Now more than ever, rent regulation has been a hot topic in the real estate world. Case in point. Peter Cooper Village/Stuyvesant Town in New York was a big deal and an even bigger failure. Why? The owners bet that they could turn over enough rent- regulated apartments to market rents to pay the huge mortgage note and still make a handsome profit. As they found out, it is much easier said than done. Stuytown’s owners immediately went about trying to oust people who were abusing New York’s rent regulations (of which there where quite a few)… the so-called low-hanging fruit. Stuytown’s owners spent money on private detectives, lawyers and the like. Yet, in the end, all they did was antagonize the tenants and forced many to prove they were indeed in compliance with the rules. The tenants fought back with a lawsuit and won rent rollbacks. That was when the owners realized that the original blueprint for buying the property at such a premium did not look good. Eventually, that led to the current situation with the lenders taking control of the property.
Rent Regulation: The Battle between Landlords and Tenants
In many cities, but especially in New York City, rent regulation spawns a whole host of issues for owners, lenders and tenants alike. The rules no doubt are abused by tenants, (witness one Charles Rangel), who have the means to pay market rents but realize that they have such a great deal that they will go to great lengths to protect it. Owners have a tough time because they have no incentive to upgrade and maintain apartments that are not profitable and will do everything in their power to bring the units to market rent. They hire private detectives, attorneys and accountants to look at financial information of tenants. Lenders are dragged into this mess as well because of lax underwriting standards and pie-in-the-sky projections of being able to get so many units to market rate rents.
Stuytown is not a rare case. There have been other deals besides Stuytown that have blown up based on these types of projections. A Pinnacle and Praedim partnership bought 36 rent stabilized buildings in the Bronx that are now in default primarily because they could not get enough units to market rate rents.
Is the End of Rent Regulation the Answer?
What we know is that rent regulation is fraught with political, legal and emotional landmines that make it very difficult to operate in the current environment. Is getting rid of regulations entirely the solution? If that happens, most certainly people will be forced out of cities like New York. On the other hand, it would foster competition among landlords who need to compete harder for tenants. That would motivate them to keep buildings in good shape. It would also eliminate the costs and headaches that go along with rent regulations, which in turn would help lower housing costs for everybody.
The bigger question is how to encourage the creation of affordable housing without many of the natural tenant-landlord struggles? These struggles will continue to be very much in the news as the Stuyvesant Town saga plays out. The lenders (now the current owners) will try their best to recover as much money as possible and the tenants will look to make sure the apartments are still affordable. Going forward, governmental help will be needed to make laws and regulations less onerous for landlords, allow for more market competition and create better tax incentives (instead of standard 80/20 agreements, perhaps a 70/30 agreement would work better) for developers to build affordable housing. It is also important to realize that no matter how hard they try not everyone will be able to afford to live in cities with expensive real estate.
