This week the Supreme Court decided not to hear the case about New York Rent Control and Rent Stabilization. The case was brought by James Harmon, a very capable lawyer who used to be an Assistant US Attorney. Even though he is now the best known Landlord-Tenant lawyer in the United States, Harmon does not practice this kind of law. He says Landlord-Tenant law in New York is actually much more technical and difficult than bringing a case before the Supreme Court of the United States, something he has done before this as well.
Harmon’s case in a nutshell, is that the State of New York has taken his property, several apartments in the brownstone building that he lives in. His grandfather had it, then his parents, now he has it, and Jim Harmon has at least one grandchild. The apartments on the second, third, and fourth floors of this building, are renting for one thousand dollars each, per month. If the apartments were not under rent control or rent stabilization, they would rent for more than two thousand dollars a month, perhaps $2600 per month. Each. This adds up to a lot of money. Harmon is not a big landlord – this is the only building in his name in the City. But it is anyway a lot of money, and he thinks it should belong to him, not to some collection of tenants who happened to live there and got a lifetime tenancy at reduced rent as the result of the laws.
There is a lot to be said for Jim Harmon’s case. Regrettably, none of it will be heard in the Supreme Court. Harmon does not say whether he thought he would win, only (as you would expect from a competent lawyer) that he had a strong case. His petition cited cases, as one would expect, and used a quotation from Mr. Justice Scalia to make his point. Diogenes is not a lawyer, and would not be able guess the outcome anyway. Really good lawyers cannot always do it. Remember, David Boies thought he had a chance to win Bush v. Gore. The lawyer for the City of Washington DC probably thought the city could ban private handgun ownership, based on having the highest handgun murder rate in the US, maybe the highest outside of Afghanistan. And based on the fact that the Supreme Court had never, since John Jay was Chief Justice, never said the second amendment guarantees gun ownership to every individual in the United States, until the Roberts Court.
The members of the current Supreme Court include five right-wing justices and four moderates.
Maybe Harmon thought the five would side with a private property owner, because right-wingers like private property, and because they do not like New-Dealish social welfare programs. Evidently the five like the rights of states to do any damn thing, more than they like private property rights, excluding guns. When Mr. Justice Souter was on The Court, they decided that a municipality could take the property of a group of Rhode Island home-owners, and give that property to a land developer. This case is not so much different from that case, and to the extent of the difference, New York had a stronger case than the town in Rhode Island.
Diogenes discusses the political aspect of this case, because he does not have the skills to discuss it as a law case, or as an economic case. Diogenes hopes that some economists might look at this, because it is very important in New York, and it also applies in other cities.
There is a very large number of apartments, all built before 1973, and most of them are rent controlled or rent stabilized. For this reason the value of similar units that are not under this law, is greater.
Not only are the rents in non-stabilized units higher than in stabilized units, they are also higher than they would be if all of the units were not stabilized. It is very much in the interests of landlords who have mostly non-stabilized apartments, to keep the situation the way it is. If for some reason the law were to go away, the market level rents would decrease, on average. Now, scarcity keeps the prices high.
Diogenes has always imagined that the reason why the law still stands, is that the number of tenants registered to vote in New York outnumber the landlords by 50 to 1 or maybe 100 to 1.
Some of the landlords live in other states, some landlords are large corporations. And as much as Willard Romney says that corporations are people, my friend, they still cannot vote in state elections.
Diogenes thinks that might not be the only thing: The interests of the landlords with mostly rent-stabilized apartments and the landlords who have mostly de-stabilized apartments, are in opposition.
Another effect of the rent regulations, is that nobody in their right mind would build apartment buildings that are intended for working class or lower middle class people. If it costs $60 thousand per unit, and if the rent is two thousand, the landlord cannot ever make enough money to cover his costs and also make a profit. So the only rental housing that has been built since The Great Depression, is luxury buildings. Landlords are people who need to make a living from their investments, almost like regular people. The housing market is made up of rental units, and also co-operatives and condominiums. If a landlord is not making a living from renting out apartments, he might decide to turn the building into a co-op or a condo, and cash out that way. In the 1950’s and 1960’s quite a lot of buildings were put up, specifically to be co-op’s. Except during the real estate bubble of the 1990’s and part of the 2000’s, when some luxury condo buildings were put up, all of the condo and co-op apartments were conversions from rentals. In addition to producing a lot of money for the developers, this also had the effect of raising rental prices for the remaining non-stabilized apartments. This situation is ridiculously complex. It looks like it would be unstable, as well, as the winners and losers are not divided according to any kind of rules. However, even though it looks like it might look unstable, it is cemented in place by votes and voters, by owners who profit from the situation as well as those who lose by it, and by the politics of the US Supreme Court, which is likewise not susceptible to logic or reason.
Whether one likes these laws, originally called Emergency legislation in the 1940’s, those laws are not going away any time soon. This is bad news for some landlords, who really thought they could win this on the law or on the equity. It might be good news for people who would like to buy properties, because the people holding out for a positive decision, will now be getting out.
That raises other issues, although maybe not to Jim Harmon, who is the third generation owner, and who has two generations behind him. The issue is the value of a residential income property.
Obviously, that would be an amount agreed by a willing buyer and a willing seller in an arm’s length transaction. But what does it mean, in money?
Used to be, years ago, that a property would be valued at about five or seven times rent-roll. That is, the yearly total of all the rents collected from the apartments in the building, plus, if the landlord is lucky, some extra money for rent of cellphone tower space on the roof. If an investor buys a building at seven times rent-roll, he can make a profit. If he buys a property at ten times rent-roll, he might be able to make a profit, if he does not have a mortgage. Nowadays, every landlord who has properties thinks that a Saudi Prince will want to live there, and make it into a one-family house. Of course someone like that will not care about the price, and in the case of an Upper West Side brownstone, that asking price is 20 or 25 times rent-roll.. So landlords are not selling. Particularly owners of buildings that could become a private residence, like the Brownstones on the Upper West Side, in Harlem, and in parts of Brooklyn. The property owners, all of them, are holding out for a sheik or a movie star to buy their property at the price they want; they have little interest in giving it away at market rate.
Good Luck to all of them!