The 2013 Guidelines in Context

With one quick vote, the 2013 New York City Rent Guidelines Board process came to a close Thursday night, with the board approving apartment increases of 4% for one year leases and 7.75% for two year leases, with a rent freeze imposed for Single Room Occupancy apartments.

For those of tenants who have engaged with the process for the past third of a year, it was a startling end and a disappointing result.

In the media narrative and in the popular imagination, the RGB’s final vote is a raucous and chaotic battle between ever-warring constituencies, representing contentious democracy at its best or worst (depending on the perspective). This is a myth. The vote is shockingly dull, and executed with an efficiency born of repetition.

The scene Thursday was ritualistic: the tenant members proposed a low increase; the owner members proposed a high increase; the public members voted unanimously in between the two, appearing as magnanimously Solomonic in the process. The press played its part, reporting equally on the tenants’ and landlord’s frustrations with the result. When the vote was over, landlord representatives spoke to reporters, lit cigars, and posed for pictures with Jimmy McMillan.

The result of this process, however, in anything but dull- it is a recurring regressive redistribution of wealth from tenants to landlords. This year’s increase will be particularly painful. At 4% and 7.75%, the rent hike is not only the largest since before the recession, as reported in the press, but is also higher than the average increase under RGB Chair Jonathan Kimmel (3% and 5.88%, including the 2013 guidelines), higher than the average increase for the much-maligned former Board chair Marvin Markus (3.44% and 6.38%), and in fact higher than the average RGB increase for the board’s entire history (3.3% and 5.84%).

If there is any silver lining to the vote, it is that the Board rejected landlords’ calls for a “supplemental” or “minimum dollar” increase, which would have disproportionately stressed the budgets of low income and senior tenants. Tenant advocates wonder, however, if they are being forced into a pattern of relatively low increases with pro-landlord provisos (like the 2012 vote) followed by high increases without them (as we saw this year).

The board also chose to freeze rents completely for SROs, dispensing with the usual provision that the rent freeze applies only to buildings with a certain percentage of occupied SRO units. This is a victory for SRO tenants and their advocates, and it should be celebrated.

The SRO rent freeze should not, however, overshadow the impact the Board’s apartment increases will have on an estimated 2.5 million tenants throughout the city. In addition to being a mid-recession transfer of income from renters to property owners, this rent increase will be another constraining factor on New Yorkers’ ability to make ends meet. It will force many to chose between rent and other necessities of life, not to mention the less vital aspects of commerce that keep the city running. It is certainly no stimulus to our depressive economy.

The high increase will also encourage many tenants to sign one year leases, rather than two. Even though a two year lease presents tenants with a slight (.25%) benefit over a one year lease, many low income tenants will not be able to shoulder the up-front costs of a 7.75% increase. This adds an additional layer of regression to the 2013 guidelines, as those most equipped to save with a two year increase are those most able to pay higher up-front costs- i.e. higher income or higher net-wealth households.

Finally, this increase cements the Board’s image as a guarantor of landlord profits. Whether by inertia or design, the Board has repeatedly chosen to increase rents to cover for any perceived fluctuations in the cost of running a rent stabilized apartment. This should not be a forgone conclusion; given that landlords have many ways of making profit off their buildings- everything from commercial rents to cell phone towers to the dreaded Major Capital Improvement- there is no need to continuously fall back on renewal lease rent increases to recoup landlords for any change in costs. The board must also rethink the way it calculates these costs, as numerous reports have shown that the Price Index of Operating Costs- the board’s main tool for estimating prices for goods purchased by landlords- seems to overstate real expenses. Whether that is because landlords find a way to economize their purchases or because the prices are overstated, we do not know. All we know is that the price data overshoots the expense data, and is leading Board members to vote for inflated guidelines.

Next year will bring in a new Mayoral administration, and with it a new Rent Guidelines Board. Fixing this broken institution should be a major priority for the next Mayor, both in terms of making responsible appointments and rethinking the Prince Index of Operating Costs. The Mayor should also call on the next Board Chair to hold more public hearings at times and places convenient to the majority of rent stabilized tenants, and present a full accounting of the Board’s decision to the City Council and the public at large. While it is the State Legislature that has the power to rewrite the rules regarding the RGB, it is in the Mayor’s power to change the culture of the Board. Elected officials have spoken out against these increases, and called for Board to change its ways (see examples here, here, and here). Tenants have made their voices heard throughout this process, whether at the People’s RGB, the formal public hearing, or the vote itself. We all know this system flawed; the process must be reconsidered before the board meets again in 2014.

The Preliminary Vote

Last night, the RGB conducted their preliminary vote, and set a range of percentages for the board to consider at the final vote in June. For the most part, the proceedings went according to schedule: the owner representatives proposed a high guideline (7% for 1-year leases and 11% for 2-year leases); the tenant representatives proposed a rent freeze; both were rejected by the public members, who instead voted as a block for the Chair’s proposal (3.25% - 6.25% for 1- year leases and 5% - 9.5% for 2-year leases). A similar dynamic was at play for the SRO vote: landlords proposed a 3% increase, and were rejected; tenants proposed 0%, and were rejected (with one abstention); the Chair proposed a range of 0% - 3% increases, effecting only buildings with 85% or more occupied SROs, and it was passed unanimously. This is what was reported in the press, which tends to focus on the familiar “ horse race” element of the RGB. With landlords and tenants unhappy, this trope implies, the RGB must be doing the right thing.

This narrative, however, glosses over some interesting moments in the margins. It fails, for example, to look historically at these rates. Since the RGB began using a range for their preliminary vote in 2004, the average range has been 2.89% – 5.14% for 1-year leases, and 5.1% – 7.69% for 2-year leases. Last night’s vote resulted in an uncommonly high range.

The public narrative also fails to interrogate the source of these approved preliminary guidelines. As the Chair stated during the vote, they come straight out of the Price Index of Operating Costs (PIOC) report, which closes with a sample set of guidelines that would keep landlords profits steady. Readers of the Rent Guidelines Blog know that we are critical of the PIOC’s centrality in Board decisions- it is just one report produced by RGB staff, and it is not in and of itself an accurate measure of landlord costs. As discussed earlier, it is simply a measure of prices, not costs.

The PIOC names a “‘Net Revenue’ Commensurate Adjustment with Vacancy Increase”, which is an estimate of how much rents would have to rise to keep landlords’ Net Operating Incomes steady, with the assumption that some percentage of tenants will leave and the landlords will receive vacancy bonuses. What would that increase be? 3.25% for1-year leases, and 6.25% for 2-year leases, exactly the low-end of the increase proposed by the Board Chair and approved by all of the public members. The PIOC also names a “‘Net Revenue’ Commensurate Adjustment”, assuming no vacancy bonuses will be taken by the landlord. This figure is listed as 5% for 1-year leases, and 9% for 2-year leases. The high end of the range voted on last night comes directly from these figures: 5% for 1-year leases, and 9.5% for 2-years. (It is not at all clear, however, why the Board voted to grant the landlords an extra half percent on the high end of the 2-year lease range.)

After months of public meetings, pouring over scores of data and debating their merits, the board settled on the figures provided for them in the PIOC to keep landlords whole. What about the Income and Affordability study, which outlined the woeful economic circumstances for tenants? What about the Income and Expense study, which showed rising revenues for landlords in an otherwise stagnant economy? What about the Mortgage Survey, which showed a healthy market for buying and selling rent stabilized properties? What about the report from the Furman Center, which spoke to the crises facing thousands of tenants after Hurricane Sandy? What about the testimonies from Bobby Sackman, Tom Waters, Gregory Lobo Jost and Barika Williams, which spoke both to tenant hardships and opportunities for landlords to reduce costs at no expense to tenants? For that matter, what about the landlord’s testimony, which confirmed that the vast majority of rent stabilized apartments are owned by very large real estate companies, often controlled by private equity? All of these factors should have pointed to a lower preliminary guideline. The fact that the Board voted on the numbers straight out of the PIOC, and even inflated them slightly, is discouraging to tenants and their advocates.

It is also interesting that this year’s range starts at a rate higher than last year’s final guideline, all but assuring a rise in the rate of rent increases for 2013. Even if they disagree on the merits of a rent freeze, it is disappointing that the board seems to have foreclosed on the possibility of a lower rent increase this year.

Finally, the Board Chair rejected amendments from both owner and tenant representatives to carve out more specific guidelines. The owner representatives, as usual, proposed a “supplemental rent increase,” imposing a disproportionate rent increase on lower rent apartments. As CSS’ testimony shows, this increase falls primarily on low income tenants, and can therefore be characterized as a poor tax. We commend the Chair for rejecting this supplemental increase, and urge the Board to reject it at its final vote in June.

The Board also rejected provisos from the tenant members, which would have limited rent increases to buildings with a solid majority of rent stabilized apartments. Buildings that are 60% or more market rate, they argued, do not need RGB rent increases to meet expenses. This proviso was also rejected as a matter of procedure- the Chair decided that provisos will only be heard at the final vote, after tenants and owners have had a chance to testify before the board. We therefore encourage tenants to talk about how much of their building they believe has been decontrolled, and we encourage board members to ask landlords what percent of their stock is subject to rent regulation.

This year's preliminary vote established a historically high range of rates. We urge the board, in its internal deliberations and its final vote, to consider establishing the lowest possible guideline.

Analysis: Income & Expense study and the Price Index of Operating Costs

Last week, the Rent Guidelines Board released two studies on economic conditions for landlords: the Income and Expense (I&E) study and the Price Index of Operating Costs (PIOC).

The I&E study is culled from documents submitted by landlords to the NYC Department of Finance in the form of Real Property Incomeand Expense (RPIE) statements. The data in this study is therefore considered to be a fairly reliable and accurate accounting of landlords incomes- from rents and other sources- and expenses in the form of operations and maintenance costs. Looking at the two together yields the “Net Operating Income”, a marker of how much money landlords are making off of their property in a year. The study presents both a snapshot of this past year’s income and expense balance (the “cross-sectional analysis”), as well as a year-to-year comparison (the “longitudinal analysis”).

The Price Index of Operating Costs (PIOC) is a figure the RGB staff creates each year based on a “basket of goods and services used in the operation and maintenance of rent stabilized apartment buildings.” This “basket” is similar to those used by the bureau of labor statistics to calculate the generalized cost of living adjustment, but it is particular to the economics of rent stabilized building ownership. The staff collects data on items like oil and gas costs, property taxes, insurance, and more, and weighs them in their sample relative to their importance as a percentage of total operating and maintenance expenses. The result of the PIOC is a single percentage, which attempts to show the change in prices for items used to operate a building in New York City.

In many ways, the I&E is the superior measure of landlord’s costs because it covers both incomes and expenses, it is based on a large and fairly reliable data set, and it measures not just the prices of goods but the exchanges in goods and services that landlords actually made. While the PIOC measures prices, it does not exactly measure costs. Landlords still have a degree of choice in the operations of their building, and can choose the most cost-efficient mechanisms options available. The I&E measures the costs landlords actually took on, not just the prices of the goods available to them.

The 2013 Income and Expense report, which is based on 2011 filings, depicts a thriving market for landlords. Rental income has risen 4.4% from the previous year, and net operating incomes (incomes minus expenses) grew 5.6%. This is the 7^th consecutive year of rising NOI, in a period of severe economic recession. Not only are rent stabilized landlords doing well in an otherwise sick economy, but their profits have risen dramatically over time. In inflation adjusted dollars, NOI has risen 21.6% since 1990. NOI in Brooklyn has sky-rocketed over the same period, rising 59%. In short, with income rising faster than expenses, rent stabilized building owners continue to realize a healthy profit, while many tenants struggle through a punishing economy.

The Income and Expense report also depicts a growing trend: preferential rents. While rent stabilization is generally understood to result in below market rents, the opposite is actually the case in a growing portion of the city. For the 4^th consecutive year, the “collectible rent” in rent stabilized apartments is lower than the “legal regulated rent”. The most likely reason for this trend (depicted below) is that after years of RGB rent increases, rent stabilized rents have surpassed market levels in many neighborhoods, and landlords are offering apartments at lower “preferential rents.” This growing portion of landlords needs no rent increase from the RGB to meet its expenses; in fact, they are already shorting themselves a significant share of their allowable rents. This topsy-turvy market, in which regulated landlords are voluntarily lowering actual rents while theoretical rents rise, is reason enough to question the inevitability of annual RGB rent increases.

The declining share of registered rents collected suggests that
ever-rising regulated rents are outpacing market forces.
(Trend oval added by RGBlog.)

The RGB’s 2013 Price Index of Operating Costs presents a picture of rising prices for goods purchased by landlords. The PIOC inched up 5.9% this year, due largely to increases both in generalized fuel costs and in the amount of fuel landlords used in this relatively cold and rainy winter. Insurance costs also rose, possibly as a result of hurricane Sandy.

It’s important to note, however, that the PIOC is a measure of prices, not costs per se. While prices and costs are of course related, there are many things a landlord, just like any business owner or market consumer, can do to keep costs low as prices rise. Nonprofit building owners all over the city have found ways to keep costs as low as possible, while only raising rents as a last resort. Often these cost efficiencies also result in environmental benefits, and are subsidized by the state, providing even lower costs.

If you look closely at the data, there are two factors that influence the PIOC far more than others: fuel costs and taxes. While these are facts of life for property owners everywhere, they are not immutable expenses. Fuel costs can be brought down with energy efficiencies, many of which can be paid for through NYSERDA grants and other public funds (as well as MCI rent increases). Tax abatements and exemptions are also available to landlords through the J-51 program, which paid out over a quarter billion dollars in tax credits last year.

While prices may be rising, we have to ask: what are landlords doing to keep costs low? The PIOC is a measure of prices, but it is just one factor in consideration for the Rent Guidelines Board.