-F TEMPORARY STATE COMMISSION ON LIVING COSTS AND THE ECONOMY 355 Lexington Avenue/New York, New York 10017 HOD .- MEMBERS Andrew Stein Chairman Walter J. Butler Dr. David L. Call Hon. Hon. Mrs. Hon. Hon. Mrs. Franz S. Leiohter Eugene Levy Joseph Ansbro Meehan Jess J. Present Linda Winikow Nellie Wright HOUSING AND RENT STUDY GROUP James Edwin Kee Director Terrence Moan Andrew Parker TABLE OF CONTENTS MEMBERS OF THE COMMISSION TABLE OF CONTENTS OUTLINE OF COMMISSION REPORTS ACKNOWLEDGEMENT A. Introduction B. Finding of Fact 10. Rent Increases Cost Increases Tax Equality Rent Stabilization Capital Investment Debt Financing in New York City welfare Renters Co?op ?Condominium Conversions Harassment Landlord Studies C. Recommendations Repeal of Vacancy Decontrol Rollback of Rents to Level of Jan.l. 1973 Rent Regulation Program Tenant's Tenure Tenants Equality Act Senior Citizens Tax Exemption Senior Citizens Rent Increase Exemption Co-op?-Condominium Conversions Mortgage Study D. Hearings 1. 2. 3. 4. 5. Summary New York City Rockland - Orange Westchester Nassau - Suffolk E. Commission Reports SECTION OUTLINE OF COMMISSION REPORTS I.VACANCY (85 pages) l.Introducticn 2.Rent Increases a. Introduction b. Background c. New York State d. New York Metropolitan Areas e. New York City 3.Capital Improvements a. Renovations and Alterations h. Appliance Sales 4.New Construction 5.Harassment 6.Abandonment 7.Conclusibn II.LANDLORD OPERATING COSTS [17 pages) l.Major Components a. Interest b. Taxes C. Fuel and.Utilities 2.Rent Stabilization 3.Conclusion Equality Act (48 pages) l.Introduction 2.Existing Inequalities 3.Proposed "leasehold tax? 4.1nternal Revenue Service Considerations 5.Eccnomic Effects 6.Technical Considerations 7.Comparative Analysis of Three Proposals 8.Conclusion 9.Appendix a. State Tax Revenue Effect b. Legislation c. Property Tax Incidence "Id-wt. IV. WELFARE RENTERS (12 pages) 1.Introduction 2.Analysis 3.Conclusi0n V. PROFILE OF NEW YORK RENTERS (13 pages) l.Statewide 2.New York Metropolitan Area 3.New York City VI. COOPERATIVE AND CONDOMINIUM CONVERSIONS (6 pages) l.Introduction 2.3ackground 3.Analysis 4.Conclusion VII. DEBT FINANCING IN NEW YORK CITY (38 pages) LANDLORD STUDIES {14 pages) l.Introduction 2.CHIP Survey 3.MET Survey 4.Conclusion iv Acknowledgment On behalf of the Commission, I wish to express our appre- ciation to many of our colleagues in the Legislature and indi- viduals in government for their advice and assistance in making this report possible. Individual citizens and representatives -of tenant and landlord interests provided the Commission with data used for our analyses and studies. Particular thanks are due Commissioner Lee Goodwin of the State Division of Housing and Community Renewal, Kathy Dexter and Perry Soskin of New York City's Housing and Developement Adminis- tration, and Dr. Judith Gueron from Human Resources Administration. Professors Emanuel Tobier and Matthew Drennan of New York University were kind enough to allow us to reprint their preliminary report on mortgage financing. Professor Peter Salins has given us the benefit of his economic insights. The Housing and Rent study was directed by James Kee, an attorney and consultant in urban economics. He was assisted in the preparation of the report by Terrence Moan, an attorney and Andrew Parker, an urban planner. Ed Swetnick and Robert Mentzer helped compile statistical data. VEra Kacelek, Liz Fonts and Rita Davis all put up with long hours of typing to finish the report for presentation to the legislature. Andrew Stein Chairman 1- "Hum- - A. Introduction I On August 30, 1973, Governor Nelson A. Rockefeller directed the Temporary State Commission On Living Costs and the Economy, to "investigate and report to the Governor and the Legislature all matters relating to the rising cost of living and energy crises and assist in the coordination and enlargement of the scope and effectiveness of present state efforts to relieve the impact of rising prices and rents and apparent fuel shortages on the state's consumers, tenants, business and agricultural communities and local governments." One month later, in a letter to the Chairman of the Commission, the Governor specifically directed the Commission to make recommendations on state action to hold down rents not warranted by economic necessity. The text of the Governor's letter follows: Dear Stein: This is to request the Temporary State Com? mission on Living Costs and the Economy to examine the rent-increase situation and to recommend possible State Action in this area. Extraordinary pressures on the economy have created difficult times for the wage earner. In these times we must re?evaluate positions, care? fully looking into inflationary trends and possible governmental intervention regarding the basic costs of a family. I am asking the State's Division of Housing and Community Renewal to cooperate with the Commis- sion in conducting a survey of rent increases in various areas of the State and to analyze the components of increased rents, whether due to rising interest and maintenance costs or due to landlords taking advantage of the present economic situation. I look forward to recommendations from the Commission for State action to hold down housing costs where feasible and on methods to prevent rent increases not warranted by economic necessity. Sincerely, (signed) Nelson A. Rockefeller Governor Rockefeller's concern for the problems of rising rents has been strongly echoed by Governor Malcolm Wilson. Governor Wilson and the members of the Governor's office have provided the Commission with every possible assistance in the performance of its task. This report is a culmination of three months' research into the problems of rising rents. The Commission has con? centrated its investigation in the Metropolitan New York City area, because nearly 80% of the State's renters, accounting for 4l% of the State's population, reside in New York City, Nassau, Suffolk, Rockland, Orange and Westchester Counties. The complaints by tenants, utilizing a tenant "hot line" set up by the Commission, were also mainly from the Metropolitan area. A major concern of the Commission was to determine the effects of vacancy decontrol on the quality and cost of New York City's housing stock. Rosemary Gunning, Chairwoman of the Assembly Housing Committee, summarized the scope of our study at a November hearing. She said we "must I vI-rtuv ?1m .- - puw?u- .- determine whether abuses are so widespread as to require elimination of (vacancy decontrol), whether there is enough substantial good to merely require some corrective action or whether some of the alleged abuses are non-existing." Extensive data to support the Commission findings are presented in the eight Commission Reports presented in Section E. The Commission has analyzed all relevant data publicly available and has sought additional data from landlords and tenants. We believe the data represent the best information available on the rental situation in the Metropolitan-New York area and the economic and social effects of vacancy decontrol. The Commission makes the following major findings of fact: I Vacancy decontrol has neither stimulated new building construction, stopped abandonment, spurred renovation nor has it brought substantial new money into the City's housing stock. It has led to tenant insecurity over tenure and harassment. a vacancy decontrol has resulted in average rent increases in decontrolled apartments 52% higher than increases recorded in apartments remaining under rent control in New York City. 0- In Nassau vacancy decontrol has resulted in average rent increases of 47%, in Westchester, 45%. I 33% of decontrolled apartments in the Stabilized Sector now exceed stabilization guidelines. I Rent Stabilization Guidelines have exceeded cost increases to landlords and have not provided an accurate pass-along of costs.? 0 Property taxes represent 20-25% of rent in New York City and even higher in the suburbs. I Taxes are a major factor in increased rents. Landlords, particularly those in the Rent Controlled older housing, are being hurt by increased especially for fuel. Section contains a more detailed exposition of the Commission's findings. The Commission makes the following major recommendations: Repeal of Vacancy Decontrol Apartments under local rent control which become Vacant should be placed under new local rent regula- tions,to be enacted at the option of the locality. Rollback of Rent to Level of January 1. 1973 January 1, 1973, should be the Base Rental Date for those localities which establish rent regulations. That date is suggested because federal controls ceased to exist on January 11, 1973. Consideration should be given to those owners who made renovations in expectation of revenue from their vacancy decon- trolled apartments. They would be allowed to pass along amortized capital costs for improvements. nun?w.? 4.- . Rent Regulation Program Cities of 100,000 or more and all counties should be given the authority to pass rent regulation legis? lation for all rental housing stock not now under the emergency housing act [Rent Control), and for housing units which subsequently become decontrolled. Provided that: l} 2) 3) The program would be comprehensive, covering all multi? family dwellings not under rent control. New construc- tion or renovated buildings would be allowed market rent for the first rental and then placed under regula- tion. I A rent advisory board would be appointed by the Chief Executive and empowered to set maximum.allowable in? creases in rent. Such allowable increases must take into account the type of building, level of maintenance and yearly increased costs to the landlords for opera? ting expenditures and taxes. January 1, 1973 would be the Base Rental Date for determining allowable increases. The Board would contract with the Bureau of Labor Statis? tics or a similar body to provide relevant economic data. The Rent Advisory Board would hear appeals of landlords and be given the power to grant additional increases based on certain defined major renovations or on in? creased interest charges on the unamortized portion of the mortgage. 4) 5) 6) 7) The Rent Advisory Board's decision would be final; how- ever, Article 73 proceedings would be allowed to test the reasonableness of the rent increase allowed. Each city of 100,000 or more or county would have the option of creating a 7?man public benefit corporation, comprised of 2 tenants, 2 landlords and 3 public mentors appointed by the Chief Executive Officer of the political subdivision to oversee the administration of the program. In the alternative, subdivisions could contract with the State Division of Housing to administer the program. Enforcement of building maintenance and a continuation of current services would be the responsibility of the Public Benefit Corporation (or State Division of Housing) in cooperation with the local code enforcement body. Injunctions could be brought on behalf of tenants by the Corporation or Division to force owners to provide proper maintenance and service. Costs of administering the program would be borne by the local subdivision, except they would have the right to charge a fee of landlords to pay for the program. I Tenants' Tenure All tenants must be given the right to a lease and the right of automatic renewal at established allow? able increases. This would not preclude a landlord from removing a tenant for cause under existing law. -un-n-I 'h a. uh mow-mupm?wn? v! I Tenants? Equality Act All residential tenants should be made jointly and severally liable with the landlord for the real pro? perty taxes attributable to their leaseholds, there- by enabling renters to take advantage of the federal, state and local income tax deduction. The tenants' rent would be reduced by the amount of the tax, and the tenant would pay the tax to the landlord, as trustee. Section of the report contains a more detailed discus? sion of the Commission's recommendations. The Commission is hopeful that the findings and recom? mendations will provide the Governor and Legislature with important information and a program fortremedial action. There is a crisis of confidence in government throughout this country, and the tenants of New York have been promised relief for their spiralling rents. They don't expect mira- cles or an unrealistic rent freeze. What they want is some security and legislation to prevent some landlords from taking advantage of a tight housing supply by unconscionably raising rents. E. Findings of Fact 1. Rent Increases Data provided by leading landlord groups indicate that rent increases in New York City decontrolled units averaged 52% above controlled levels in 1972, while destabilized apartments rose by an average of 19% during 1971?72. In New York State median decontrolled rents were 47% above controlled rents in Nassau, 45% in WEstchester, 19% in the Albany area, and 18% in the Buffalo area. These increases were in many cases compounded by the allowed regulated in- creases which preceded decontrolled rents. City wide, the decontrolled rents averaged 16.5% higher than Maximum Base Rent levels, which are the levels calculated to provide owners with a 8.5% profit, after payment of all?operating and main- tenance expenses. A frequency distribution of "destabilzed" rentals indicates that, overall, 33% of the rents exceeded Stabilized Guidelines. Furthermore, 10% of the stabilized buildings appear to have been receiving stabilized rentalsin excess of market rents. (See Report I, Section The impact of vacancy decontrol on renters may also be deduced from the H.D.A. Tenant Survey, which found that 34% of decontrolled units are occupied by families with incomes less than $5,000 (see Report V). The fact that the great majority of such households are eligible for governmental assistance makes government a principal source of funds for the inflated decontrolled rentals. 10 The lower-priced rental accommodations experienced the greatest percentage increases under vacancy decontrol, averaging 60.6% city wide, and 74% in both the Bronx and Brooklyn. The rate of vacancy decontrol, approximately 10% a year, has already eroded the controlled and stabilized sectors by 25%. The large numbers of households directly affected by unusually high rent increases is a highly significant factor in assessing the impact of vacancy decontrol. Facing not only an initial decontrolled rent increase, but continuing unregulated increases, tenants have often suffered severe hardships. This has been particularly true among the elderly and the disadvantaged. Compounded by Spiralling food costs, the plight of such families demands immediate 2. Cost Increases Operating and maintenance costs for rental housing have risen sharply over recent years; particularly dramatic have been the soaring fuel costs over recent months. (See Report II, The four major components of rental costs are: interest and amortization of mortgages; real estate taxes; labor costs; and fuel and utilities. Together they represent 70?75% of a landlord's expenditures. Interest rates moved significantly downward for most of 1971 and 1972 but than moved sharply upwards in the latter part of 1973. The increased costs attributed to debt ser- vice by landlords are in many cases genuine. - mun-un- . 11 However, during the period of lower interest rates in 1972, landlords were still claiming increases in mortgage costs of around 33% upon refinancing. Such cost increases would indi~ cate that owners were increasing the size of their loans and "taking out" as profit the additional debt, while passing along the total higher interest rates to their tenants as "operating expense". Real estate taxes have also risen sharply. The Bureau of Labor Statistics notes an 8.4% increase between 1972 and 1973 in New York City rent stabilized buildings. This would require a 1.9% increase in rent in newer housing, which has been hardest hit by tax levies. The growing impact of real estate taxes has further increased the disparity between a home? owner, who can deduct property taxes, and the tenant, who cannot. The costs of energy have accelerated the fastest of all apartment operating costs. The Bureau of Labor Statistics indicates an increase of 7.9% from April 1972 to April 1973 for the fuel and utilities component of the cost index on stabilized apartment houses. The National Wholeslae Price Index from December 1972 to December 1973 indicates a 65.1% increase for "Fuel and Related Products and Power". The impact of fuel and utility costs on rents varies according to building age, hitting hardest at the older, rent controlled stock. Whereas newer buildings in Westchester would need a rent in- crease of 4.5% to cover recent fuel cost increases, city rent controlled buildings would require as much as a 9.7% increase 12 in rents, assuming constant fuel consumption. The overall impact of the rise in cost components varie significantly by building age. Older buildings spend a greater proportion of the rent dollar on labor, fuel and repairs, while newer buildings spend more on taxes and debt service. Taxes in both types of building surveyed average about 22% of rent, although some studies estimate it at about 25-30% of rent. (See Report II) 3. Tax Equality A serious inequity exists between the tenant and the homeowner with respect to the tax treatment of real property taxes, which represent approximately 25% of the tenant's rent The property owner is allowed to deduct property taxes on his federal, state and local income tax returns, but the tenant is not. (See Report 4. Rent Stabilization The rent stabilization program was examined by the Commission and found to provide inadequate protection to tenants. The landlord dominated program has been a con- tinuous source of discontent to tenants, who experienced pro- blems in obtaining redress for excessive rents or complaints on reduced service. Most important, however, is the vaguenes 0f the rent stabilization enabling legislation with regard to establishing the allowable increases. The result has been rent guidelines that are unjustified and pro-landlord. .. v1. .n-pThe Stabilization program was designed to limit excessive profits during a tight rental housing market and provide a mea- sure of security for tenants. Although the program has pro- vided a significant amount of tenant security, it has not restricted rent increases to amounts justified by increases in operating and maintenance costs. Where a tenant has been in residence since the program began in 1969 in a stabilized building and took a series of 5 one year leases, 3 two?year leases, or 2 three?year leases, he would have "overpaid" his landlord $1,312.30, $429.60 or $708.12 respectively. "Overpaid" here means unjustified increases on the basis of the Bureau of Labor Statistics cost index movements, presuming such costs account for 55% of the rent dollar. The overpayment is undoubtedly greater than the indicated amount because additional increases were allowed for vacant apartments ranging between 7.5 and 10% each time an apartment became vacant, which then compounded the'base for subsequent lease renewal increases. (See Report II, Sec. 2) 5. Capital Investment A Commission study measured the effects of vacancy decon- trol on the initiation of capital improvements. The purpose of the study was to investigate the validity of the contention that such investments had increased as a result of vacancy decontrol. The study found that the number of buildings renovated in each borough has decreased to a level half of that of 1969. 14 The expenditures on such renovations, although increasing steadily prior to vacancy decontrol, decreased to a level aPPr?ximatElY $1,000,000 per month lower than during rent control. {See Report I, Section 3a.) The study further found that appliance sales had decreased in Brooklyn and the Bronx while increasing in Queens and Manhattan, suggesting that the sale of new appliances is limited to those areas where the owner can enter the luxury housing market by such installations. {See Report I, Section 3b.) The Commission examined various data that may be indi~ cators of the rate of abandonment of rental structures in New York City. The continuing increase of in rem actions, and the increasing proportion of uncollected tax levies both signify that there has been no decrease in the rate of abandonment since vacancy decontrol. Furthermore, the steep and increasing rates of abandonment in other cities across the country that do not have rent controls would make any claim correlating abandonment to rent controls a highly tenuous one. (See Report I, Section 6) 6. Debt Financing in New York City A.study on mortgage lending in New York City's housing market is now being conducted at New York University?s Grad- uate School of Public Administration. A preliminary report, written by Professors Emanual Tobier and Matthew Brennan is reprinted in Part E, Report VII. The study is being financed under contract from New York City's Housing and Development Ml'a? n- Hun-th 15 Administration. Professor mobier is Project Director of the study. The_study consists of a random sample of the City's 128,000 privately owned and financed multi?family residen? tial buildings, stratified on the basis of number of units and age of structure. The study is concentrating on the mortgage holdings of financial institutions, which hold mortgages of about 5.5 billion dollars (30% of the city?wide multi?family property value). of this amount, about 4 billion dollars comes from mutual savings banks and the balance of 1.5 billion dollars represents, in roughly equal proportions, the holdings of savings and loan association, commercial banks and insurance companies. Another $1 billion in debt is held by non-institutional lenders, primarily individuals. The study indicates that the availability of mortgage financing in ?ew York.city properties has worsened percepti- bly since 1966. In that year, the mortgage investment powers of New York mutual savings banks were broadened to permit investment in conventional mortgages on property located outside New York State and adjoining states, subject to a limitation that such investments would not exceed 20% of the assets of any savings bank. The mutual savings banks have quickly implemented this authorization, and out-of?state conventional mortgages by December 19?2 were almost 12% of total savings bank investments. since this is still below authorization, it seems likely that out-of?state mortgages will continue to grow rapidly, at the expense of mortgages made inside the state. 16 The 1966 liberalization coincided with a sharp rise in interest rates. Savings banks found it difficult to com- pete with opennmarket securities (Treasury bills and cor- porate bonds) and commercial banks for funds. Tobier and Brennan estimate that the number of multi-family properties in New York City which were secured by conventional mortgages by savings banks fell by a minimum of 20?25% in the period between December 31, 1966 and December 31, 19?2. They also believe that savings and loan associations and insurance com~ panies have reduced their holdings. Commercial banks, a potent source of mortgage funds, have not yet appreciably in? creased their holdings. Multi?family housing cannot be operated without large amounts of debt financing. There is no indication in the study that the new Maximum Base Rent Program or Vacancy Decontrol have elicited an increase in the flow of mortgage finance into the city's housing stock. We cannot talk about continued maintenance or renovations of the city's housing stock without reversing the trend of reduced mortgage finan- cing. Tobier and Drennan conclude that "if there is an accelerating withdrawal of mortgage finance from.the city's housing stock, the future prospects for stability in the city, both as a jurisdictional and as a social entityr are very bleak indeed." (See Report VII) Ip- . .- nil!? 17 7. Welfare Renters Tenants in New York City who receive a shelter allow? ance from the Department of Social Services comprise 18.9% of the renter market and therefore have a great impact on the entire market. With the data presently available, it is not possible to isolate the different influences on welfare shelter allowances; however, it is clear that these payments are increasing by an annual rate of A Commission study of security deposits, paid by the Department of Social Services when clients move into new apartments found that such payments have increased by a minimum of 61% above those paid prior to vacancy decontrol. The study found that the policy of separating the shelter allowance from the grant gave the welfare tenant a negotiating advantage when compared to the working tenant, in that the client could afford to outbid the wage earner without consideration of the remainder of his budget. The Department of Social Services will soon start a flat grant program which the Commission will watch with interest. The market effect of the shelter allowance policy was to create a "false bottom," which acted to the detriment of the low income tenant not receiving assistance. (See Report IV) 3. Cooperative and Condominium Conversions The-Commission found that the conversions of existing rental units to cooperative or condominium apartments is generally a socially unproductive investment of capital which is often accompanied by serious negative side effects. One such side effect is the withholding of rental units from the market in order to achieve the 35% level of pledges required to form the cooperative. This effect is particularly reprehensible in light of the critical housing shortage facing the Metropolitan Area. Another negative effect is that tenants unprotected by statute are being threatened with evictions or required to sign leases with provisions requiring the tenant to move if the cooperative plan is approved. (See Report VI) 9. Harassment The Commission found no convincing evidence that harass- ment has increased under vacancy decontrol. However, the impact of harassment creates such a serious threat to the health and safety of all tenants that, even without evidence of an increase, it remains a major problem (See Report I Section V). 10. Landlord Surveys The Commission has received two surveys conducted by landlord groups in New York City. Both groups, Community Housing Improvement Program (CHIP) and Metropolitan Fair Rent Committee (MET), requested voluntary compliance from their member owners. Accepting the surveys on face value, they seem to verify the Commission's findings which were based on the H.D.A. . l- ti. ~mm .n 1-. 19 survey and the Commission's study on capital investment. The landlord data shows 78% of vacancy decontrol units esceed the M.B.R. ratelr which was calculated to provide the owner with an 8.5% profit after payment of all operating and maintenance expenses,r including mortgage debt service. The average rent increase reported by CHIP was 42%, 10%1ower than that reported in the H.D.A. survey. However, the housing population in the CHIP organization are middle and upper income units, while the H.D.A. survey reported the largest increase in the lower income housing stock. The surveys are not susceptible to any analysis on the question of capital improvements because neither survey requested data on capital investment prior to vacancy de? control. The CHIP survey did gather some data on investment but failed to separate normal maintenance costs from capital investment. Using this data, including maintenance capital investment averaged only $6.44 per apartment per month, while receiving $26.93 more than the M.B.R. rent. (See Report survey asked only for first decontrol rents and the difference to full MBR levels. Results indicated 80.8% apartments exceeded their full MBR's by an average of 13.4%. The extremely limited scope of the questionnaire and the inherent sampling biasr diminish the contribution of the MET survey. 20 'MM'mmwu-muwmum 21 C. Recommendations Of the Commission? 1. Repeal of Vacancy Decontrol Vacancy decontrol has succeeded in increasing rents in previously controlled units by more than 52% and in previously stabilized units by 19% in New York City. No beneficial side effects have resulted from vacancy decontrol; major capital investment has slowed, new construction has been unaffected and there is no indication that the abandonment rate has abated. Vacancy decontrol has placed an extreme hardship on the tenants of this state, particularly on the elderly and the poor, in the form of increased rent and insecurity. The vacancy rate of the Metropolitan area is 2.03%, much below that level needed to provide'free market compet- ition. The policy of returning vacant apartments to the free market has failed because the free market does not exist in the Metropolitan area. Therefore, vancancy decontrol should be repealed. 2. Rollback of Rents To Level of January 1? 1973 Vacancy decontrol beCame effective on June 30,1971, six weeks before the federalfreeze.on wages, rents and prices. Phase II of federal controls permitted some increases in rents but limited them.to a level of comparability with similar apartments in the area. On January ll, 1973 all controls were removed from rents and many landlords who had escalation provisions in their leases immediately increased their rents 22 to "market levels." In the suburban areas, where federal guidelines per? mitted an 8% increase followed by annual 2.5% increases: federal controls existed long enough to permit the initial increase but were lifted before any renewals could occur. With no controlsisuburban landlords charged 20% increases for all subsequent lease renewals. Twenty-five percent of New York City's regulated housing stock have become vacant in the 30 months vacancy decontrol has been effective. Since vacancy decontrol has been applied on an apartment by apartment basis, there is no comparability of rents within a formerly uniformly controlled building: and great inequities exist between the rents charged for identical apartments. A repeal of vacancy decontrol without a rollback would aggravate existing inequities in pricing of rent control apartments. In effect, three "classes" of citizens would exist. The most favored, those who have been and remain under rent control, would be paying the lowest rent. A second group would be those who entered a vacant apartment after repeal of vacancy decontrol. They would be paying a higher rent than the rent controlled tenant but less than the decontrolled tenant. Finally, without a roll back, the pre? sently decontrolled tenant would be paying the highest rent, perhaps 100% more than the controlled tenant for similar accommodations. -u p. Ir gu- -I1lnui?. . "It?f .. .u .q-u 1 23 Therefore, in order to permit the rational regulation of rents, those communities which choose to regulate rents should be allowed to roll back the rents to January 1, 1973. 3. Rent Regulation Program Communities in the Metropolitan Area have been seeking and should be given the right to regulate rents. In order to prevent a crazy?quilt of systems, a limitation on the minimum.size community which Ivould be permitted to establish a rent regulation should be enacted. Cities of 100,000 or more and counties are sufficiently large and well-defined areas to give tenants and owners the degree of certainty in the identity of the regulating body so that complaints may be properly directed. Since the problems facing tenants are not universally felt throughout the state, the city or county should have the option on whether to enter into a rent regulation program. Each community which chooses to regulate rents should be allowed to set its own guidelines and mechanisms for the determining of rents, because the problems in each community are frequently unique to that area. Therefore, the local legislators, who know their problems best, should be allowed to try to remedy them. However, in order to protect the valuable housing stock of New York State, certain elements should be required. 24 The program must be comprehensive and cover all mult? family dwelling rental units not under control of the emer? gency rent control act and should cover those controlled units when they become vacant. The comprehensiveness is essential for the protection of the tenant population. New construction and renovations would be covered by the re lations, but units would be initially rented at their market 181 and regulated thereafter, treating the first rental date as the date from which all increased costs would be measured. The rent program must include the formation of a Rent Advisory Board, appointed by the Chief Executive of the political subdivision, which would set maximum allowable rent increases. Such rent increases would be required to take into consideration the type of buildings, level of maintenance and increased costs to the landlord for operating and maintenance expenditures and increased taxes, from January 1, 1973. The highest rate of inflation in two decades has occured in the past year, and increased costs must be reflected in the rent, otherwise essential services will be curtailed. The Board would contract with the Bureau of Labor Statistics or some similar body to determine the actual increases in costs. The importance of the cost data requires that a neutral body actually determine the increases and that this function be insulated from the political process. The Board would hear appeals of landlords and be given the power to grant additional increases based on certain defined major renovations or on 3 I - nua- 25 Alternatively, the localities could contract with the State Division of Housing to administer the program. The balancing of landlords and tenants is necessary in order to ensure that the administration of the program is fair. The landlord's representative would be able to assist small landlords in presenting their grievances, while the tenant representative would likewise assist the tenants. The public members, who would outnumber either the tenant or the landlord representatives, would lend their administrative expertise and their non-partisan participation to guarantee an even?handed system of administration. Enforcement of the maintenance of the building and the level of services would be the joint responsibliity of the Corporation (or Division of Housing} in cooperation with the local code enforcement agency. Since the increases in rents are permitted on the assumption that the property and the services remain in at least as good a condition or on a higher level than on January 1, 1973, the services must remain at that level. Injunctions could be brought on behalf of the tenants by the Corporation or Division of Housing to force owners to maintain proper levels of maintenance and service. Costs of administering the program would be borne by the locality, but each locality would have a right to charge a fee to the landlord. Such fee could be included as a cost to the landlord in the calculation of future rent increases. 26 increased financing charges attributable to the unamortized portion of an outstanding mortgage. The importance of permitting increased rents for essential capital improvements cannot be overemphasized. An owner should never be penalized for improving his property if such modifications either raise the level of services provided to the tenants or permit those services to be maintained at present levels. The outstanding mortgages on the property will be re? quired to be renegotiated at certain times in the future because, unlike single family homes, mortgages on multi- family dwellings are not always self-amortizing over the term of the mortgage. When renegotiation occurs, the mortgage rate may be higher than the original mortgage. Therefore, this cost of increased debt service is an actual cost attri? butable to the operation of the building. However, the owner may renegotiate the mortgage at a higher debt and thereby receive a substantial sum of money in the form of a loan. The extra debt service attributable to the increased debt should not be reflected in the rent because it is not a real cost of the operation of the building. However, if the ad? ditional money is spent on capital improvements, the Board could grant further increases. The determination of the Board would be final. The political subdivision should be given the option of creating a Public Benefit Corporation appointed by the Chief Executive and comprised of tenants, landlords and public members to oversee the administration of the regulation pro- gram. T-F-I-uul . - ran ?wannaTenants' Tenure All tenants legally in occupancy would be given the right to a lease and a right to renew at the established allowable increases. With tenure, the tenant would not be afraid to report failures in services or levels of main? tenance. The tenant would be given a measure of security which is lacking under the present system, and which is particularly necessary for the elderly tenant. The right to a new lease would not abridge the right of a landlord to remove a tenant for cause. 5. Tenants' Equality Act All residential tenants should be made jointly and severally liable with the landlord for the real property taxes attributable to their leaseholds in order that they may have the advantage of the federal, state and local real property tax deduction. The tenants; rent would be reduced by the amount of the tax, and the tenant would pay the tax to the landlord, as trustee, in order to take advantage of the tax deduction. Studies have reported that the real property tax repre? sents approximately 25% of the rent dollar. The property tax is presently hidden and the tenant neither sees it nor can he take advantage of it in his federal income tax deduction. The homeowner, who also pays the tax, can at least in part, offset increased taxes by increasing his federal deductions. . I . n- 28 Only those tenants who will itemize can take advantage of the benefits of this proposal, which generally means that most middle income tenants will benefit. To those who do itemize, the proposal would be a federal subsidy to New York tenants. 6. Senior Citizen Tax Exemption A companion proposal to the Tenant Equality Act is an extension of the senior citizen real property tax exemption to tenants who meet those income limits required by localities. At present, a locality has the option of granting a tax ex- emption to senior citizens who own their own homes.and earn 1e: than $6,000. The proposal would allow the locality to extend the exemption to the elderly who rent and pay a leasehold tax as established by the Tenant Equality Act. Thus, since a grea1 portion of the poor are elderly, the Tenant Equality Act would benefit the middle?class tenant and the lower income elderly tenant. 7. Senior Citizen Rent Increase Exemption Current law allows localities to provide for senior citi- zens living in rent controlled housing an exemption from rent increases, provided the senior citizen is paying in excess of one?third his income for rent, and his income does not exceed $5,000. The owner of the building is allowed to credit the lost rent dollars against his local property tax liability. The Commission makes two recommendations. First, that the income limitation be raised to $6,500, with an option that localities could chose a lower limit. Second, that eligibilit for the exemption be expanded to include all senior citizens ?51 IF. . . Hi) NHL, -. 9.1.- 1h. -- - Idl*1u- . 1 I. 29 now renting, regardless of type of regulation limiting rent. It makes no sense to provide for two classes of lower in- come senior citizens. Those with low incomes are hard?pressed to meet rising rents regardless of the type of housing in which they live. In the H.D.A. survey.13% of the elderly were living in older apartments but at decontrolled rents. Many live in stabilized apartments with higher rents and built?in increases. Testimony at Commission hearings described the plight of elderly residents going without food in order to pay the rent. All senior citizens meeting the financial criterion should be pro? vided relief. - It is suggested that a more realistic income level for providing the rent increase exemption would be $6,500. Infla- tion has been cruel on senior citizens, and prices are rising faster than Social Security increases. An increase in the dollar limitation would help alleviate the increasing burden of inflation. 3. Co-Op Condominium.Conversions vacant units should be included in calculating the number of pledges necessary to convert an existing rental apartment dwelling to a cooperatively owned apartment. New York is fac? ing a severe housing shortage, and all rental units should be rented whenever possible. The present co?op conversion law encourages owners attempting to convert to withold vacant apartments from the rental market because this reduces the burden of pledges he needs to convert. By counting the number of vacant apartments in the determination of number of pledges 30 necessary, it is no longer profitable to keep these apartments vacant, thereby stimulating maximum use of the existing housin: resources. Tenants who live in a unit which has been properly- con? verted to a co?op should not be evicted in order to make their apartments available for sale. Sales shouldtwamade at the tim the apartment becomes vacant or, if a purchaser is found for an apartment which is occupied by a renter, the voluntary re- location of that tenant should properiv be a cost of conversi The tenant should not be forced to bear his relocation expense while the landlord/owner makes a profit on the sale. 9. Mortgage Studv The Commission recommends that further study he conducte? on the availability and cost of mortgage financing. Specifics 13, it believes that annual compilation of mortgage data on multi-family dwellings, by the Department of Banking, would be useful to analyze current trends. It is proposed that the Commission, jointly with the sta: ing Assembly and Senate Housing Committees, discuss with majo: bankers the problems and issues involved in the apparent dis- investment of savings banks in central city mortgages. Speoif questions that should be considered are the following: . Is the saving bank disinvestment due to an upward trend in the delinquency rate or foreclosure rate experienced by those banks . Has the liberalization of investment laws, allowing mutual savings banks to invest in 3 4 learn?mp Ir 11 warn .lnj- up; 'il??r?r mortgages outside the state, significantly contributed to the problem of central city borrowing? What is the possible role of the state in guaranteeing or subsidizing multiple family mortgages in a manner to lower financing costs and rent? The United States Bureau of Labor Statistics recently report? ed that this country and, in particular, this state, have under? gone a period of inflation unequalled since the end of world War II. It was during this earlier inflationary period, that this state continued rent controls which the federal government had enacted during the war. The Commission's recommendations are based. on an awareness of the effects of inflation and on the belief that no one sector should be asked to bear all the costs. Instead, the re? commendations proposed will allow the minimum impact required by today's inflation to be passed on to the tenant population without either endangering the prOper delivery of services, or inhibiting long term growth and renovation of our valuable housing stock. nmnuutW-Ih: - uh uh. - June-?1! -.-.I 1:154..- ul'u dull-um . II InJOh-lg (-1.. I 33 D. Public Hearings Of The Commission Six days of public hearings were held throughout the New York Metropolitan Counties. They provided invaluable factual information, both on general rent problems and on particular issues. Housing experts, local and state officials, landlord and tenant representatives, and numerous individual owners and tenants presented their perspective on the rental housing situation. The resulting quantity of information is, perhaps, even more substantial than the Commission has been able to digest to date. Nonetheless, certain issues surface over and over again, vieWed, quite naturally, very differently by the interests involved. This summary shall attempt to present these issues as they conoern tenants, landlords and legis- lators. Following the summary is a list of speakers and excerpts from testimony at each hearing. A. Tenants By far the greatest problems for tenants has been the wave after wave of increased rentals, accelerating in recent months as has the general inflation in the economy. Where pricing control mechanisms were altered in recent years, as in the case of vacancy decontrol, the end of federal cont- rols, and the introduction of "pass?along" clauses, tenants perceived the effect to be yet more dramatic and harmful. 34 Tenants reporting rent increases of over 100% are not uncommon. Indeed, when the sheer numbers of tenants in the region are considered, and even when these "horror stories" account for but a tiny fraction of the total, their real numbers amount to hundreds of thousands of house- holds. For the elderly, the disadvantaged and the working poor, such rent increases are calamatous, at a time when they are totally without means to improve themselves. The impact of the rent price spiral on tenants has inevitably worsened landlord?tenant relations and produced the loudest and most widespread demands for governmental action in many years. One of the most disliked causes of rent increases is the operation of vacancy decontrol. In municipalities which have maintained rent controls, administered either by the State or New York City, apartments become free from such controls once vacated. The inherent dynamics of vacancy decontrol produce not only an incentive for owners to be rid of their controlled tenants, but further, it rewards "bad" buildings where the tenants' desire to remain is less, while penalizing "good" buildings that do not experience such high turnover. Most important, however, is the increase in rent on the new occupant, not only on taking possession but sub- sequently on new leases at the will of the owner. waters: ma :3 Lithi?hh mi? .- p'h-V'q-l 35 An owner now may offer no lease, or dictate the period covered; moreover, he may refuse to renew it once it expires. The tenant has very little option in a rental housing market that hovers around the 1% vacancy rate. For such tenants, the inequities between rent controls and the absence of con- trols are most keenly felt. Landlords who may be faced with rising costs are natu? rally going to increase rents where they can, as much as they can. Again, evidence was presented that the impact of vacancy decontrol is poorly targeted, falling most heavily on those young and new households that are least established, on those poor and disadvantaged families which suffer most disruptions of residence, and on those old households that are shrinking in both size and economic strength, and so seek more appro- priate accommodations. The hearings produced testimony from tenants of rent increases which averaged 72% increase upon decontrol in Manhattan, with subsequent lease renewal increases of 40%. The same degree of rent hikes were reported around the other boroughs. In Rockland County rents were reported generally doubled over a five year period, likewise in Wastchester and Nassau Counties but with particularly sharp increases in those municipalities that were effected by vacancy decontrol. Aside from the rise in the price for shelter, vacancy decontrol was cited as a major cause for profound insecurity 36 for tenants. 0n the one hand those tenants still occupying a controlled apartment were in greatly increased numbers becoming the victims of landlord harassment. The Commission heard numerous stories of inhuman treatment on the part of landlords and their employees. Reduced services, particularly of heat and maintenance, verbal and physical abuse, and the use of continuing court proceedings were some of the tech- niques which tenants charged were being employed by landlords. The decontrolled tenant is commonly refused any kind of lease, so that he is at the continuous mercy of a landlord who may serve notice at any time, particularly if the tenant ?makes trouble" by asking for a paint job or some other reasonably required service. Numerous examples of retaliatory evictions were brought to the attention of the Commission. Rental.building become even less subject to legal incentive to maintain and improve itself as controls are with- drawn. Tenants were especially vociferous in claiming de? clines in service despite the effects of as much as 50% de- controlled units in their buildings and the higher rents. Another major cause of tenant insecurity is the growing practice for owners to convert their building to co-ops or condominiums. For tenants unwilling to buy into the co- operative corporation, which in most cases remains controlled by non-resident interests, or to buy their own condominium, 37 there is a serious incentive for owners to be rid of such "non-cooperative" tenants in order to realize the huge and rapid profits on conversion. In some cases decontrolled tenants were forced to sign leases requiring them to vacate if their apartment was sold. Tenants charged that the cur- rent law which requires only 35% of tenants' approval for the conversion plan, results in the same kinds of harassment in? dicated earlier, together with the practice of "warehousing" apartments, that is, keeping them vacant but off the market in order to facilitate compliance with state requirements.. Specific examples were presented of such warehousing. For controlled, stabilized and decontrolled tenants, the ineffectiveness of institutionalized remedies was another major source of complaint. For rent controlled tenants, the slow pace of the bureaucracies, the sometimes cursory exam? ination and approval of landlord claims and the inability of these agencies to provide coordinated relief to tenants. For New Ecrk City stabilized tenants, the landlord dominated Rent Stabilization Association and the Conciliatory and Appeals Board were considered too pro landlord. For the decontrolled tenants, as for the other recourse to the courts and bureaus can be an expensive and frustrating experience. Tenants pleaded, demanded, and prayed for some realistic solution to their many ills. In the most part, their pro- posed solution was for rollbacks on rent and locally controlled MWW tr Tim? tmwwes ve- :Lr; 38 programs of rent control, hitched to justifiable cost in- creases which allowed owners a "fair return" on their invest- ment. Such a program should provide a new tenant-landlord legal framework and guarantee the provision of all essential services. B. Owners The owners of rental housing that Spoke before the Commission emphasized the need for a free rental market, with? out government price regulation, in order that they may meet the costs of operation and maintenance, as well as make their profits. In general, all landlords were particularly concerned that vacancy decontrol be preserved as the solution to much of the housing problem of the region. Vacancy decontrol, they said, enabled owners to receive sufficient income to improve and maintain rental housing and reduce abandonment. In New York City, owners were especially critical of the current rent control program of Maximum Base Rents, citing bureaucratic delays, the masses of paper work owners had to complete in order to be eligible for increases, the need for certification of removal of violations and the $8 permit fee required to participate in MBR. Rising costs in the areas of payrolls, materials, fuel, taxes, insurance and mortgage interest payments were all cited as compounding the problems owners faced in managing older, 39 rent controlled housing. In this respect, the steady toll of "abandonment", cited as 50,000 units a year, was contin? uously pointed to as the consequence of controlled rents. No comprehensive statistical evidence of recent cost increases, nor of rent increases, was presented by the city owners to the Commission. In the suburban counties, however, the Nassau owners presented the results of their survey, in? dicating rolls rose only 5.36% between 1972 and 1973 while costs rose 17.19%. The Westchester owners presented survey results which indicated, for the period 1971-1972, an average expense increase of 15% and rent increase of 7 In both cases the information was voluntarily submitted by members of the landlord organizations concerned?and accounted for approximately 1% and 2% of the potential populations surveyed in Nassau and Westchester, respectively. In Nassau buildings included had 10 or more units, in Westchester, 25 units or more. In overall terms, owners, whilst expressing their re- pugnance to any form of controls, did express that if a pro? gram of stabilization be determined necessary, it should be tied as closely as possible to the cost increases owners are continuously faced with. C. Legislators Substantial numbers of local and state representatives and officials gave testimony before the Commission at each of 40 at each of the hearings. Although perspectives and pro- posals differed, each were able to provide substantive in- formation on local conditions and problems. Almost all the legislators indicated increasing pres- sure from constituents to do something about increasing rents. Worsening conditions in the quality of life for the senior citizens, poor and middle classes, as a direct result of inflationary rent increases and declining services Were the issues they had been made aware of. In consequence, many have been unable to enact sufficiently comprehensive local laws that would fall within the State's current delegation of municipal or county authority; the frustration of such legis- lators was apparent. Proposed legislation covered a wide spectrum from state- wide mandatory controls to local option, locally financed stabilization programs. Bills that would provide tenants with "guarantee of habitability", rights of tenure, and the right to property tax deductions from their income taxes were also presented to the Commission for study. In general, legislators emphasized the need for immediate and strong action in the rental housing field whilst main- taining that such programs must be "responsible" and not aggravate current problems. THEE ENDS THE HECOWEMDATIONS 0F REPORT. FOR NEWER 0F REPORT, TI-JE EDIE-1D VOHIIJE MUST BE OONSULED.