Affordable Housing Institute : US

Yesterday  we became acquainted with Jenner & Block’s giant pro-bono lawsuit against the New York Pinnacle Group, as reported by the New York Times:

A group of tenants filed a federal racketeering lawsuit against one of the city’s fastest-growing residential landlords yesterday [July 11, 2007 — Ed.], accusing it of harassment, fraud, rent overcharges and illegal evictions.

 

I was totally in sympathy with the plaintiffs, when I hit the two tinny words:

 

I wish I hadn’t heard that

 

The lawsuit, filed on a pro bono basis by Jenner & Block on July 11, constitutes a new fight against corporate slumlording and comes at a time when rising property and rental prices have made it increasingly difficult for middle class families to find affordable housing in the city.

 

Slumlord? I thought.  Mr. Wiener’s company is no slumlord. 

 

A popular view of slumlords

 

Mr. Wiener is being, if not libeled, at least mislabeled; he is not a slumlord, because the word has a specific meaning:

 

A slum lord (also spelled slumlord) is a derogatory term assigned to some landlords, generally Absentee landlords, who maximize profit by spending little on property maintenance, often in deteriorating neighborhoods.  

 

That’s not Mr. Wiener’s group; their properties are in appreciating neighborhoods, and they’re accused of spending more.

 

They may charge lower than market rent to tenants. (As many of these neighborhoods are often populated by poor minorities, the term ghetto landlord has also been used.)

 

The phrase slumlord first appeared in 1953, though the term slum landlord dates to 1893. [1]

 

Here, from another site certainly not a landlord’s whitewash, is a more extended definition of a slumlord:

 

    Most good and scrupulous investors try to maximize their return on investment by taking advantage of all three possible benefits. They do it with financial and tax planning, careful purchase of each property, good property management while they own it, then professional marketing when they decide to sell.

 

    However, there are short sighted fools who rape neighborhoods and steal money from a property by chasing cash flow with no thought to the long term ramifications.  

 

Not Mr. Wiener: he’s accused of having a very long-term plan.

 

I spy profits with my little eye

 

As a sad result, slumlords destroy buildings, neighborhoods and seriously impact the lives and hopes of poor tenants and their children.  They also miss a chance to make a decent profit while building long-term financial security by investing intelligently in rental housing.

 

      Typically, a slumlord looks for an opportunity to buy a structurally and aesthetically challenged property for little or no down-payment.  

 

Again, not Mr. Wiener: he paid large sums of cash for the properties, and is backed by a large institutional investor.  Indeed, Jenner & Block sees his capitalization as itself proof of his scheming:

 

Partner Richard F. Levy, who led the Firm’s team on this matter, said “Slumlording, and the attack on affordable housing in New York city are not new.”

 

“You keep using that word.  I do not think it means what you think it means.”

 

“But the sheer size of the Pinnacle and Wiener assault on rent regulated units, financed and supported by the $6 billion Praedium Group and its publicly announced “value enhancement program” that focuses “on underperforming assets” provides a serious threat to many of Pinnacle’s tenants in particular, and affordable housing in New York City in general.”

In a bit, we’ll return to the question of what threat Mr. Levy sees.  Meanwhile, let’s go back to our hypothetical slumlord:

 

That kind of deal is all to often available from someone who bought something that was fairly decent, but then “milked” and mismanaged the property until they can no longer stand to deal with the maintenance problems and the kind of problem tenants you get in a problem building. 

 

      A slumlord is happy to take over any junk property they can get cheap, with little or nothing down. Why not, they don’t ever intend to finish paying for it anyway. Their whole goal is to put the least amount of money possible in a property and take the most they can out of it - for as long as they can.

 

Setting aside the allegations of fraudulent work, most of the charges leveled against Mr. Wiener are predicated on the premise that he’s going to take the buildings up market — putting money in.

 

We were just trying to improve the property!

 

A slumlord is not usually concerned about tax benefits, because they try to collect as much of the rent in unreported cash as they can.

 

Not Mr. Wiener; he documents everything.

 

They are not concerned about appreciation because they intend to abandon the property when it has been finally milked dry.

 

 

Not Mr. Wiener; appreciation is their alleged (and entirely plausible!) motivation.

 

      When a tenant moves out and leaves a mess, a mainstream landlord cries, cleans, repairs and repaints. Then they try to do a better job screening their next tenant. A slumlord just lowers the rent on a trashed property until some poor soul will take it as is.

 

Not Mr. Wiener; his alleged goal is moveouts to raise rents.

 

Then it’s the same scenario with the next tenant, and the downward spiral continues until the cash dries up from the last desperate tenant willing or forced to live in squalor.

 

Not Mr. Wiener: he wants the spiral to go up!

 

 

So Mr. Wiener is not a slumlord by any stretch of the imagination.  But if he’s not, and if he’s something undesirable (on which BRUSH, Jenner & Block, Public Advocate Gutbaum, and Manhattan Borough President Stringer all agree), what is he?

 

He is an evolved rent-control landlord.

 

From hominid to landlord, it’s all about evolution

 

Ecosystems fill; and only those with advantage win. 

 

Owners hold properties less long than properties last; so even as the property remains in the same location, serving the same purpose, owners come and go.

 

Always improving

 

Each time the ownership changes is an evolutionary event: the incoming owner wins a competition (akin to a mating dance) to capture the property.  Like other reproductive contests, this one encourages species development, and the fittest win, survive, and propagate.

 

Under New York City rent control, apartments are capped at rents well below market.  Everyone knows this — it’s why tenants cling so ferociously — but no one wants to acknowledge it, because the original statutory purpose (in 1947!) said nothing about a rent bargain, it was solely an anti-gouging ordinance.

 

[Sidebar: New York likes to blame rent control on the Federal government:

 

Rents charged in controlled apartments are set and adjusted on the basis of registrations filed by owners when Federal rent control was imposed in 1943.

 

Flash alert — World War II’s been over for 62 years.]

 

And we won

 

Sixty years of downward bias has led to the current state, where virtually all the rent-controlled property is well under market.  That, in turn, creates investment opportunities and trading pressure, as I documented at great length in the case of Stuyvesant Town.  It also creates rampant hidden free riders whose resident imperatives are themselves not immune to self-interest, including those (like former UN Secretary General Kofi Annan) who are supposed to know better.

 

Under New York City rent control (and its successor rent stabilization), rents can receive a one-time upward boost closer to market in several circumstances:

 

1. When the current rent-controlled tenancy ends (’vacancy reset’)
2. When the rent rises above $2,000 (so the owner may decontrol)
3. When the owner undertakes necessary capital improvements (and recoups them in higher rents)

Markets work because given any set of rules, people optimize.

 

I’ve optimized my environment

 

Given the foregoing rules, how does the owner optimize?

 

1. Challenge every potential change in tenancy, seeking vacancy reset.
2. Improve the property, to boost rents above the $2,000 ceiling.
3. Dilute the effectiveness of resident rights provisions, by keeping the residents unaware, misinformed, or intimidated.

 

Let’s start with the third of these, and the one that is indefensible (if true):

 

The nine individual tenants from West Harlem and the community group Buyers and Renters United to Save Harlem (BRUSH) claim that Pinnacle’s pattern of deceptive consumer-oriented acts and practices violate the New York State Consumer Protection Act. 

 

Like it or not, rent control and rent stabilization are the law in New York City.  The laws must be respected, not simply because they are the laws but also because laws are seldom changed by flouting them.

 

Okay, some laws are changing by widespread flouting

 

Rent control, as I’ve posted on many occasions, is founded on illogic.  It’s not about preventing slumlords; rather, it practically forces an owner to be a slumlord.  Don’t raise rent!  Don’t fix up your building any more than the absolute minimum necessary!  Don’t inquire into who lives in your building!

 

We’re practicing to be landlords

 

New York rent control yields the absurdist position that it demands public regulators to snoop into the behavior of both landlords and tenants.  Is a tenant transfer permissible?  Was that unrelated person really living in the apartment?  Who else is living there now?  Was that renovation necessary?  What did it cost?  Was it properly done? 

 

Nowhere else in America do issues like these ever rise into the public debate, because in any normal market, these questions would be sorted out by residents and owners themselves, because each has a choice.  Owners can raise rents; residents can move out or move in. 

 

That market dynamic — balancing the optionality, as the current business-school phrase has it — eliminates the need for the army of fact-checkers and snoopers New York deems not just necessary but inadequate.

 

I wonder how many live behind this door?

 

Endless protracted fights about minutiae are a good signal of a badly-designed system.

 

Brought to you by the people who invented rent control

 

Who knows whether Mr. Wiener’s group is saint or sinner — or somewhere in between?  If we assume that Jenner & Block’s attorneys bill at an average of $350 an hour (surely conservative for the Big Apple), they’ve invested over half a million dollars’ filing this lawsuit.  Mr. Wiener’s attorneys will probably spend a like sum defending it.  All that lawyering is cost entirely unrelated to the business of fixing faucets, providing attractive apartments, and delivering resident service.

 

At the systems heart is its fundamental illogic, the political love that dare not speak its name:

 

New York City rent control is a wealth transfer from landlords to tenants

 

Any semblance of public policy has long since vanished over the political event horizon.

 

There used to be policy in here

 

So embedded is this doublethink premise that it peeps out only when one examines the premises of perorations, such as this community board hearing, which heard testimony from Congressman Charles Rangel:

 

AMY GOODMAN: New York tenants testifying against Pinnacle at a community board hearing. New York Democratic Congressmember Charlie Rangel was also in attendance. He blasted what he called a conspiracy to gentrify the community.

 

REP. CHARLES RANGEL: And what you are doing is stopping even a broader conspiracy to take our community away from us. This is not just coming from Pinnacle, but throughout our borough we have similar schemes where speculators and landlords have acquired large amounts of property and found loopholes in the state law that would allow them to move in an aggressive way to remove tenants, either through legal means or through harassment. And once they leave, the apartments are redone, and the type of rents that are being asked for or demanded are absolutely ridiculous.

 

Presumably, not so ridiculous that someone will not pay them.

 

Let’s end with the voice of the aggrieved:

 

Andres Mares-Muro, a Pinnacle tenant who is a plaintiff in the suit, said he had recently learned that the rent on his Harlem apartment, $1,275, was almost double that of the previous tenant, $648.  “In this supposedly rent-stabilized unit, we are paying market rate,” he said.

 

Maybe he shouldn’t have said that

 

Could the real problem be any clearer?

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