Affordable Housing Institute : US

More evidence of rent control’s policy-destroying effects comes from the ever-enterprising Patrick O’Gilfoil Healy of the New York Times in this Tale of Dangling Carrots:

 

 

The woman had brilliant blond hair, a decent job and a rent-stabilized apartment on West 88th Street, but she longed for grander things.  She yearned to cast off Manhattan and her job teaching special education.  She wanted to trek to India to live spiritually, alone.

 

Observe the curious adverse byproduct of rent control: it decreases mobility, which means it likely increases over-consumption even as it is inhibiting economic evolution.

 

She described this wish to Jan Reynolds, an independent broker and managing agent, and then laid out her cards.  The woman knew her landlord wanted to clear out his rent-stabilized tenants, with help from Ms. Reynolds.  The tenant also knew she had a right to live at West 88th Street until she dropped dead.  So she made Ms. Reynolds an offer.

 

If the landlord gave her $20,000, the tenant said, she would give up her apartment.  Ms. Reynolds told the landlord, and within a few months, the tenant had made peace with her family, stripped the blond from her graying hair and boarded a plane to an ashram in India, Ms. Reynolds said.

 

With that deal 10 years ago, Ms. Reynolds leaped into a corner of the real estate world that is uniquely New York. She began brokering agreements to buy tenants out of their rent-stabilized and rent-controlled apartments.

 

What is rent control for?  Advocates typically advance three arguments, all of which are contradicted by the Times’ tale:

 

1.         Prevent gouging … by landlords, that is

 

The original postulate for rent control was the claim that a temporary emergency housing shortage was leading to rent gouging.  At least, that was the argument used in 1947 and then again in 1974, as the Washington Post notes:

 

Local rent rules are a vestige of World War II-era inflation worries, as well as fears that landlords would take advantage of the wartime slowdown in housing construction to gouge tenants.  Most cities lifted those restrictions after the war ended, but not New York.  Landlords say politicians have long been kowtowing to residents, and they mutter words like “central planning” and “Soviet Union” when they discuss the topic.  Reps for tenants say the rules allow the poor and middle-class to live in a town that otherwise would be beyond their means.

 

Today, who is gouging whom?

 

When landlords want to demolish a building, take over an occupied brownstone or pull a stabilized apartment off the regulated rent rolls, they call in people like Ms. Reynolds to perform the seemingly impossible feat of wooing the tenants out of their cheap apartments. They are the pied pipers of Manhattan’s rental market, operating on the belief that every tenant, no matter how entrenched, will make a deal.  Their job is calculating each person’s price tag.

 

Not only do markets always clear, the ecosystem is so fast-evolving it creates highly specialized critters to make markets:

 

Facilitating is work landlords and developers could handle on their own. Many do. But if the stakes are high enough, they often want a pro, in part because the negotiations are time-consuming and in part because many tenants won’t trust a landlord, no matter what.

 

Also, a landlord who negotiates for himself lacks the essential element of distance, both emotional distance and that handy deniability interrupt (”I’ll check with my principal”). 

 

They speak softly and carry a big purse, offering tenants $30,000, $50,000, $100,000.  They dangle new apartments, moving expenses, a week in a hotel, a new life replete with doormen, sunlight and city views.  Anything to make a deal.  A lone tenant holding up a major redevelopment project can get as much as $1 million.

 

“It’s a strange world,” said Michael Grabow, a managing agent with A. J. Clarke, who has been brokering buyouts for more than 20 years. “There are windfalls in the city of New York.”

 

Michael Grabow is paid by New York landlords to talk tenants into leaving their rent-controlled apartments. Sometimes money (how’s $300,000 sound?) talks the loudest.

 

“Apartment 300G?”

 

Key to the facilitators’ success is they understand, and accept without fuming, that rent control has created an economic entitlement for those lucky enough to occupy the apartments, and that like every other economic entitlement, it can be valued and traded at some price.  The facilitator’s job is finding the price:

 

“I tell them, we’re going to settle this together,” Grabow says, sitting in the conference room of his midtown office on Broadway. His voice is steady, low and reassuring, like a hostage negotiator. “I tell them, ‘If we make a deal, you’re going to be happy. You’re a lucky person. Your life will be better, not worse. If it’s not better, you won’t sign.’ ”

 

… and then the terms:

 

The hardest cases are people who don’t care about money. Like the 80-year-old guy who’d lived in his neighborhood for decades, who couldn’t imagine what he’d do with a sudden windfall.

“I kept saying, ‘Tell me what I can offer.’ He said, ‘That’s the problem, I don’t think you have anything I want.’ I got to know him. I said, ‘Do you have any kids?’ He said, ‘Yeah, I have one son.’ I said, ‘Look, we’re all mortal, we’re not going to live forever. If I paid you some money, wouldn’t it be nice to be able to leave that for your son?’ He said, ‘To be honest, my son hasn’t been that good to me and we’re not on good terms.’

 

“So I said to him, ‘Any grandkids?’ He said, ‘Oh yeah, I’ve got a grandson,’ and his whole demeanor changed. Eyes started to shine. I said, ‘When you’re gone would you like your grandson’s education to be paid for? Would you like your grandson to say, my life is comfortable because my granddad left me this?’” 

 

That did it. Eighty thousand dollars changed hands.

 

“He moved to a very comfortable apartment, I found him something in the neighborhood. He shook my hand, blessed me, and he was a happy guy.”

 

2.         Protect the powerless, help the deserving

 

Who is deserving here?

 

These deals are a runoff from New York’s system of rent controls and regulations, which bestows rock-bottom rents and non-eviction leases on thousands of lucky tenants, essentially giving them the right to live cheaply until they die.  They may pay half, or even one-tenth, of market rents and can be evicted only if they stop paying the bills, use their homes as pieds-√†-terre rather than primary residences, or illegally sublet them.  Inheritance rules allow tenants to pass on their $600 two-bedrooms like heirlooms.

 

Like property, in fact, which is what a rent control tenancy effectively is.

 

About half of the city’s 2.08 million rental apartments are stabilized, and another 59,324 units are controlled, according to the New York City Rent Guidelines Board.  Rent-controlled units can be found in prewar buildings where a renter has lived continuously since 1971.  Stabilized apartments largely sit in buildings of six or more units built from 1947 to 1974, and their rents are usually regulated by the board.

 

AN UNUSUAL SPECIALTY Jan Reynolds, Sherwin Belkin and Michael Grabow are hired by landlords to figure out deals that will convince tenants that moving out of regulated apartments is in their best interest. Sometimes, the landlord just wants to raise the rent to market levels. Other times, a new development is planned and the owner hopes to sell to make way for a new building.

 

So the facilitators use the most nefarious of arguments: they appeal to residents’ enlightened self-interest.  This works with a facilitator who comes to the scene fresh:

 

The hardest cases are those in which inept landlords have attempted to organize buyouts themselves, Mr. Grabow said, generating not solutions but anger. Sometimes, they offered insultingly low buyouts of $3,000 per apartment.  Other landlords, frustrated by the negotiations, threatened to sue or evict their tenants or stopped maintaining the building.  In those buildings, the tenants are angry, organized and eager to bleed their landlord.

 

As of course they should be: inability to reach a deal is no grounds for the owner behaving badly and breaching his obligations to the residents.

 

“That can be a problem,” Mr. Grabow said [with tactful understatement! — Ed.].  “If a tenant’s there legally, you can’t do anything but negotiate.”

 

Facilitators like Mr. Grabow and Ms. Reynolds got into the buyout business by clearing out illegal tenants. They would interview the building superintendent, monitor the postmarks on rent checks and check whether tenants had books on the shelves and cosmetics in the bathroom - typical signs of life.

 

But even when landlords have the law at their backs or have caught their tenants living in Phoenix or subletting to tourists, eviction is not cheap. Often, tenants stop paying rent and go to court to tie up the process for months. So facilitators began offering a free month’s rent or moving expenses if tenants agreed to leave swiftly. Landlords saved on legal fees and quickly replaced tenants.

 

Early in my career, I was representing the limited partners in an affordable housing property whose general partner was not merely incompetent to operate it, he seemed also to take a positive delight in milking the property for everything it was worth and daring both the regulatory agency and the investors to do anything about it.  (The legalities in both cases are more complex than worth going into here.) 

 

I negotiated a recapitalization with our company taking over as white-knight general partner …

 

“I’m an investor representative and I’m here to help you.”

 

… and we were moving toward closing, when the general partner suddenly ‘discovered’ that the decrepit washing machines in the property’s central laundry were, he claimed, not owned by the property but by him personally.  Did he have any proof of this?  Of course not.  Would he remove them?  Certainly not, he insisted that we buy them.  How much did he want as his price for selling us this junk?  Five grand. 

 

I mentally debated briefly, and paid him.

 

One portrait of James Madison, one non-functioning laundromat

 

Important life lesson: sometimes you pay them to stop stealing from you.

 

One town house owner who recently used a facilitator to clear her property on the Upper West Side said the experience was still a nightmare. One of the tenants refused to deal with the facilitator. Some threatened lawsuits. They slammed doors, cursed and bargained hard, said the landlord, who refused to be named, saying she feared reprisal.

 

“Tenants see this as, they won the lottery,” she said.

 

In practical terms, they did — up to a point.

 

Like any other economic asset, a tenancy has a maximum value, and an owner normally has an ‘or-else’: a controllable action, at a predictable cost, as the Best Alternative To Negotiated Agreement.

 

[Mr. Grabow] has, however, come across tenants playing a game of real estate chicken with their landlords, betting that the longer they hunker down, the more money they’ll be offered. A few years ago, Grabow had negotiated all but two tenants out of a building, which a landlord wanted to convert into a loading dock for an adjacent hotel.

 

“The landlord said to me, ‘I’ve got a million for these two. They can split it any way they like, I don’t care. But if they want a million dollars and ten cents, no deal.’ This was after months of talking. So I went to them and I said, ‘You’ve done an amazing job. You got the landlord to put up his last dollar. Doesn’t always happen. If you don’t believe me and you want more money, you’re making a mistake. Can you trust me? That’s up to you. I’m telling you there won’t be another ten  cents.’ ”

 

One tenant said yes. The other thought it was a bluff. The renters stayed put and the landlord ripped out the floors below and built the loading dock underneath.

 

“They blew it,” Grabow says. “Half a million each. The guy who wanted the deal was so livid he wasn’t talking to the other guy.”

 

Meanwhile, some tenants recognize that the asset is economic and trade it more shrewdly:

 

On the East Side, Mr. Belkin negotiated a deal in which a woman living in a stabilized co-op unit agreed to move out for a pittance, with the caveat that she would receive a percentage of the profit when the apartment was sold off.

 

Now that was a smart lady.  Maybe she should take up eminent domain?

 

3.         Enhance supply of affordable housing

 

Rent control seeks also to increase affordable housing supply by preventing housing from ‘escaping’ into the marketplace:

 

“We look at buyouts as another destructive tool that landlords use to diminish the stock of rent-regulated apartments,” says Stuart Lawrence, Metropolitan Council on Housing [”Housing for people, not for profit” — Ed.] volunteer. “We prefer to advise tenants to stand up for their rights and understand the value of rent regulations for the community as a whole.”

 

It’s understandable to seek to preserve affordability — preservation is good public policy — but if it is done by judicial confiscation, what really happens to supply?  (Link in .pdf.)  It’s not just the apartments in question, but all those not being built (NYC vacancy is 2.94%) because who in her right mind would enter this funhouse?

 

Further, removal of apartments from the rent-controlled or rent-stabilized stock by itself does not reduce supply at all — one family moves out, another moves in.  (Occasionally there’s consolidation.)  Indeed, the very tenant who relocates often secures a better apartment at the same price, and the property left behind is then renovated to an improved standard:

 

At least one stabilized tenant, now ensconced in a one-bedroom on West End Avenue, said she could not be happier with the new life a buyout afforded.

 

The tenant, Linda Leigh, had spent 25 years in her cramped brownstone apartment on the Upper West Side before learning her landlords wanted to clear the building and operate it as a bed-and-breakfast.  Ms. Leigh, a school secretary, knew she could not afford market rents in her neighborhood and worried that her landlords would sell the building to someone who would be hostile to the tenants.

 

So, working with Ms. Reynolds, Ms. Leigh negotiated a deal. She would move out of her cramped studio and into a roomy one-bedroom with Central Park views. The owners would get their building.  [Whose building? — Ed.]   Ms. Leigh would pay the same rent, with nominal increases, for the rest of her life.

 

“My whole life, I loved West End Avenue, and I always joked I could never afford to live here,” Ms. Leigh said. “As far as I’m concerned, this is a gift.”

 

It is.

Send post as PDF to