As New York stands on the precipice of a major reform in rent regulations, the Independent Budget Office has released a report examining one of the more heavily contested and confusing policies, that of preferential rent.
Preferential rent is a rent charged to a rent-stabilized tenant that is lower than what is legally allowed. The reason landlords elect to use preferential rents is because some neighborhoods may not be able to support the maximum rents established by the Rent Guidelines Board. While that by itself is not controversial, housing activists have objected to a 2002 amendment that freed landlords of any obligation to use the preferential rent as a baseline for future increases. In some cases, rent-stabilized tenants who have been receiving preferential rents face a rude awakening when they renew their lease and find that the landlord has suddenly decided to raise it to the legally allowed limit.
Roughly 29% of all rent-stabilized units received preferential rent in 2017, the most recently available data, according to the IBO. But the report found this share to be rising over time, from 23% in 2010.
An increase in the use of preferential rents does not by itself mean that something nefarious is happening in the market, according to Elizabeth Brown, a supervising analyst for housing, environment, and infrastructure at the IBO. If renters were getting deals, that would be a positive outcome, she explained. However, she added, if landlords were using preferential rent to obscure the legally allowed rent and then drive out tenants with unexpectedly large rent hikes — an argument housing activists have made — then an increase in the number of preferential rent units would be alarming.
A bill sponsored by Assemblyman Steven Cymbrowitz and Senator Liz Krueger is proposing to require landlords who charge preferential rents to use those amounts as the base rent for the duration of a rent-regulated tenant's stay.
So have landlords been using preferential rent to uproot tenants?
The report found that overall, an overwhelming proportion of rent-stabilized units — 92% — continue with preferential rents.
On average, only 8% have had their rents jump to the legally allowed maximum.
But within that small subset, there are some troubling signs. For one, the average rent increase in those cases was dramatic: 15% versus the 2.25% one-year increase set by the Rent Guidelines Board. And perhaps not surprisingly, units that no longer continue with preferential rents see a much higher tenant turnover, 29% compared to 12% of rent-stabilized units that destabilize every year.
“Both sides can make a case,” said Sarah Stefanski, the author of the report.
Benjamin Dulchin, the executive director of the Association for Neighborhood & Housing Development (ANHD), a tenant advocacy group, said he is interested in learning where the 8% of units that are having their preferential rents abolished are located, a narrow breakdown that the report did not provide. "That would tell us a lot more," he said.
The report did, however, show the split by borough and found that the biggest shares of units that went from preferential to maximum legal rent were located in Brooklyn (30%) and Manhattan (28%).
In gentrifying neighborhoods, tenant turnover from preferential rent would suggest it's being used as a displacement tool, with other measures like vacancy bonus, which allows landlords to raise rents by up to 20 percent when tenants move out, and the rent increases permitted when landlords perform capital repairs and individual apartment renovations.
Dulchin has argued that these provisions amount to legalized eviction strategies. He pointed out that commercial real estate brokers routinely market multi-family buildings by stating the number of units that receive preferential rents so that prospective buyers can assess how quickly (and easily) they can de-stabilize rent-regulated units.
“It’s fine to have preferential rent,” he said, but it shouldn’t be used to “upend the security of the tenant.”
A spokesman for the Community Housing Improvement Program, a group representing landlords, said in a statement that the IBO report "makes plain that preferential rent is a core policy mechanism for keeping rents lower for hundreds of thousands of New Yorkers. This data shows how misguided attempts are to eliminate the program. When the 92% of preferential rents have increases of only 2% a year, that is something to celebrate, not to dispose of."
The Real Estate Board of New York did not immediately respond to a request for comment.