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An Introduction to the NYC Rent Guidelines Board
Table of Contents

DUTIES OF THE RENT GUIDELINES BOARD
(PART II)

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(Part I) (Part II) (Part III)

Research and Mandated Considerations

The Rent Stabilization Law sets forth the factors that must be considered by the Board prior to the adoption of rent guidelines. These include:

  1. the economic condition of the residential real estate industry in N.Y.C. including such factors as the prevailing and projected (i) real estate taxes and sewer and water rates, (ii) gross operating maintenance costs (including insurance rates, governmental fees, cost of fuel and labor costs), (iii) costs and availability of financing (including effective rates of interest), (iv) over-all supply of housing accommodations and over-all vacancy rates,
  2. relevant data from the current and projected cost of living indices for the affected area, and
  3. such other data as may be made available to it.

Economic Condition of the Residential Real Estate Industry

Price Index of Operating Costs Survey

Each year since 1969 the Board has been provided with a Price Index of Operating Costs (also known as the price index or "PIOC") which approximates the actual changes in gross operating costs for apartment buildings. The PIOC also provides information on actual changes in real estate taxes and sewer and water rates.156 These price changes are incorporated into a single figure that often becomes a point of departure for consideration of other economic and policy issues relating to the guidelines. Although not controlling, the PIOC is perhaps the most influential figure affecting the final guidelines.

The price index is a relatively complex instrument for estimating the actual costs of operating a rental building. In 1970 the federal Bureau of Labor Statistics constructed a "market basket" of goods that a typical owner is expected to purchase in a given year. The basic components of that market basket include taxes, labor, fuel, utilities, insurance, maintenance and administrative costs. Each item is given a "weight" to gauge its relative importance in the overall basket. Price changes in the various components are gathered through a series of surveys of vendors and reviews of such things as labor and insurance contracts. In the case of taxes, actual changes in tax bills are reviewed through a computer link up with the City's Department of Finance. The price of heating fuel is adjusted to reflect the relative warmth of the year under review, by adjusting for degree-day variation. Each year the weights in the market basket are adjusted to reflect the relative changes in the price of each component. Thus, for example, if labor costs outpace insurance costs, the weight given to labor will be increased before the next survey.

With the exception of taxes and water and sewer costs, the price index is not a measure of cost changes.157 Rather it is a measure of price changes. Thus, if an owner experiences fuel savings due to conservation measures such as the installation of thermopane windows, or labor savings by switching from manual to automatic elevators, such gains are not captured in the index. Similarly, if an owner is saddled with new costs such as new permit or filing fees, or regulatory obligations such as lead paint removal, these burdens are not captured in the index.

In addition to these limitations, any mechanism for measuring prices may run askew over long periods of time. Thus, periodic "reality checks" through alternative data sources or through a wholesale updating of the weights or the market basket may be needed. In 2000 the Board undertook a review of these various issues by contracting with Dr. Anthony Blackburn, who authored many of the price index reports in the 1980's, to examine the need for updating the index. Dr. Blackburn found that "[t]he PIOC appears to have provided quite accurate estimates of changes in operating costs over the last 17 years, in part because its errors have been offsetting. It also appears that, because of a drift in the expenditure weights, there is now a potential for the PIOC to misestimate future changes in operating costs." For this reason, Dr. Blackburn recommended various adjustments utilizing alternative income and expense data. A complete copy of his report is annexed hereto in Appendix R.

The chart below shows the percent changes in both the PIOC and the "core" PIOC from 1982 to 2000. The "core" PIOC eliminates the more volatile fuel and fuel-related costs from the calculation. The figures for 2001 are estimated.

Price Index Projections

In addition to the price index, each year the staff produces a set of price projections for the coming year. These projections are particularly helpful with respect to the renewal guidelines for two-year leases. A complete summary of the projections from 1975 through 2000 including actual changes in the price indices with which to gauge the accuracy of the projections is included in Appendix S.

RGB Rent Index

The price changes measured by the PIOC are also compared to projected changes in rent levels to produce an estimate of the average operating cost to rent ratio ("O&M to rent ratio") in rent stabilized buildings. The staff uses a measure called the RGB Rent Index to estimate the overall impact of the Board's guidelines and the statutory vacancy allowance on rent rolls each year. The one and two-year guideline increases, the mix of lease terms, the supplemental adjustment, the statutory vacancy allowance and the minimum rent are combined to produce the aggregate change in rent levels. A chart of the changes in operating costs from 1969 through 2000 as estimated by the price index, along the RGB Rent Index over the same period is contained in Appendix T. A full explanation of the RGB Rent Index and the methodology for calculating the index is included in Appendix U.

Income and Expense Study

Much has been said about the accuracy and general value of the annual price index. Owners have charged that it fails to reflect true operating costs and other obligations of ownership while tenants claim that the index methodology is unsound and misleading in the sense that it does not provide data on actual expenditures and profits. While no study of profits has ever been undertaken, recent access to income and expense statements on file with the New York City Department of Finance has greatly enhanced the Board's understanding of the financial condition of rent stabilized properties. For eleven years the Board has received detailed summaries of operating costs as well as rental incomes. The Real Property Income and Expense (RPIE) data is analyzed by RGB staff in its annual Income and Expense Study. In addition, in the Spring of 1992 the Department of Finance conducted audits on some 46 rent stabilized properties in order to gauge the accuracy of the I&E filings.

The changing relationship between incomes and expenses is an extraordinarily complex matter that draws upon a variety of data sources. A complete history of the income and expense issue was prepared in the spring of 1993 and was published in the 1993 Summary of Research. The full text of the 1993 report is contained in Appendix K1. A recent update of that memo, analyzing historic changes in the relationship between operating costs and rents is contained in Appendix K.

The findings of this analysis are divided between units in buildings constructed before 1947 ("pre-war") and after 1946 ("post-war") due to disparate data sources. The main findings are as follows:

In the Post-War stock, the O&M to rent (contract) ratio increased by 2.1 percentage points from .55 to .571 from 1969 - 1997. That is, owners of post-war buildings spent an average of 55 cents of each rent dollar on operating costs in 1969 (the first year of stabilization), and an average of 57.1 cents in 1997.

In the Pre-War stock, the O&M to income ratio declined by 5.4 percentage points from .65 to .596 from 1967 to 1997. In other words, owners of these units (which were subject to rent control at the time) spent 65 cents of each rent dollar on operating costs in 1967. By 1997 (after these units moved to rent stabilization) they spent only 59.6 cents of each rent dollar on operating costs.

Overall, the O&M to rent/income ratio declined by 3.4 percentage points from .623 to .589 between 1967 to 1997. That is owners, on average, devoted 62 cents of each rent dollar collected to operating costs in 1967-70, and only about 59 cents in 1997.

When operating costs are subtracted from rent collections, the amount remaining is net operating income ("NOI") which allows for capital improvements, financing costs and "profit."158 According to the analysis provided in the memo, "[a]djusting NOI for inflation in the post-war stock (the only stock for which comparative data is available) ... from 1969-70 to 1997 average monthly NOI fell slightly from $386 to $378 (by $8 or 2%). Given the fact that this stock was 27 years older at the time of the 1997 measurement, an even greater decline was expected.

These are complex issues and many caveats are in order. New members are advised to consult the complete text of the memo. Generally, the cost of operating a rental building relative to rental income has fallen slightly over three decades of rent stabilization. This means that average net operating incomes have grown relative to operating costs. In inflation adjusted terms, net operating incomes have held steady with a slight drop in real NOI for post-war housing. The relative gains in NOI for pre-war housing suggest that in inflation adjusted terms, NOI has grown as these units transitioned from rent control to rent stabilization. The chart below is derived directly from annual income and expense filings. It shows, for every dollar of stabilized owner income, the average amount spent on expenses in a building and the amount left over for net operating income. As the chart illustrates, since 1992, owners have generally spent less on expenses and have had more income left over for debt service, income tax and profit.

The price index along with the O&M to rent/income ratio and the projections are used to generate two figures known as the commensurate rent adjustment. This adjustment was previously discussed here. A memorandum setting forth the mechanics of the various commensurate formulae is included herein at Appendix J.

The Cost and Availability of Financing

The Mortgage Survey

Each year the Board's research staff conducts a survey of area lending institutions. This survey includes questions on financing terms, financial characteristics of "typical mortgages," factors influencing mortgage decisions, and the number and dollar value of loans made to owners of stabilized buildings. The results of the survey are reported to the Board annually in the Mortgage Survey Report. In addition, experts in banking and finance are often invited to testify at Board meetings. The chart below shows average interest rates for new and refinanced multi-family mortgages for rent stabilized properties from 1981-2000.

Overall Supply of Housing and Overall Vacancy Rates

The Housing Supply Report

The local emergency housing rent control act mandates the production of a housing survey every three years specifically to determine if the declared housing emergency continues to exist justifying a continuation of the rent control law.159 This survey commonly known as the Triennial Housing and Vacancy Survey (or the "HVS"), has evolved over the years into a highly detailed picture of the City's rental housing stock along with demographics on the tenant population. Although originally concerned only with rent control, the survey now provides a wealth of data on all housing sectors. Consequently, the Board is provided with a comprehensive base of information regarding the overall supply of housing and vacancy rates every three years.

In addition to the HVS data, the Board updates its information on the City's housing supply by reviewing new construction levels and rehabilitation efforts through information provided by the Department of Buildings and the Department of Housing Preservation and Development. Data provided by the State Attorney General's Office on the number of buildings converted to cooperatives is also reviewed. This data is summarized annually for the Board in the Housing Supply Report. See also the chart of New Dwelling Units Constructed in New York City, 1921-1999.

Data from the Cost of Living Indices

The Income and Affordability Study

Each year the Board is provided with data on an April to April basis from the regional cost of living index. This information may be compared to the data provided by the annual price index to gauge changes in a landlord's cost of maintaining rental housing relative to the overall cost of other goods and services. It is also helpful in comparing relative changes in rent to the cost of other goods and services. A comparison of changes in rent stabilized rents to changes in the regional consumer price index is contained in Appendix V. The cost of living data is reported to the Board annually in the Income and Affordability Study.

One of the most important indices, stabilized tenant income, is only available in the triennial Housing and Vacancy Survey. The table below details median stabilized household income from 1974 through 1998, in nominal and real 1998 dollars.

Another important figure derived from the HVS is the share of income paid in rent, or rent burden for rent stabilized tenants. The chart below shows the median rent burden for rent stabilized households from 1970-1999. As discussed earlier in the Affordability section, the rent burden for both stabilized households and all renter households has risen sharply, especially in the initial stages of stabilization.

Other Data - Summary of Special Research from 1989-2000

Along with the large variety of facts and figures provided by those who testify at the Board's annual meetings and hearings, the Board has requested special reports in a number of areas related to the economic condition of the rental housing industry and to the circumstances faced by rent stabilized tenants. Key findings from these various reports are provided below. The year noted on the left column refers to the annual research summary where the full report may be found.

1989

Building Violations and Tax Arrearages in Rent Stabilized Hotels, SRO's and Rooming Houses (pp. 113-115)

While now dated, this brief report disclosed that median per unit tax arrearages were a more serious problem for rooming houses ($390) than for hotels ($360) and SRO's ($210). Similarly, rooming houses averaged about three times as many housing code violations per unit (1.34) than SRO's (.42) and more than seven times as many as hotels (.17).

1990

The Supplementary Rent Adjustment / Housing Affordability (pp. 46 - 47)

This report provides an overview of the effects of the Board's supplemental allowance on individual rent levels from 1983 to 1989 in percentage terms - depending on rent levels and the lease terms chosen. Generally, tenants unaffected by the supplemental adjustment experienced cumulative rent increases of 30 to 32% depending on whether they chose a one or two year lease. Cumulative rent increases for tenants affected by the supplemental adjustment ranged from 40% to 72%. Thus, while the dollar amount of increases may have been as great or greater for higher rent tenants, low rent tenants experienced much larger increases in percentage terms.

1991

Energy Efficiency in Rent Stabilized Buildings (pp. 48)

This brief report compares energy usage targets for "efficient" buildings developed by the Department of Housing Preservation and Development's Division of Energy Conservation, with actual energy usage derived from income and expense data for rent stabilized buildings. The report concludes that owners should save "anywhere between 6% and 13% on heating bills if greater conservation efforts are made." Such improvements "should be achieved through 'better maintenance procedures, and low cost retrofits'" and "do not represent targets achievable only through highly expensive system replacements."

Report on Rent Stabilized Hotels (pp. 74 - 85)

This extensive report reviews the economic condition of rent stabilized hotels, SRO's and rooming houses, along with levels of rent registration with the DHCR for each group. The study finds that "it appears that 40% of all (potential) stabilized hotel-type units have not been registered even once since 1984." It further found that 47% of buildings had not registered. It found that 59% of rooming house units, 29% of hotel units and 18% of SRO units were unregistered. A later analysis conducted in 1992 (reported at pp. 91-93 of the 1992 Research Summary) found that, among hotels that did register with the DHCR, on average, only about 60% of income was derived from registered rents. Among SRO's and rooming houses that registered with DHCR, virtually all of their income was derived from registered rents. Both reports raised troubling questions about the enforcement and efficacy of rent regulations in the hotel/SRO/rooming house sectors.

1992

The Vacancy Allowance (pp. 51 - 61)

This report summarizes the history of the Board's vacancy allowance and some arguments for and against the allowance. Issues discussed include its effects on rent skewing, tenant mobility, building revenues and the enforceability of alternative vacancy allowance formulas. In addition, an analysis of DHCR's treatment of preferential rents (rents below legal levels) and what happens to these rents when a vacancy occurs. While instructive, much of the analysis has been rendered moot by the imposition of a statutory vacancy allowance formula under the Rent Reform Act of 1997.

Effects of Rent Regulation on Economic and Racial Integration (pp. 71 - 76)

This extensive review found that "there is no statistical evidence of a relationship between rent regulation and economic or racial integration" but does "not conclusively negate the possibility that, under some circumstances, rent regulation may promote or facilitate greater economic and racial integration." The report relies upon extensive economic and ethnicity information available from the 1987 Housing and Vacancy Survey. Utilizing various statistical measures, the report found no significant variations in integration levels resulting from the relative proportion of rent stabilized units in 53 sub-borough areas.

1993

A Review of Change in Income and Expenses, 1967-1991 (pp. 33-44)

This extensive report examines the effects of over twenty years of rent stabilization on the net operating incomes of regulated buildings. It is fully updated and the same issues are analyzed in a 1999 staff memo included herein at Appendix K and K1. The key findings in that memo were previously noted here.

Tax Arrears in Rent Stabilized Buildings, 1993 (pp. 50-54)

This brief report analyzes the characteristics of buildings in distress as indicated by excessive tax arrears (3+ quarters in arrears). It discloses that the arrearage problem reflects "the ongoing financial deterioration of the worst-off buildings" insofar as many of the buildings were chronic delinquents. About 80% were built before 1929. They had slightly higher operating costs than average (driven by higher fuel and repair costs), and lower rent collections. Average tenant incomes in these buildings was about 25% lower than the average for all stabilized households. Average rents were 10% below the average for comparably sized buildings and 20% below the average for all buildings. Buildings with arrears also tended to be "over-mortgaged" insofar as they carried debt levels that were difficult to service given their rent rolls.

The NYC Housing and Vacancy Survey: A Ten Year Retrospective (1981-91) (pp. 62-76)

This extensive report covers developments in the housing market during the 1980's including new construction, household incomes, rents, affordability, vacancies, demographics of tenant households, and housing and neighborhood quality. One of the more notable findings with respect to the operations of the RGB is that during this period "[r]ent increases outpaced the RGB's Price Index of Operating Costs by a fair margin. The ten year change in the PIOC was 71% compared to an 85% increase in rents."

1994

Tax Arrears in Rent Stabilized Buildings, 1994 (pp. 48-58)

Expanding upon the work started in 1993, this report includes a survey of owners of buildings with 3+ quarters in tax arrears. For those owners, the study reveals "vacancy and collection losses to be a severe problem" with "nearly 20% of the potential monthly rent roll" being "uncollected, 6% due to vacancy and 13.5% due to collection losses." When asked what single city initiative would most improve the profitability of their buildings, 40% favored lower property and water & sewer rates; 30% favored a "fairer and more efficient housing court" and only 25% favored higher rent guidelines. With respect to the actions of the Rent Guidelines Board, two-thirds of the owners responding indicated that targeted guidelines for low rent apartments or small buildings, as opposed to general guideline increases, would most improve their profit levels. This report is particularly helpful in understanding conditions in distressed housing and the concerns of owners.

Rent Skewing in Rent Stabilized Buildings (pp. 62-65)

Rent skewing is a way of describing substantial differentials in rent for comparable units. One of the more significant problems with most rent regulation systems is that rent adjustments tend to impose relatively higher rents on newcomers. Allocating rent adjustments in an even-handed way is a difficult task. In this 1994 report, the RGB staff found that "length of occupancy" discounts occur in both regulated and unregulated rental housing. The annual discounts tenants receive are about the same. Nonetheless, rent stabilized tenants generally had deeper overall discounts due to the fact that they tended to occupy their apartments about twice as long as unregulated tenants. Thus, for example, in Manhattan the annual longevity rent discount received by both regulated and unregulated tenants averaged 2.6% per year. Still rent stabilized tenants in Manhattan stayed in their apartments 8.9 years on average, compared to 4.2 years for unregulated tenants. This resulted in an average longevity discount of 23.4% for stabilized tenants, and only a 10.7% average discount for unregulated tenants. The longevity discounts for the other boroughs are far less pronounced. (Brooklyn: 14.8% stabilized; 14.2% unregulated / Queens: 16.2% stabilized; 11.0% unregulated.) In the Bronx, unregulated apartments actually witnessed larger longevity discounts (11.4% - stabilized; 12.1% unregulated). In sum, the RGB staff found that because stabilization tends to produce longer-term tenancies, greater longevity discounts (and skewing) are generally found.

1995

Distressed Housing (pp. 49-56) (tax arrears and foreclosures)

These reports continue the Board's review of distressed housing. Most notable is the examination of tax foreclosure policies of 26 cities compiled from a survey taken by RGB staff. The survey found that few cities managed tax delinquent properties as New York has (i.e. seizing delinquent properties and managing them as a public sector landlord). Rather, "[n]early all [of the cities surveyed] attempt to retrieve as much revenue as possible from buildings in arrears through auctions, lien sales or, if necessary, demolition and subsequent sale of vacant lots." In 1994 the City announced that it had stopped foreclosing ("vesting") tax delinquent properties. By the time the RGB revisited this issue in 1996, the City began selling the tax liens of relatively healthy properties to investment banks. (See 1996 Report - Tax-Delinquent Property p. 76-77). More troubled buildings were deeded to third party buyers who were given various incentives and loans to improve the properties. The City's Department of Housing Preservation and Development also set up an "early warning" system to help responsible owners improve the financial and physical condition of their buildings to avoid tax foreclosure.

Small Buildings (pp. 59-63)

This report examines the condition of small buildings in terms of rent levels operating costs, tax arrears, and tenant incomes. The report concludes that while "small buildings are not vastly different from large buildings in most respects, small buildings are slightly worse off than large buildings according to every variable we reviewed." Small buildings have lower gross income and slightly higher expenses; they pay slightly higher property taxes relative to their total income; they have higher vacancy and collection losses; they tend to be older; they are more likely to have an owner living in them; their tenants have somewhat lower income and tend to move more frequently. The report also observes that these buildings are more vulnerable to economic downturns. Indeed, three quarters of buildings falling into tax arrears have fewer than 20 units.

Notably the report does not examine the profitability of small buildings. To do so, RGB staff would have to examine the return on equity placed at risk by small building owners. While small buildings produce less income, it is also likely that they have lower per unit purchase prices. In short, apartments in small buildings generally tend (a broad generalization) to be at the lower end of the market and their economic conditions reflect that position.

1996

Rent to Income Ratios - a comparison among large cities (pp. 66-68)

The RGB staff utilized census bureau data to compare the relative cost of rental housing in New York City with 21 other large cities (those with at least 50,000 rental units). New York was found to have relatively high rents (exceeded by only six of the cities). However, because New Yorkers have higher average incomes, the median tenant household had a relatively low rent to income ratio. That is, while nationally, the median tenant household spent 31% of their income on rent, in New York the average was 28%. Three-quarters of the 21 cities listed had higher average rent to income ratios than New York.

1996 Tax Arrears Study (pp. 58-60)

See note under 1995 - Distressed Housing, above.

1997

Summary of 1996 Housing and Vacancy Survey Data (Appendix D, pp. 94-111)

This extensive statistical summary of data from the 1996 Housing and Vacancy Survey covers regulatory status, vacancy rates, economic characteristics (rents, incomes etc.), neighborhood quality and demographic characteristics of renter households. It is largely dated, but may be useful for historical comparisons. A complete analysis of the 1996 HVS was subsequently published by the Department of Housing Preservation and Development and is available to RGB members. A similar publication for the 1999 HVS should be available in 2001.

1998

Recent Movers Study (pp. 56-68)

This important study offers an initial glimpse of the effects of the luxury decontrol provisions of the Rent Reform Act of 1997. In an extensive survey of recent movers, the RGB staff found that rents rose 12%, on average, when a vacancy occurred - less than the 18% to 20%+ "minimum" allowed by law. This suggested that not all landlords were able to collect the increases and that regulated rents were already at or close to market in many areas. The study found a stark difference between the market in Manhattan south of 96th Street on the East Side and 110th Street on the West Side, and the other areas of the City. In the "core" area of Manhattan recent movers paid rent increases averaging 21% while recent movers in the Bronx paid 5%; in Brooklyn 8%; and in Queens 8%. The increases were attributed to both a strong economy as well as the legislative changes in 1997. The study also found that "vacancy decontrol" (where a vacancy occurs and lawful rents exceed $2,000) was occurring almost exclusively in Manhattan.

 

DUTIES OF THE RENT GUIDELINES BOARD
(Part I) (Part II) (Part III)

An Introduction to the NYC Rent Guidelines Board
Table of Contents

Footnotes

156 From 1969 through 1981 this index was prepared by the Bureau of Labor Statistics. Between 1982 and 1987 the index was prepared by Urban Systems Research and Engineering and in 1988 and 1989 by Abt Associates. In 1990 it was prepared by Speedwell Inc. Since 1991 the index has been prepared by the RGB staff with the assistance of Speedwell Inc. A payment history of the contract is included in Appendix G. Separate price indices are also provided for hotels and lofts.

157 The prices changes in the fuel component and some fuel-related items are 'cost-weighted,' to account for seasonal usage.

158 The term profit used here is not true profit, insofar as it does not account for appreciation in resale value.

159 See Unconsolidated Laws of N.Y. §8603.

 


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