A Proposal to Limit Rent Subsidies to Those Who Need Them
- Aug 16, 2010
In 1945 the New York State Legislature enacted an Emergency Tenant Protection Act to safeguard returning soldiers from price gouging because very few apartments had been built as a result of the Great Depression and World War II.
Today, 65 years later, low supply of rentals is still a major issue in New York City. Also, as a result of the Rent Control Law, Rent Stabilization Law and the consequent suspension of the Law of Supply and Demand, it is unlikely that the shortage will ever end. At the same time, all of New York City’s residents who reside in free-market apartments are subsidizing those in rent controlled or rent stabilized units.
The subsidy arises from the fact that real property taxes, the only tax that the City government has control over, is based on the income produced by rental buildings, so limiting the rent paid by almost half of the residences in New York City, means that the occupants of the other half either have to pay higher taxes or receive fewer services.
Meanwhile, as a result of the byzantine structure that has been created, there is a paucity of residential construction and certainly not enough to house the 10 million people who are estimated to reside here in a few years.
The issue is not whether some people who need help should receive it, but that there is no means test for the 1.5 million rent regulated apartments. A solution to this problem would be to change the formula for calculating the rent payable by tenants of rent regulated apartments to the lesser of 33 percent of the income produced by the residents of the apartment or the fair market rental of the apartment.
In that case, someone wanting to remain in a three-bedroom apartment can do so as long as they are prepared to pay the appropriate rent. This would also remove the disincentive for people to move to smaller, non-regulated apartments.
Understanding that people have made other economic decisions based on their low rent, the plan would phase this new law into effect over 10 years, with the rent transitioning to the higher amount by 20 percent every two years. This would increase the real estate taxes that the city receives from rental real estate as well as co-operatives and condominiums which, according to state law, are based on comparable rents in a rent stabilized building.
However, in order to limit the windfall to the landlords, 50 percent of the increased rent would go to the owners provided they cure all building violations and reduce the carbon footprint of their buildings. The other 50 percent would go to the State of New York Mortgage Agency to fund the development of additional affordable housing in the market in which the funds were raised.
While the proposed plan may not be welcomed by all rent controlled/stabilized residents, it does protect those who the program was initially intended to benefit, while also increasing revenues for New York City to develop additional housing in the city and provide a mechanism for funding the sustainability program that the City has mandated.
Stuart Saft is partner and chair of the Global Real Estate Practice at Dewey & LeBoeuf LLP