New York State’s new rent-regulation law makes dramatic changes to housing rules—limiting rent increases after owners make major improvements and even after units become vacant and the rents have not been raised for years. The law will likely lead to lower values for buildings with rent-stabilized units, potentially weakening the city’s tax base. Ironically, it may discourage development of new, so-called affordable housing, the type that Mayor Bill de Blasio sees as a central goal of his mayoralty.
De Blasio is betting that he can reach a signature goal of “building or preserving” 300,000 affordable units, in part through “inclusionary zoning.” In exchange for generous tax abatements and the easing of height and density restrictions on their buildings, developers set aside 30 percent of units in new buildings and subsidize them as “affordable” for lower-income tenants. Those units become rent-stabilized; the rest can be priced at market rates, though the new legislation could be interpreted to mean that those market-rate apartments fall under rent regulation, too.
Developers who specialized in affordable-housing deals had been managing to build through a combination of incentives and the possibility that rent-stabilized units might not remain that way forever. Higher-rent subsidized units could be deregulated when they became vacant, and developers assumed that market-rate units would never be rent-regulated.
All that’s now changed. With the stroke of a pen, Governor Andrew Cuomo has turned new affordable buildings into depreciating assets. There is no longer any possibility that subsidized units will gradually fall out of regulation as their rents rise or as the tenants move out. Even relatively wealthy people occupying high-rent apartments will now be protected from rent increases.
Owners will also no longer be able to recoup the true cost of renovations and repairs—investments that all buildings need to stay in good order. Instead, the state will “establish a schedule for ‘reasonable costs’ for major capital improvements” that will set a ceiling for what can be recovered, no matter the specific situation.
Developers consider new building projects with an eye toward the long-term income stream that they can generate. If new rent regulations wind up capping the expected revenue gain, builders will likely find more profitable ways to invest their capital. Investors will not agree to take less profit for the sake of a good cause. Instead, their capital will migrate—to commercial projects, to luxury projects, or to other cities, leaving New York with an even-tighter housing market.
The new law will also make it harder for Mayor de Blasio to achieve his affordable-housing goal—which he upped, last year, from 200,000 to 300,000 units “built or preserved.” The administration claims to have accomplished this for 121,700 units, though most of those affordable units were not newly built but “preserved,” meaning that city subsidies will keep those apartments under rent regulation. Still, 38,700 new units were built—and it’s such construction that the rent-stabilization law is likely to stop. In 2018 alone, the city budgeted $1.7 billion for 10,000 new affordable units and the “preservation” of an additional 24,000. De Blasio’s plans already faced serious obstacles despite such high levels of spending. As the NYU Furman Center on Real Estate has found, “Without additional subsidy, inclusionary housing applied to high-density development is financially feasible only in neighborhoods with relatively high rents.” Without tenants willing to pay a high market rate, there isn’t enough revenue coming in to subsidize the building and maintenance of the affordable units.
A larger problem of rent-regulated and other subsidized housing generally is that there’s no guarantee that it will benefit low-income people. Tenants in “inclusionary” zoned buildings must qualify as having income between 60 percent and 120 percent of the area median when they move in. Regardless of their fortunes later, they will always enjoy a low rent. Rent-stabilized units have no income qualifications. The theory of rent regulation is simply that housing should be cheap. The problem—for the mayor and the tenant advocates who pushed through the new law—will be finding enough of other people’s money to pay for it.
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