as such mortgages are retired - adding to the value of each share
- tenants do not benefit from this. Second, shareholders are
permitted to take income tax deductions for that part of their
maintenance charges which go to mortgage interest and property
taxes. This means that co-op shareholders see a good portion
(often 10-20%) of their maintenance returned at tax time. Tenants
get no such discount.

Rent increases for tenants - especially rent controlled and low
rent stabilized tenants - generally exceed increases in annual co-
op maintenance charges. Also, as tenants vacate their apartments
those units may be sold or rented at market. In sum, upon serious
reflection most co-op shareholders realize that they are not
treated unfairly by their rent regulated neighbors. As with all
things, there are some exceptional cases. Those cases can be
addressed through modest adjustments within the present system.

HAVE RENT REGULATIONS HURT THE CITY'S HOUSING STOCK?

New Construction

The presence of rent regulations has never affected new housing
starts in the City because new housing was always exempted from
controls. In fact, New York's biggest housing booms occurred
during the 1920's, and during the period from 1947 through 1966 -
a time when stringent rent controls covered most of the existing
apartments.

In an owner sponsored study examining, in part, the effects of
moderate rent regulations on new housing construction, economist
Anthony Downs found that "repeated studies of temperate rent
controls in the United States provide no persuasive evidence that
such controls significantly reduce new construction here."
Opponents of rent regulation often blame rent regulations for all
negative events in housing markets. This can be highly
misleading. For example, among the several New Jersey cities that
adopted rent controls in the early 1970's by 1977 new apartment
construction fell by 52%. In New Jersey cities without rent
controls, new apartment construction fell by 88% over the same
period.

Some analysts have suggested that deregulation will increase the
demand for new housing as middle income families are deprived of
"bargain" apartments. These arguments fail to consider two
critical facts: First, their is no guarantee that such families
will shop for new housing in the five boroughs and a loss of
middle income families would be a disaster for New York. Second,
rent increases will cause a decline in tenant savings making it
very difficult for many middle class families to save up a down
payment for a new home or co-op and thereby depressing demand for
new housing.

Abandonment

The factors which cause housing abandonment have been the subject
of multiple studies and reports focusing on local and national
markets. The most thorough investigation of the relationship
between rent control and housing abandonment was undertaken by
Professor Peter Marcuse of Columbia University in 1981. Professor
Marcuse concluded that "[t]he substantial evidence available from
national as well as local studies suggests that there is no
correlation between rent control and abandonment. Rent control is
neither a necessary nor a sufficient explanation of abandonment.
Abandonment takes place, and as severely, in cities without rent
control as in cities with it." Very few economists who have
studied the actual workings of New York's housing markets have
concluded that rent regulations reduce new construction or cause
abandonment. Anyone familiar with the sources of housing distress
readily understands this. Poverty, joblessness, redlining by
lending institutions and excessive property taxation in low
income areas are primary factors which cause abandonment.

The views of professional economists on this subject are often
grossly mischaracterized by the press. The common misconception
that economists universally oppose rent controls appears to find
its source in a survey reported in 1984 where economists were
asked, among other things, if they agreed with the proposition
that "a ceiling on rents reduces the quantity and quality of
housing available" [Frey, Pommerehne, Schnieder and Gilbert,
Consensus and Dissension Among Economists: An Empirical Inquiry,
74 Am. Econ. Rev. 986 (1984)] Of the American economists
responding 77% "generally agreed" and 19% "agreed with
provisions". One has to wonder how anyone could reasonably
disagree with such a statement; A rent "ceiling" would be a
drastic measure which would certainly have dramatic market
consequences.

Nonetheless, the consensus on the effects of a rent ceiling
hardly proves that economists are united in opposition to
moderate rent regulations which allow adjustments in rents to
compensate for increases in operating costs and which exempt new
construction from coverage. This is the case with New York's rent
laws.

Housing Quality

Most analysts who criticize rent regulations as causing a decline
in housing quality fail to examine the fact that most regulatory
systems allow generous rent adjustments for building wide capital
improvements and improvements to individual apartments. New
York's rent laws allow 1/40th of the cost of improvements made to
individual apartments (usually done after a vacancy occurs) to be
passed on in monthly rent increases. That increase stays with the
apartment forever. Consequently, an owner who invests $400 in a
refrigerator is entitled to a $10 per month rent increase
forever. By the eighth year the refrigerator is in use the tenant
will have paid the owner $960 for it. Owners are allowed to
charge 1/84th the cost of capital improvements. Thus, an
investment of $10,000 in a new boiler will yield twice that much
over a 14 year period. These incentives have supported the
massive upgrading in heating systems and weather proofing (such
as double pane windows) which occurred during the 1980's.

Buildings suffer from chronic neglect in poorer communities where
the income base of tenants simply cannot support rent increases
for major improvements. In these buildings, the struggle is for
day to day minimal maintenance.

Studies of the effects of rent regulations on housing quality
are, at best, inconclusive. This is not surprising since each
regulatory system provides varying incentives for repairs and
improvements and disincentives for neglect. One of the most
powerful tools for housing improvement has been the linking of
rent increases to the removal of housing code violations.
Unfortunately, the 1971 law which requires the removal of 100% of
serious violations and 80% of all others in the rent controlled
stock has been undermined by cutbacks in housing code inspectors
and administrative inaction.

DO RENT REGULATIONS HURT THE CITY'S ECONOMY?

To be sure, increased rents would cause a flood of billions of
dollars into the hands of landlords and a portion of that
increase would go to City property tax collectors. But every
dollar that goes to a landlord is a dollar that a tenant will not
have to spend in the local economy or to place into a savings
account. Thus, while landlords may reap the gains of rent
increases, local merchants and service providers would experience
a corresponding loss of income as consumer spending by tenants
declines. Sales taxes and other local tax revenues would suffer,
local jobs may be lost and the character of New York's
neighborhoods would change. There is a good deal of evidence
indicating that new businesses already shy away from New York
because the City's high rents produce high wage demands. On
balance, there is no credible evidence that a dollar in a
landlord's pocket produces a greater economic benefit for the
community than a dollar in a tenant's pocket.

It is simply myopic to assume that a transfer of wealth from
tenants to owners will increase the overall wealth of the City.
All of the studies sponsored by landlord organizations fail to
credibly analyze the impact of rent increases on the disposable
incomes of tenants and the implications this has for the economy
at large.

CONCLUSION

Without practical arguments to support ending rent regulations,
we are left with a stark ideological dispute: Does the ownership
of property give landlords a moral claim to take advantage of a
housing shortage by unrestricted rent increases and evictions?
The answer lies in centuries old customs, well established
constitutional norms and democratic ethics. It is a resounding
"No!". Rent and price controls rest on a time honored principle
that public authorities may intervene in markets driven by
scarcity to ensure fairness in bargaining relations. This anti-
profiteering purpose is well documented in the legislative
history of New York's rent laws. Whether you are rich or poor you
should be allowed to rent an apartment that is worth $1,000 for
$1,000. Unless we are prepared to abdicate our democratic
birthright to a handful of conservative ideologues who believe
that property rights should override all other public values,
there is no practical or ethical reason to depart from the goal
of fair rents for everyone.

[end]

About the Author

Timothy L. Collins is a Partner in the law firm of Collins & Dobkin.
From 1994 to 1995 he was an Assistant Attorney General in the Real 
Estate Financing Bureau, from 1987 to 1994 he was Executive Director 
& Counsel to the New York City Rent Guidelines Board, and from 1985 
to 1987 he was an Assistant Counsel in the Office of Rent and
Housing Maintenance of the New York City Department of Housing 
Preservation and Development

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