One day before a scheduled state assembly hearing on proposed reforms to New York's rent laws, a new report by housing advocates says that a 25-year-old provision allowing landlords to raise rents on renovated apartments has fueled rampant speculation in the city’s real estate market and led to the deregulation of thousands of affordable units.
The Association for Neighborhood & Housing Development (ANHD), in partnership with the Housing Rights Initiative, examined a database of 118 apartment rent histories, which encompassed 52 buildings and three landlords, and found that monthly rents on these units more than doubled on average following the renovation increase — from $1,089 to $2,149, a 107.5 percent jump.
According to the report’s authors, the magnitude of the rent increase suggests that landlords are using an increasingly scrutinized rule known as the Individual Apartment Improvements (IAIs) that was introduced under the Rent Regulation Reform Act, passed in 1993. The provision provides landlords with a formula to legally and permanently raise monthly rents for an apartment one-fortieth of the renovation cost (one-sixtieth in larger buildings).
As recent lawsuits and news reports have pointed out, the law has opened the door for some landlords to dramatically inflate the cost of improvements. In a strange loophole, landlords are not required to submit proof of the renovations to the state agency that oversees rent-regulated apartments.
“It’s the legalization of fraud,” said Aaron Carr, the founder of Housing Rights Initiative, a housing watchdog group which collects data on suspected predatory landlords. “How can you enforce the largest affordable housing system in New York if you aren’t even willing to verify the truth?”
Under the current system, the state’s oversight agency, the Department of Housing and Community Renewal, does not even vouch for the reported rent histories provided by landlords, much less the improvements they say they have made. (DHCR did not immediately respond to requests for comment.)
But Carr and Benjamin Dulchin, the executive director of ANHD and the lead author of the report, write that the "IAI formula itself actively incentivizes landlords to significantly increase rents and remove apartments from rent regulation.”
IAI is "fundamentally designed and legally used to drive speculation and displacement," they write, adding, “Even if the IAI loophole is used with no fraud, the formula allows a major, sudden, permanent increase in rent for a relatively small investment in the apartment “
The introduction of IAI rent hikes in New York City, Dulchin told Gothamist, "changed the way investors talked about [rent-regulated] buildings,” which went from being seen as a “secure, but backwater investment” to “an underutilized asset.”
Victor Sozio, the co-founder of Ariel Property Advisors, a real estate brokerage and debt provider, agreed. Sozio, who has worked in the New York City market for 15 years and whose company markets rent-regulated properties, said that the reform law in 1993 made aging multi-family properties a lot more appealing.
“What emerged was a business model for value-added multifamily real estate,” he said.
Dulchin and Carr’s report cites a Commercial Observer interview Sozio gave in April, where he laid out the concerns from landlords and investors over the current proposals in Albany to strip away landlord incentives like IAI.
Sozio told Gothamist that some of the objections regarding oversight were valid. He also acknowledged that over the years the real estate industry had seen “bad actors,” some of whom had overleveraged themselves to buy large portfolios of buildings and felt pressured to turn a quick profit.
On Thursday, the state legislature will convene hearings on a package of rent reform bills that includes a proposal to eliminate IAIs as well as its counterpart, Major Capital Improvements (MCI), which allow building owners to pass on some costs of building-wide improvements to tenants in the form of rent increases. But unlike renovations on individual apartments, landlords seeking to use MCIs must at least submit proof that the work was done.
Those in the real estate industry like Sozio have said that such provisions encourage landlords to maintain and invest in aging buildings, which helps tenants and neighborhoods in the long run.
But Carr disputed that argument. “They are legally required to take care of their buildings,” he said, by the real property law's warranty of habitability.
Carr and other housing advocates are asking state lawmakers to remove IAIs and beef up enforcement. Currently, HRI culls information on buildings by looking at publicly available property data. For rental data, his organization approaches tenants, who can request a full rental history for their own apartments from the state regardless of how long they have occupied the unit. A startup with a shoestring staff, Carr's group has to date produced research that has resulted in more than 55 class action lawsuits against dozens of landlords.
“If we can do this, [the state] can do it better,” he said. “The question is, do they have the political will to do anything at all?”
UPDATE: In response to the story, Jay Martin, the executive director of the Community Housing Improvement Program, a landlord group, issued the following statement: “This is not a report - this is a press release with photos and cribbed portions of an HRI lawsuit that’s already been partially dismissed. If advocates were interested in reporting real, unbiased numbers, they’d acknowledge that the number of rent stabilized units has increased year over year and that building costs, as reported by the de Blasio controlled Rent Guidelines Board, continue to exceed rent increases. ”