The Real Estate Board of New York to The New York State Division of Homes and Community Renewal Regarding Regulations to Implement the MCI Reasonable Cost Schedule

Basha Gerhards

Vice President Policy & Planning

September 13, 2020

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The Real Estate Board of New York (REBNY) is the City’s leading real estate trade association representing commercial, residential and institutional property owners, builders, managers, investors, brokers, salespeople and other organizations and individuals active in New York City real estate. REBNY strongly supports policies that expand the local economy, grow and improve the City’s housing stock and create greater opportunities for all New Yorkers. Thank you to the New York State Division of Homes and Community Renewal (DHCR) for the chance to comment on the proposed regulations to add Section 2522.11 of the Rent Stabilization Code, Section 2502.10 of the Tenant Protection Regulations, Section 2102.11 of the State Rent and Eviction Regulations and Section 2202.28 of the New York City Rent and Eviction Regulations to implement the Major Capital Improvements (MCI) Reasonable Cost Schedule.

The changes enacted last June as part of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) included the effective wholesale elimination of increases beyond those provided for by the Rent Guidelines Board (RGB) at lease renewal – including the vacancy allowance, luxury decontrol and preferential rents during tenancy. Draconian changes to MCI and Individual Apartment Improvements (IAI) have rendered them effectively useless.

Rental income and capital investment are the lifeblood of rental housing. Rental housing with a steady and reliable stream of income is sustainable, and conversely, tenants suffer decreased building quality and services when revenue is lacking or constrained by unrealistic restrictions on rent growth that are not sufficient to accommodate increasing expenses. With 71% of the rent stabilized housing stock built prior to 1947, maintenance and operational costs are a fact of business, with a regular cycle of necessary major system overhauls like gas, electricity, water, boiler, elevator and roof replacements. According to the RGB’s Income and Expense report, owner expenses increased 5.8%. Property taxes comprise the largest share of owner expenses, averaging 30.4% of all costs among rent stabilized buildings. From 2017 to 2018, the average monthly expense per dwelling unit paid toward taxes increased 7.9% and have more than doubled since 2007. In spite of a methodology that results in an overstatement of a building’s Net Operating Income (NOI), this year’s RGB Income and Expense study shows a 0.6% decrease in NOI for the first time since 2003.

As a result, the burden to maintain quality housing amid escalating costs falls squarely on the RGB via annual rent increases. Despite these facts, the NYC RGB implemented zero percent increases for guidelines effective this October and there was serious discussion about rent roll backs at the hearings.

This brings us to the current exercise in public review of establishing the procedures around setting and implementing a reasonable cost schedule. This is an unreasonable exercise on many levels. In theory under the new law, MCIs are how owners will be able recoup investments in major capital components of a building, including work on building components such as roof replacements, hot water heaters, air conditioners, structural steel and fire escapes. In reality, the 144/150-month amortization and 2% cap leave little incentive to engage in work. Pre-COVID, preliminary research suggested early warning signals that owners were undertaking substantially less work and investing less in the City’s regulated housing stock. A Wall Street Journal study of New York City Department of Buildings permits found that property owners started 535 fewer renovations in rent regulated buildings between July and November of last year— a 44% decline and a $71 million fall in renovation spending from the previous year. Additionally, REBNY’s Investment Sales Report for the second half of 2019 found a significant decrease in investment of rent stabilized buildings, with total dollar volume declining 73% year-over-year, from $5.7 billion to $1.6 billion.

New York has been acutely affected by the unprecedented COVID-19 crisis, not only from devastation to public health but also the upending of virtually every aspect of society. New Yorkers worry about their jobs and financial health – their ability to keep a home and food on the table. REBNY recognizes the affordability and homelessness challenges of this city and recognizes that the impact of COVID-19 will only exacerbate both for many months. Collections are down significantly, especially in stabilized and affordable housing, with those numbers continuing to drop. The National Multifamily Housing Council (NMHC) Rent Payment Tracker found 76.4% of apartment households paid rent as of September 6, a drop of 4.8% ,or over a half million households, decrease from the prior month. This is directly attributed to the expiration of the CARES funds and will continue until the federal government surmounts its inability to come to an agreement on expanded unemployment benefits, local and state aid and a rental assistance voucher program.

The combination of greatly diminished cash flow from existing tenants and higher vacancies representing zero cash flow underscores a fundamental flaw about the current rent regulation system. Reasonable people have no issues stating they want quality housing and low rents. However, the only way to keep providing quality housing is to increase rents.  It is an untenable system for tenants and owners.  The MCI Reasonable Cost Schedule will therefore never be reasonable to tenants as it represents potential rent increases, and it will never be reasonable to owners because it sets a price ceiling regardless of the nuances of their particular building or buildings. A better system would be centered on subsidies and/or property tax breaks to provide for the valid public policy goal of affordable rents in quality buildings.

The HSTPA specifically directed DHCR, not the legislature, to derive the schedule of reasonable costs. What follows are more detailed comments to the two main prongs of that work - the waiver provisions from the cost schedule and comments to the schedule itself. 

Download the full testimony, including detailed comments on the waiver provisions and schedule.