Legislative Update – Senator Espada Introduces S.6811
Many questions have arisen regarding the legislation introduced recently by Senator Pedro Espada. Here’s what owners need to know:
What is S.6811? S.6811 would allow property owners to return the J-51 tax benefits they have received from the City and to waive future J-51 benefits they expect to receive so they can continue to utilize the luxury decontrol laws. Those funds would be used to create a program to freeze the out-of-pocket rents paid by low-income and moderate income rent-regulated tenants who pay more than one-third of their income for rent and who earn less than $45,000 per year.
How would the rent-freeze work? Two programs in the City currently assist certain tenants by freezing their out-of-pocket rents. SCRIE protects rent-regulated tenants over the age of 62 who pay more than one-third of their income for rent and who earn less than $29,000. DRIE operates in a similar manner and protects rent-regulated tenants with disabilities. The rent-freeze bill would protect all rent-regulated tenants if they pay more than one-third of their incomes to rent and their household incomes are less than $45,000. Under the rent-freeze bill, as with both SCRIE and DRIE, property owners would receive dollar-for-dollar tax credits from the City for the foregone increases in rents.
Why should a property owner be allowed to repay and waive their J-51 benefits? Since 1996, the State Division of Housing and Community Renewal allowed property owners whose buildings were rent-regulated prior to the receipt of J-51 benefits to deregulate apartments through the luxury decontrol laws. DHCR’s interpretation was supported by the City’s housing and tax agencies, never challenged by tenants and never reversed by any legislation. As a result, thousands of apartments in J-51 buildings were luxury decontrolled. This interpretation was accepted universally until 2009, when the State Court of Appeals ruled that it was incorrect. Countless owners may now be subject to extraordinary claims for rent overcharges and reductions in rent, and potential financial distress. The Court acknowledged that dire financial consequences for owners and financial institutions could occur and recognized the potential for legislative relief. The rent-freeze bill is intended to use this opportunity to create a housing subsidy program paid for by those affected residential property owners who seek to avoid rent overcharge claims, rent reductions and the re-regulation of deregulated apartments because of the Court’s decision.
Which tenants benefit from the Court’s decision? Free-market tenants who knowingly entered into unregulated leases, typically for thousands of dollars per month, would benefit through the re-regulation of their apartments, rent overcharge awards and rent reductions. Approximately 80,000 apartments have been deregulated; the non-partisan Citizens Housing and Planning Council has estimated that between 19,000 and 37,000 of those apartments are in J-51 buildings, primarily in Manhattan.
Are there costs connected to the Court’s decision? Luxury decontrol has yielded enormous economic benefits to the City, which would be at-risk as the direct result of the Court’s decision. Since the enactment of luxury decontrol in 1993, residential property owners have invested at an extraordinary rate in their buildings in the form of major capital improvements and individual apartment improvements. Approximately $4.1 billion in construction and improvements have been undertaken since 1994, employing thousands of workers, and the City has reaped $2.1 billion in increased real estate tax revenue. The implementation of the Court’s decision would cause a significant decline in deregulation and in building improvements, as well as a decrease in assessments, resulting in the loss of tax revenue to the City.
Who will benefit from the rent-freeze bill? The rent-freeze bill will directly benefit rent-regulated, working-class households. There are approximately 300,000 eligible rent-regulated households based upon 2008 HVS out-of-pocket rents. After accounting for households which already receive some form of housing subsidy, such as SCRIE, DRIE, and Section 8, the projected number of eligible households is approximately 212,000. In contrast to the free-market tenants who will receive windfalls under the Court’s ruling, the tenants who would benefit from the rent-freeze bill are working class tenants located throughout the five boroughs.
What is the number of SCRIE participants and how much does SCRIE cost? Since 2001, participation has ranged from 44,481 in 2001 to 46,362 in 2010 at a cost of $63.5 million in 2001 and $87.5 million in 2010. Despite the increase in the income threshold from $24,000 in 2004 to $29,000 in 2009, participation only increased from 44,258 in 2004 to 46,362 in 2010; the program’s cost increased from $73.7 million in 2005 to $87.5 million in 2010.
What are the expected revenues resulting from the rent-freeze bill? Since 2001, property owners have received about $2 billion in J-51 tax abatement and tax exemption benefits. Typically, J-51 tax abatements run for 12 years and J-51 tax exemptions run for 14 years. Approximately 40% of the J-51 benefits are received for properties in Manhattan; most affected building owners, primarily in Manhattan but some also in other boroughs, would pay back and waive their benefits so they could continue to use luxury decontrol. Assuming a 40% repayment rate, the City can expect more than $800 million in repayments, and additional revenue will be derived from waivers of future benefits.
What are the expected costs of the rent-freeze bill? Costs will vary depending upon rates of participation, apartment turnover, changes in income and other factors. SCRIE provides the best available indicator of potential participation. The current SCRIE rate of participation, based upon 2008 Housing and Vacancy Survey data, is 30%. Over the past decade, the rates of participation have ranged from 30% to 40%. Assuming a 30% rate of participation, 63,795 households would have their out-of-pocket rents frozen; the first year cost would be approximately $21 million, the annual cost in the tenth year would be $131 million and the aggregate costs over ten years would be $839 million. (By comparison, the aggregate cost for SCRIE since 2001 was $819 million.) Assuming a 40% rate of participation, the first year cost would $28 million, the tenth year cost would be $174 million and the aggregate costs over ten years would be $1.1 billion. All of the foregoing cost projections assume a continuation of an average stabilized rent increase of 3% per year and, based upon 2008 HVS data, a turnover rate of 12.7%.
If you have any further questions regarding this or any other matter, please call RSA at 212-214-9200. |
