Live From New York

Taxpayers, Meet Your New Tenants

Rent control and the U.S. Treasury -- a marriage made in Schumer heaven.

By 2.3.10

an 80-year-old black landlord who had just spent two weeks in jail for not providing heat to squatters in his building. Rent control, you see, doesn't just involve forcing down rents. Along with it goes an elaborate set of anti-eviction laws so that landlords can't evict their low-paying tenants, plus requirements that landlords provide all manner of services, whether they are collecting rent or not. By the time all this is in place, even illegal squatters have a bevy of rights.

The house-to-house warfare was so intense that New York had created special housing courts to handle the pandemonium. The rule in housing court – in Manhattan at least – was simple - "the tenant always wins." One notorious housing court judge had even started his own rent strike, refusing to pay for his Gramercy Park apartment on the grounds that it had cockroaches and the floorboards squeaked.

What kept people living in such conditions was that it was impossible to find an apartment. Rent control had so decimated the market that people scanned the obituaries and trolled funeral homes looking for vacancies. Since that time things have improved. The city government finally released the 100,000 apartments it had confiscated from landlords -- turning over large numbers to bureaucrats in its own Department of Housing Preservation and Development, another remarkable transfer of wealth. "Luxury decontrol" took away rent protections from tenants with incomes over $200,000 and rents higher than $2,000 -- a strangely misplaced effort since the real winners are the people paying far less than $2,000. Zoning laws have been relaxed and some new construction revived. The sagging economy has lowered demand and basically the worst has passed -- for now. Yet trench warfare continues in pockets of regulated housing throughout the city.

So why is this of interest to anyone outside New York? Well, through the magic of federal mortgage guarantees, the U.S. taxpayer will soon be shouldering the burden of subsidizing 25,000 regulated tenants in Stuyvesant Town and Peter Cooper Village, a city-within-a-city on the East Side of Manhattan that is New York's biggest housing complex. Tishman Speyer Properties, one of the world's largest real estate companies, inauspiciously bought the property in 2006, confident it could drive a wedge into New York rent regulations. It was the biggest real estate deal in American history. Four years later, it has discovered what every Polish-speaking landlord-janitor living in his basement apartment has known for decades – in New York the rent-controlled tenant always wins.

As a result, Fannie Mae and Freddie Mac -- which have already burned through $111 billion of federal bailout money -- are on the hook for another $2 billion. Fortunately, unlike the Big Bad Banks Obama keeps warning us about, Fannie and Freddie both have open access to the U.S. Treasury. And so they will able to sustain 25,000 middle class tenants -- many of them owners of second homes far from New York -- in apartments where they are often paying less than half the market rent.

How did this all come about? In any normal housing market, landlords are focused on attracting tenants, fixing up properties and maintaining a reasonable level of service. With rent control, however, you want to get rid of your tenants. The longer they stay, the further below market their rents sink. There is usually some kind of vacancy allowance, so the longest-lasting tenants have the best deals. That is why so many prominent personalities from the 1960s and 1970s (Mia Farrow, Mayor Ed Koch, Katrina vanden Heuvel, editor of the Nation) had rent-controlled apartments while anyone just arriving in the city would pay $700 a month to sleep on someone's couch.

Deprived of any chance of evicting tenants, the only thing the landlord can do is reduce services. So another layer of law is necessary saying that if landlords don't provide heat or make repairs, the tenant doesn't have to pay rent. Now the tenant has an interest in seeing things fall apart. One of the most common confrontations involved a rent-controlled tenant refusing admission to the repairman sent to fix the leaky sink. In the end, the tenant can just create his own violations -- a missing smoke alarm, graffiti in the halls. "Paying rent in New York is really optional," one landlord after another told me. "It's lucky more people don't know the law."

The stories from this netherworld sometimes sounded like chronicles from the Spanish Inquisition. One Chinese woman, whose property-owning family had been murdered by the Communists, had been running an apartment house in Harlem. After one tenant refused to pay rent for two years, she finally got an order of eviction. The tenant responded by firebombing her office. She took him to criminal court. The judge looked at the case and said, "This isn't a criminal case, it's a housing matter." Back they went to housing court. The housing judge overturned the eviction. For firebombing her office, the tenant got to keep his apartment. "I think I'm going back to China," she told me. "Over there they just kill you and get it over with. Here they torture you first."

You'd think Tishman Speyer might have been a little circumspect walking into this maelstrom. (I would have sent a copy of my book if they asked.) Instead, as owners of Rockefeller Center, the Chrysler Building, and office towers from London to Rio de Janeiro, the company naively assumed it could handle the ropes. Bad mistake.

Stuyvesant Town and Peter Cooper Village epitomize the triumph of rent-regulated tenants over their landlords. Built right after World War II by Metropolitan Life, Stuyvesant Town has 8,700 apartments in 35 buildings while Peter Cooper Village, slightly more upscale, consists of 2,500 apartments in 21 buildings. In 1947, rents ranged from $50 in Stuyvesant to $91 per month in Peter Cooper. On the day the doors opened there were 100,000 applicants.

Unfortunately, 1947 also happened to be the year New York City made wartime rent controls permanent. The two complexes qualified. City officials felt guilty about blindsiding Met Life so they set up a special board that would supposedly allow small rent increases, but this was quickly overridden by tenant pressures. Met Life never built in New York again.

By the 1980s tenants were paying rents 30 years out of date. Waiting lists stretched out 22 years in Stuyvesant Town, 100 years for Peter Cooper Village. (If rent-controlled tenants don't leave feet first, they usually pass the apartment on to relatives.) In one fascinating development, rents in Stuyvesant Town had ended up higher, illustrating an iron law of price controls -- affluent people usually get the most benefits. The wealthier Peter Cooper residents had been able to stay in their apartments longer and manipulate the law more to their advantage.

The two complexes also became the epicenter of another rent-control phenomenon -- tenants subletting their apartments at market prices. A 1983 Met Life survey found 40 percent of the apartments occupied by illegal subtenants. The prime tenants had usually moved to upstate New York or Florida, using their illegal rent earnings to buy second homes or as retirement income. When Met Life tried to crack down, residents raised the roof. "The issue," complained one tenant-landlord in Town and Village, "is whether big corporate landlords should be the only ones allowed to make money in the rental business."

Apparently misled by an overconfident legal staff, Tishman Speyer bought out Met Life for $5.4 billion and dutifully began trying to enforce luxury decontrol and evict illegal subletters. By 2009 they had shoehorned 4,000 of the 11,000 units out of rent regulations. In reporting this protracted struggle, the New York Times discovered one tenant who had amassed a valuable art collection with the savings from his below-market rent.

Then in October it all came to an end. The New York State Court of Appeals, the state's highest court, ruled that the whole decontrol effort was illegal. Back in 1993, Met Life had accepted a property tax exemption in exchange for making major renovations. Although the law is ambiguous, the Court ruled the exemption precluded the owner from taking apartments out of rent regulations. In a typical outcome, Tishman was told to refund $200 million in "illegally collected rents." At that point, Tishman threw in the towel. The biggest real estate deal in history became the biggest real estate default in history.

So the role of being exploited will fall to the mortgage holders -- among them, CALPERS (the California pension plan), the Florida state pension plan and the Church of England. But the biggest stakeholders are Fannie Mae and Freddie Mac, who are in for $2 billion.

Within days, Senator Charles Schumer -- like all New York politicians an apostle of rent control -- was telling the 25,000 tenants, "We must ensure that whoever buys the properties is committed to maintaining them as haven for the middle class which it has always been" – i.e., the subsidies must continue. "The silver lining," Schumer told the crowd that gathered in front of Stuyvesant Town last Sunday, "is that the two largest creditors are Fannie Mae and Freddie Mac and we have some leverage over them."

And why not? After going through $111 billion of bailout money, what's another $2 billion?

It was Margaret Thatcher who said, "Socialism never works because you eventually run out of other people's money." In New York, this has definitely been true for the poor. Their landlords' money eventually ran out -- which is why the city ended up owning 100,000 abandoned apartments in poor neighborhoods. (Officials put decals in the windows to make it appear people were still living there.) The great advantage for affluent tenants, however, is that the money never seems to run out. First Met Life, then Tishman Speyer, and now the U.S. Treasury are always there to be endlessly exploited.

And, so, Mr. and Mrs. American Taxpayer, you're the new landlord! Welcome to your job of subsidizing 25,000 New York City rent-regulated tenants.

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William Tucker is news editor for