How to Fix Rent Regulation

Rent-regulated apartments should be allocated based upon need. As rent stabilization is a form of welfare, all stabilized tenants should be required to submit tax returns to become eligible to occupy a rent-stabilized apartment.

First, I would propose that the income hurdles be based upon the higher of last year’s earnings (using adjusted gross income to include capital gain and dividend income), or a three-year average. Anyone earning more than $135,000 should be moved immediately to free-market status at the expiration of that lease. This level of income is chosen because, based upon current federal, state and local tax rates, $2,000 per month would be affordable for that resident at less than 30 percent of after-tax income. This would immediately increase real estate tax collections and free up supply, placing downward pressure on free-market rents, as explained in the Wharton and M.I.T. studies.

Second, a minimum rent should be established for every rent-stabilized unit, which should be a pro rata percentage of operating expenses. Clearly, operating expenses should not include capital expenditures, and general and administrative expenses would have to be capped at a fixed percentage to dissuade owners from overloading operating expenses. Tenant contributions to that rent should be capped at 30 percent of their income-hurdle amount, protecting the affordability of that unit. If the tenant’s cap is below the minimum rent level, the government should provide a subsidy to make up the difference. The incremental increase in real estate taxes received could form a fund out of which the subsidy could be paid for.

Third, modifications to rent regulation could be used to stimulate our local economy through private-sector investment, increased construction jobs and increased real estate tax collections. Modifying the individual apartment improvement (IAI) bonus of 1/40th increase in rent level to 1/36th would create additional incentive for owners to increase the renovation work done to individual apartments. And this would not impact any in-place tenants.

Fourth, the cost of MCIs should be passed along to regulated tenants in proportion to the tenant’s ability to pay. Under this program, rather than 1/84th of the cost, MCIs’ increases would be passed along at the rate of 1/48th, constrained by the ability of the tenant to pay the increased rent. The rent that a tenant would pay could be capped at 30 percent of their after-tax income, thus leaving the unit at an affordable rent for that tenant, provided the increase is at least 1/84th. Environmentally sensitive improvements could be passed along at an even healthier rate.

These last two suggestions would create tremendous incentives for owners to improve the quality of their buildings while keeping rents at affordable levels for tenants.

Last year, approximately $500 million was spent on IAIs and MCIs. These program modifications could potentially add $250 million in private-sector investment to our economy. This is a 100 percent private-sector–funded stimulus program that would increase jobs for New Yorkers, particularly in the construction industry. Given increased property incomes, it would also increase the real estate tax base and collections.

Being a realist, I don’t expect any politician to endorse any of these ideas. However, rent stabilization should be for those who are clearly in need. Abusers of the system place an undue burden on the rest of our residents, who are left paying more taxes and higher rents simply to subsidize those who were in the right place at the right time. These suggestions attempt to transform our system to one that remains more fair for all New Yorkers while providing affordable housing for those who truly need it.

Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,000 properties in his career.

How to Fix Rent Regulation