Introduction to the NYC Rent Guidelines Board
FEATURES OF RENT STABILIZATION
I) (Part II) (Part
has long been recognized that any "attempt to limit the landlord's
demands" through rent regulation would fail "[I]f the tenant remained
subject to the landlord's power to evict".114 Therefore,
under rent regulation the general power to evict is eliminated
in favor of a limited power to remove tenants for specifically
enumerated causes. Also, special protections have been added to
protect tenants from illegal evictions and harassment.
the rent control system tenants have permanent tenure and
their rights and obligations are fully spelled out in the state
Rent and Eviction Regulations.115 Consequently
they are referred to as statutory tenants and they do not face
periodic lease renewals. Rent controlled tenancies may only be
terminated on grounds set forth in the Rent and Eviction Regulations.
Under the rent stabilization system tenants are also granted
permanent tenure, but their rights and obligations are defined
by both the Rent Stabilization Code and their individual leases.
Rent stabilized tenants have a general right to renew their leases
as they expire. Under rent stabilization there are two means for
ending a tenancy: First, there are a number of grounds to evict the
tenant such as nonpayment of rent, maintaining a nuisance, illegal
subletting or use of the apartment for unlawful purposes; Second,
there are grounds for refusing to renew the lease such as
recovery of the apartment for the owner's personal use or recovery
when the tenant maintains a primary residence elsewhere.
an owner attempts to remove the tenant unlawfully s/he will be
subject to both civil and criminal penalties. The Rent Stabilization
Code provides as follows:
shall be unlawful for any owner or any person acting on his or
her behalf, directly, or indirectly, to engage in any course
of conduct (including, but not limited to, interruption or discontinuance
of services, or unwarranted or baseless court proceedings) which
interferes with, or disturbs, or is intended to interfere with
or disturb the privacy, comfort peace, repose, or quiet enjoyment
of the tenant in his or her occupancy of the housing accommodation,
or is intended to cause the tenant to vacate such housing accommodation
or waive any right afforded under this Code.116
a tenant was removed from a unit through harassment, the owner
is not permitted to collect a vacancy increase from the next tenant
who occupies the unit.117 Whether
or not the tenant vacates, the Division of Housing and Community
Renewal may impose fines against the owner and future rent increases
of any sort may be denied.118 Further,
criminal penalties may be sought through the Office of Corporation
Counsel under the Unlawful Eviction Law.119 Note
that this latter law protects tenants in all rental units - not
just rent regulated units.120 In
addition, treble damages for unlawful evictions may be imposed
under section 853 of the Real Property Actions and Proceedings
broad goal of the rent stabilization system is the establishment
of "fair" rent levels for both owners and tenants. Fairness, of
course, is a normative matter that is open to interpretation. Given
the overall legal framework supporting the establishment of rent
guidelines the term appears to connote a process which attempts
to balance three objectives. One objective is the establishment
of rent levels which are generally humane - in the sense that owners
are not permitted to fully exploit demand for housing accommodations
driven by situational scarcity. A corresponding objective is setting
rents that reasonably support the reliance and expectation interests
of good faith (non-speculative) investors. While the Board cannot
guarantee a profit for every owner, it should attempt to preserve
the kind of returns that a competitive market with a vacancy rate
in excess of 5% might generate - given all the various and changing
factors of supply and demand such as tenant incomes and costs of
operation. Finally, fairness requires that the overall rent burden
be allocated among tenants in an even- handed way - or that differentials
in rent adjustments among similarly situated tenants bear some
reasonable relationship to legitimate public policy.
rent stabilization produce "fair" returns? In order to consider
this question logically it would be useful to have a common measure
to determine whether the goal is being achieved. Unfortunately,
much of the disagreement over the effectiveness of rent regulation
is really disagreement over the objectives of rent regulation.
Rent regulation may have many purposes:
keep rents generally affordable;
maintain a building's net operating income at stable levels;
ensure a "reasonable return"
closest thing to an authoritative measure for considering the success
of the rent stabilization system is contained in the law itself,
and, like many laws, the rent stabilization law contains some objectives
and ideals that may not operate in complete harmony.
rent stabilization law generally directs that the Rent Guidelines
Board consider cost-push inflationary factors such as increases
in heating fuel or labor costs before establishing rent adjustments.
In addition, special rent increases administered by the DHCR are
permitted to encourage major capital improvements, individual apartment
improvements and to remedy economic hardship. Yet, the same laws
appear to prescribe an end to the effects of demand-pull inflation
on rents. This is the type of inflation that commonly results from
a shortage or fixed supply of a needed good. As Justice Bellacosa
summarized in the case of Manocherian v. Lenox Hill Hospital, "the
State intended to protect dwellers who could not compete in an
overheated rental market, through no fault of their own... and
to 'forestall profiteering, speculation and other disruptive practices.'"121
the Rent Stabilization Law does not speak about "profits." There
is a good reason for this. Simply put, the Board does not control
profit levels. Any such attempt would result in an intractable
circularity problem: rents rise, property values climb, investors
must spend more to purchase properties, rents must rise again to
maintain the same relative return on investment.
speaking there are two investors in every rental property: the
purchaser and the lending institution. The lender's profit is determined
by the interest it charges and the percentage of defaults it copes
with. The purchaser's profit is determined by the return it realizes
on the amount of capital it has placed at risk. In a very real
sense, virtually all owners of rent stabilized properties receive
market rate profit levels.122 That
is because purchase prices are wholly unregulated and market driven.
rent stream of any given building will determine its market value.
Although the Board sets the rents, it cannot order an investor
to pay more (or a seller to take less) than the building is worth
in market terms. Thus, if the Board sets a rent below market, it
will limit a building's appreciation and value. Any purchaser of
that building will pay less for it in order to ensure that the
investment is worthwhile. Whether the investment was a wise one
will depend on how well the investor predicted future rent streams
given the regulatory environment in which the building operates.
The ultimate effect of rent stabilization is, therefore, to mute
property values - not profits.123 In
the absence of rent regulation an investor would presumably pay
more for the subject property, and, in a sense, gamble against
what the market would bring in terms of changes in demand. Under
rent regulation, the investor pays less and gambles against what
regulatory authorities will do.
course, the Board may affect profit levels in unforeseen ways if
it acts unpredictably or erratically. Thus, if the Board gave a
far larger rent increase than its prior practices would have suggested,
prudent investors would be awarded with an unexpected windfall.
Conversely, if the Board adopted rent adjustments well below those
suggested by its past actions, the reasonable expectations of owners
who purchased stabilized buildings would be frustrated.
sum, one factor in ensuring fair profit levels is steady
and predictable behavior on the part of the Rent Guidelines Board.
Stable behavior on the part of the Board allows new investors to
make a rational assessment of whether or not the asking price of
a particular building is competitive relative to other investments.
Commensurate Rent Formula
requires that the Board monitor the changing relationship between
operating costs and rent levels. The general approach taken by
the Rent Guidelines Board over the past three decades has been
to "keep owners whole" for changes in operating costs, and to protect
net operating incomes from the effects of inflation. This has been
accomplished, with varying degrees of accuracy, through the use
of an annual price index of operating costs, along with certain
formulas falling under the heading of "the commensurate rent adjustment." The "traditional" commensurate
formula simply attempted to ensure that net operating income was
preserved in nominal terms - unadjusted for inflation.
commensurate rent formula has evolved over the years to a rather
precise mechanism that reflects actual lease renewal and vacancy
patterns from year to year. In addition, an adjustment has been
added to preserve net operating income against the effects of inflation.
A complete discussion of the various formulae used to construct
the commensurate adjustment is included in Appendix J.
commensurate is neither a rent floor nor a ceiling. When the commensurate
is relatively high, the Board tends to adopt guidelines somewhat
lower than it suggests. When it is low, the guidelines typically
exceed it. For example, in 1990, when a 21% spike in fuel and utility
costs resulted in a commensurate rent adjustment of 7.3% for one
year leases and 9.5% for two year leases (under the "traditional" formula),
the Board adopted a 4.5% for one year leases and a 7% for two year
leases. In 2000, the traditional formula suggested a 4.8% one-year
guideline and a 6% two-year guideline; the CPI adjusted formula
suggested a 6% one year guideline and a 10% two year guideline
(largely due to fuel costs). The Board adopted a 4% one-year guideline
and a 6% two-year guideline.
comparison, in the low inflation years of 1995, 1998 and 1999,
when the traditional commensurate was 0% for one year leases and
ranged from 1.1% to 1.8% for two year leases, the Board adopted
2% increases for one year leases and 4% increases for two year
leases. For further detail, see the chart of commensurate rent
increase formulas as presented to the Rent Guidelines Board, the
PIOC percent change and final rent guidelines.
practice of "smoothing" out year to year adjustments to obtain
a steady pattern of increases, although not without its critics,
has been a consistent feature in past RGB orders. This may, in
part, be due to the fact that approximately one third of tenants
do not experience renewals in any given year. Those tenants in
the second year of a two-year lease, signed under a prior guideline,
may either miss, or be consistently hit by periodic jumps in the
guidelines. Consequently, the Board has leaned against mechanical
application of the commensurate rent formula.
the Board has managed to maintain a very stable relationship between
building incomes and expenses. Indeed, the best evidence available
to the Board's staff suggests that pre-war buildings, which include
more than two out of three stabilized units, have witnessed a substantial
increase in relative net operating income since 1970. This resulted
from a decline in the proportion of each rent dollar devoted to
operating expenses (the "O&M to Rent Ratio"). This occurred despite
the fact that aging buildings usually tend to see a rise in the
O&M to Rent Ratio over time. Relative returns in post-war buildings
are more difficult to track, but appear to be stable. Overall,
the RGB staff has estimated that in 1967 about 62% of rent was
devoted to operating expenses. By 1997, in essentially the same
group of buildings, only 59% of rent went to operating costs. As
a result, average net operating income rose from 38% to 41% of
rent over the period of stabilization. A detailed analysis of this
issue was set forth in a May 13, 1999 memo to the Board, and is
included herein at Appendix K. The
usefulness of this memo cannot be overstated. It provides the best
evidence available to the Board of the effects of rent stabilization
on operating returns since the rent stabilization system began.
The original income and expense review from 1993 is also included
herein in Appendix K1.
Against Tenant Abuses
attempting to equalize bargaining relations between owners and
tenants the rent regulation laws conferred special benefits on
tenants that were generally intended to protect their welfare.
If such benefits are exchanged for the personal enrichment of the
tenant, or if put to frivolous use, the objective of the laws would
be undermined. Consequently, the rent stabilization laws prohibit
or limit tenants from engaging in such practices as subletting
or assigning apartment leases at a profit; assigning leases without
the owner's consent; passing lease renewal rights on to occupants
who have no legally recognized relationship with the tenant; or
claiming the protection of rent regulation when the apartment is
not used as a primary residence. In addition to these prohibitions,
the rent laws continue to permit the remedy of eviction for practices
that are generally recognized as abuses. These practices include
non-payment of rent, maintaining a nuisance, use of the unit for
illegal or immoral purposes or refusal to provide access for repairs.124
rent stabilized apartments is permissible under limited circumstances.
Apartments may be sublet for two years in any four-year period
if the owner has agreed to the sublet. The tenant must, however,
be able to establish that the apartment will be maintained for
his or her primary residence and that s/he intends to return to
it upon the expiration of the sublease.125 An
owner may not unreasonably refuse to grant permission to sublet,
and a failure to respond within 30 days to a request from the tenant
for permission to sublet is considered an approval of the request.
This procedure is described in detail in the Real Property Law §226-b,
which governs all sublets in buildings with four or more units.
In rent stabilized apartments subtenants may not be charged any
rent in addition to the stabilized rent except for the following:
percent may be added by the prime tenant for furnishings - the
10% furniture allowance is a constant statutory percentage
and is not affected by actions of the Rent Guidelines Board.
This fee is paid by the subtenant to the prime tenant; and
allowance under the rent guideline in effect at the commencement
of the prime lease may be added by the owner. This allowance
percentage is determined annually by the Rent Guidelines Board.
The sublet allowance is paid by the subtenant to the prime
tenant, who in turn pays it to the owner.
rent stabilized tenant may not freely assign his or her lease (i.e.
transfer to another all rights under the lease). According to §226-b
of the Real Property Law, written permission of the owner is required
unless a right to assign is already contained in the lease. If
the owner unreasonably withholds such permission, the tenant's
only remedy is to gain release from the lease after 30 days notice
to the owner. If permission to assign is granted, the owner is
entitled to increase the rent by the vacancy allowance in effect
at the time the departing tenant last renewed his or her lease.
are generally obligated to honor their lease obligations throughout
the lease period. Tenants who vacate before their leases expire
may be held liable for rent due through the remaining period.
limitations on assignments should not be confused with the "succession
rights" of occupants of the apartment who are family members as
defined in §2520.6(o) of the Rent Stabilization Code. These
occupants may have the right to renew the lease in their own name
upon the death or departure of the tenant of record.126
or family members127 who
have resided in the apartment for the qualifying periods provided
in the Rent Stabilization Code may remain in the apartment as fully
protected rent stabilized tenants. The inclusion of adult lifetime
partners within the definition of spouse or family member is recognized
by the Division of Housing and Community Renewal and has been upheld
by the courts.128
of the Rent Stabilization Code an owner may refuse to renew the
lease of any tenant who does not occupy his/her apartment as a
primary resident. The evidence necessary to establish non-primary
residence is left to the discretion of "a court of competent jurisdiction".
Often tax filings, voter registration records, utility bills, drivers
licenses and other evidence of a regular presence in the unit are
tenants who refuse to execute properly offered leases are subject
rent stabilized tenant's right to have a roommate is secured by
Section 235-F of the Real Property Law, which governs additional
occupants in all types of housing. Prior to the last revision of
the Rent Stabilization Code, a tenant's right to charge rent to
an additional occupant was unlimited. Under § 2525.7 of the
new code, rent stabilized tenants may charge roommates no more
than a proportionate share of the rent. A proportionate share of
the rent is determined by dividing the legal rent by the total
number of tenants named on the lease and the total number of occupants
in the apartment. However, a tenant's spouse and family, or an
occupant's dependent child, are not included in the total.
FEATURES OF RENT STABILIZATION
I) (Part II) (Part
Introduction to the NYC Rent Guidelines Board
Table of Contents
O.W. Holmes, J., U.S. Supreme Court Block v. Hirsh 256 U.S.
115 NYCRR §2200
116 R.S.C. §2525.5
RSC §2526.2(c)(3) & (d).
Admin. Code §26-521 et. seq.
also §235-d of the Real Property law granting all tenants
the right to obtain injunctive relief against harassment; §286(6)
of the Multiple Dwelling Law denying free market status to loft
units held by owners found guilty of harassment; §26-412(d) & §26-403(e)(2)(i)(9)
of the NYC Rent Control Law, making harassment a violation and
forbidding decontrol of units vacated via harassment, respectively.
Further, see §2.7(2)(a) of the City's 421-a regulations -
included in Appendix P - prohibiting
deregulation in certain cases where harassment occurs, and §26-504.2
of the RSL prohibiting high rent vacancy decontrol in the case
N.Y.2d 385 (1994) cert denied, 514 U.S. 1109 (1995).
notable exception to this generalization would be those owners
who purchased buildings in an open market environment and were
subsequently subjected to rent regulations. The precise proportion
of such buildings in the stabilized stock is not known, but is
thought to be relatively small.
in empirical terms, the actions of the Rent Guidelines Board have
not been shown to mute growth in the re-sale value of rent stabilized
buildings. In a survey of real estate transactions for rental buildings
in New York City covering the period from 1976 through 1993, median
sales prices increased over 400% while the national inflation rate
increased at less than half that rate. See Sales Price Data, Rent
Stabilized Housing in New York City: A Summary of Rent Guidelines
Board Research, 1993, p. 112. Although this increase may be
affected by a variety of factors, such as the type and quantity
of buildings being sold, this consistent trend does suggest that,
in general, the RGB has not acted to frustrate the reasonable expectations
of good faith investors.
used in eviction proceedings are generally governed by Article
7 of the Real Property Actions and Proceedings Law.
member" is defined as a husband, wife, son, daughter, stepson,
stepdaughter, father, mother, stepfather, stepmother, brother,
sister, grandfather, grandmother, grandson, granddaughter, father-in-law,
mother-in-law, son-in-law or daughter-in-law of the tenant or permanent
tenant. See also here for a
discussion of changes to the definition of family member under
the Rent Regulation Reform Act of 1997.
regulation was upheld by the N.Y. State Court of Appeals. See Lease
Succession Regulations Upheld, N.Y.L.J., 12/22/93, page 1,
col. 3, describing the court's ruling in RSA v. Higgins,
164 AD 2d 283 (1st Dept. 1990), Affirmed, 83 N.Y. 2d 156
(1993), cert denied, 512 U.S. 1213 (1994).