Rent control’s negative assets
When is an occupied apartment a liability rather than an asset?
O wise one, what apartment occupant is a liability?
When its cost of operations is greater than the NOI derived. Because apartments are occupied by money, not people, this arises only when the collectible rent is below the operating cost. And because markets always clear, this state of affairs can be sustained only through contractual bargains (affordable housing) or judicial intrusion (rent control). Though I love and endorse affordable housing, I despise judicial rent control, which not only slowly destroys neighborhoods but also creates truly perverse incentives for landlords and residents, as illustrated by these cases cited by The New York Times:
REAL ESTATE listings are filled with houses and apartments with sky-high prices. But sometimes, a listing will turn up that seems too good to be true.
You know what they say, if it seems too good to be true …
“He thinks I’m too good to be true …”
Usually there’s a catch, and the catch is often that the property comes with one or more rent-regulated tenants. While these houses and apartments can sell for hundreds of thousands of dollars less than similar places nearby, they also come with a long list of problems that buyers will have to contend with.
Rent regulations were established in 1943 as a way of ensuring affordable housing for returning war veterans.
Rent control enacted when the lindy hop was hot
That’s inaccurate. The 1943 controls were part of a broader wartime freeze, of which New York City took advantage, and then in 1947 made rent control permanent, to deal with the rent spike caused by returning GI’s. Sixty-five years later, they’re still here. As Robert A. Heinlein once wrote, ‘there is nothing so permanent in this world as a temporary emergency.’
They strictly limit the amount of rent that a regulated apartment can command and protect tenants from the vagaries of the rental market.
To be accurate, they mandate that owners rent apartments for absurdly low rents, and in effect force a monthly wealth transfer from the property owner to the resident.
For buyers, removing rent-regulated tenants can be difficult and in some cases, impossible.
In most cases.
Even when the situation can be resolved to everybody’s satisfaction, the process tends to be time-consuming and expensive.
‘Expensive’ means ‘paying residents to move out,’ a state of affairs unique in American experience.
But in a market where anything considered a bargain is worth a second — or third — look, brokers and real estate lawyers agree that with careful planning, or fortunate circumstances, some buyers are able to make such purchases work to their advantage.
Sorry, New York Times, you’ve fallen into the trap.
Paul Balme and Isabel Rubio decided it was time to move out of their apartment on the
Yours, Mine and Ours
Isabel Rubio, center, Paul Balme and their son David Balme moved into their house in
After a broker, Gigi Zimmerman of Brownstone Real Estate in Cobble Hill, showed them one house they considered unsuitable, she offered to show them another that fell within their relatively modest budget of $2 million, including renovations. But this house, a four-story brick row house in
“We liked the house immediately,” Mr. Balme said, and two days later, their $1.5 million offer was accepted.
Got that? The house’s value has been depressed by the two rent-control residents.
We’re going to squash the value right out
The house was 20 feet wide and 45 feet deep with a full basement, 1,800 square feet of living space on the two lower floors (plus the opportunity for a 1,600-square-foot addition into the deep backyard).
Contrary to their broker’s assumption, the fact that the house had two essentially unremovable tenants paying a total of about $1,300 a month was, for Mr. Balme and Ms. Rubio, what made the transaction work. Without the tenants, the house would have fetched up to $1 million more, putting it way beyond their reach.
Without the tenants, the house would long since have been divided into condominiums or co-operatives, and the buyers would have bought one floor, without the headache of having residents.
“Rent control allowed us to buy a house we otherwise could have never afforded,” Mr. Balme said. “We’re happy with the situation now, and whatever happens in the future is just gravy.”
There speaks a wise man, for there is one bit of optionality available to the rent-control landlord: the residents might vacate, and if so, then Mr. Balme and Ms. Rubio can occupy the space they own.
The bet, in short, is that the resident will have to move, and have no permitted successor (yes,
Prospective buyers apparently did not see such opportunities in a three-family, four-story brick town house on a prime Cobble Hill block that was listed by Brown Harris Stevens. Comparable town houses range in price from about $2.2 million to $2.5 million, but this building had a rent-controlled tenant in the lower duplex, which had exclusive use of the garden. The other two apartments were not rent-regulated, but they were occupied.
Even though the building was in good shape and the two upper apartments were newly renovated, the broker, Jill Seligson Braver, priced the house at $1.65 million because of the tenants. Still, it didn’t sell for two and a half months, and the owner decided to take it off the market in early October.
Jill, who’s Braver than most
Not that the house didn’t arouse lots of interest. Ms. Braver said that she had fielded hundreds of phone calls about the listing. “There are no houses in that condition in Cobble Hill for that price,” she said.
Rent control leads to over-housing, and to reduced household mobility.
After she led each caller through the litany of details, most said they would consult a lawyer, and she never heard from them again.
“I told them, ‘Look, do you understand that the lower duplex is inhabited by a 82-year-old rent-controlled tenant in good health who pays $800 a month?’” she said.
Rent control puts a landlord in the position of economically rooting for the resident to become incapacitated, ill, or dead.
Not that we’re hoping you’ll die, or poisoning you with arsenic, or anything
“I explained the difference between rent stabilization and rent control, because most people don’t understand it, and tried to dissuade as many people as I could. Otherwise, I would have just been spinning their wheels and mine, not to mention annoying the tenants with constant fruitless showings.”
That would be annoying, wouldn’t it?
These perverse incentives would disappear if
Precisely.
Brokers say that they have no precise formula for pricing buildings that have rent-regulated apartments, but they tend to begin the process by researching the sale prices of similar buildings.
Then they discount the price, taking into account how much rent the tenants pay and factors as varied as how pleasant the tenants are and who gets the use of the front hall.
In short, the brokers are calculating the net present cost of the resident’s established tenancy, and projecting for how long the impairment will be inflicted upon the property.
Not that we’re hoping for anything, you understand
Perhaps the most important distinction is whether the apartments are rent-controlled, which provides tenants greater protections, or rent-stabilized.
It’s all economics, folks. And it can be traded.
[Some] potential buyers choose less aggressive approaches: attempting to negotiate a buyout with a tenant, for example. As long as there is no harassment involved, landlords or their lawyers may offer a tenant inducements to move or to relinquish their rights to certain areas of the building.
The carrots can range from a cash settlement to what the law terms an “equivalent or superior living situation” in another building.
But brokers and lawyers strongly caution that buyers have all agreements drawn up by a lawyer and signed in his or her presence.
Zerline Goodman, a Brooklyn real estate lawyer, said that she had negotiated buyouts for as much as $800,000 (paid to the last tenant in a TriBeCa loft building) to as little as a few thousand dollars in moving expenses (paid to a tenant in a nine-family Brooklyn Heights brownstone).
Eight hundred thousand bucks for one tenant to move!
Does that convey the magnitude of the value impairment?
Mr. Guerra of Prudential Douglas Elliman suggests approaching the subject of a buyout with extreme tact. “I’d say, ‘Blank, you know I just bought the building,’” Mr. Guerra said. “‘I have to ask, Would there be any terms that we could discuss that would make you consider ending the lease and moving somewhere else?’”
Yes, when you’re going to pay someone to leave, and you have no legal means of compelling him or her to go, you want at all costs to avoid the word ‘bribe,’ lest someone become offended at having what he or she is doing so characterized. ‘Relocation payment’ is so much nicer.
You take the money, you leave the apartment, nobody gets hurt, right?
Many buyers who are going through or have been through the process of removing tenants, either by eviction or through negotiation, are hesitant to talk about their experiences.
“It’s very emotional,” said Frank Ricci, director of government affairs for the Rent Stabilization Association, which represents
Landlords resent their residents. This isn’t good either, but it’s inevitable.
Mr. Ricci recounted a story about the owners of an
Thus we have a couple who want to bring their parents to live with them — something this society should endorse and facilitate whenever possible. But they cannot, because their residents are holding on to an economic bargain that said tenants did not pay for and have done nothing to earn.
Who’s being selfish here?
Any way I look at it, I’m okay
Building owners talk about negotiating with tenants before the closing only to have them announce that they’ve decided they don’t want to move after all.
“If you’re buying something with a rent-controlled or rent-stabilized tenant, you just never assume” that the tenant can be persuaded to move, said Karen Heyman, a broker with Sotheby’s International Realty. “If you can afford the rest of the building with the rent the way it is, great. If not, it’s not for you.”
There it is, the quintessence of rent control: if you can afford the negative assets — that is, the liabilities — then you can buy. If not, there is nothing you can do.
Who’s really been penalized by rent control? Whoever was foolish enough to own the building when rent control was enacted.
Who’s suffering? The City of New York, which has too little rental housing, often occupied by people who do not deserve it (why does Kofi Annan need a rent-regulated apartment?), and won’t create any more so long as rent control persists.
I’ve got my rent-stabilized apartment, who cares about yours?
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