Rudy Giuliani Tax Break Continues to Hurt Tenants and Help Landlords

New York City is the poster city for rising rents. Given current trends, don’t expect that to change any time soon. New York’s municipal leaders, however, have not been idle in addressing this. The City and State are actively pursuing measures such as implementing city-wide rent freezes to slow rising rents. Yet, with so much money at stake in the rental and leasing sector, there are those who seek to create and exploit loopholes. New Yorkers are now fighting back against a bill that, due to such a loophole, not only failed to preserve and improve affordable housing but gave landlords and developers millions of dollars in tax breaks.   

In 1995, the New York State legislature sought to revitalize Lower Manhattan, which was riddled with aging buildings and had few development projects on the horizon. A proposed bill gave developers tax incentives if they converted old office buildings into apartments. In exchange for these tax incentives, landlords would limit rent increases, therefore assuring reasonably affordable housing stock for the foreseeable future. It seemed like a win-win situation for developers and tenants alike.

Hours before the bill was set to pass, Republican lawmakers pulled it from the voting schedule, citing the need to consult Rudy Giuliani, New York City’s mayor. Giuliani wrote a letter to Republicans stating that an exemption should be granted to units that initially rent for greater than $2,000 per month. Republicans reinterpreted the rent-stabilization component of the bill by introducing a reading of Giuliani’s letter into the public record just before the final vote. The bill, 421-g, passed 53-1.

rudy via photopin (license)
rudy via photopin (license)

Between 1995 and 2006, before the law expired, 421-g helped create close to 10,000 new rental units in Lower Manhattan. However, nearly three-quarters of those units were not rent stabilized because they initially rented for more than $2,000 per month. So while 421-g accomplished its goal of sparking revitalization in Lower Manhattan, it did not protect tenants as intended. And even though the law expired in 2006, some buildings continue to benefit from tax breaks that totalled nearly $75 million in 2015.

Some legal experts believe that developers have misused the law at a large cost to the city and tenants. Lawyers claim that the intent of the state legislature was to encourage the creation of rent-stabilized housing units by offering tax incentives. Therefore, having 75% of units created under this program exempt from rent stabilization not only defies the spirit of the law but is costing the city tens of millions of dollars each year in lost tax revenue.

There is substantial debate regarding whether or not the law has been applied properly, and it is centered around one major issue–namely, the exemption. The bill was not officially amended before it was passed to stipulate exemptions to units that initially rent for greater than $2,000 per month. That policy was instated by the attachment of the letter from Rudy Giuliani recommending the exemption.

By David Shankbone - Own work, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=13842042 Jimmy McMillan founded The Rent is Too Damn High Party and ran for Mayor of New York in 1993 and 2013
By David ShankboneOwn work, CC BY 3.0 Jimmy McMillan founded The Rent is Too Damn High Party and ran for Mayor of New York in 1993 and 2013.

Multiple lawsuits have been filed against landlords by tenants alleging massive rent overcharging. Decisions from the bench have been varied. In one instance, a judge ordered Skyline Developers to re-instate rent stabilization status on a number of its rental units, citing the Giuliani interpretation of the law as invalid. Another judge came to the opposite ruling on a similar case with developer UDR.

A number of other lawsuits are working their way through the courts, and legal scholars are hopeful that clarity will finally be reached regarding proper interpretation of the law.

That said, there are better ways to promote the creation and preservation of affordable housing units. Common Ground NYC activist Scott Baker argues the following:

If the city wants to have affordable housing AND new building AND condos people can afford to buy AND a reliable and large revenue stream to replace many if not most taxes, there is only one proven way to do this: The Land Value Tax.

It works like this: over a period of time, phase out taxes on buildings and replace them with taxes on location. This discourages hoarding and inefficient use of location because there is an increasing tax on that, while it encourages building because there is no tax on that (eventually).

Every location is to be taxed at its full rental value. This means more apartments, which means lower rents and costs due to competition.

Park Slope (9th Street, Brooklyn) via photopin (license)
Park Slope (9th Street, Brooklyn) via photopin (license)

The idea for taxing land values originated with classical political economists like Adam Smith and were popularized globally in the 19th century by two-time New York City Mayoral candidate Henry George. Today, economists refer to Land Value Taxation (LVT) as the most efficient of taxes, meaning that it is difficult (if not impossible) to evade taxation or paying what is owed to society. That’s because land, unlike money, cannot be moved, hidden or tax-sheltered, a quality that would have made LVT succeed where 421-g failed.

In retrospect, 421-g was designed to legislate additional affordable housing into existence–contrary to the demands of the market and their underlying forces, and regardless of any shortages this may cause. Rent controls also have the pernicious effect of privileging older residents at the expense of younger residents.

By contrast, the function of land value taxation is to make the ownership of raw and underdeveloped land prohibitively expensive. This encourages landowners to make use of the space in order to accrue the rental income necessary to pay the land value tax.
Consistent with Baker’s statements, this would effectively turn the housing market into renters’ market due to the increased supply of housing and working space, leading to increased competition to attract renters. Thus,we could expect lower housing costs while realizing the improvement of the conditions of affordable housing. Ultimately, LVT achieves organically what 421-g was designed to accomplish artificially.

Cover image: Good morning, New York via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Rent Subsidies Fail to Help Homeless in Los Angeles

Laura Luevano, a homeless woman struggling with severe diabetes and arthritis, failed to find an apartment in Los Angeles after searching for several months–despite holding a federally subsidized rental voucher. She is one of more than 2,000 people in Los Angeles who remain homeless despite holding these rental vouchers. Her story represents one of many that demand a fair and just solution.

In Los Angeles, a city known for its pristine beaches and Hollywood glamour, 35,000 people are without homes, and the situation is not improving. Just last year, the  homeless population increased by 5.7%, which has been deemed a crisis by Peter Lynn, the executive director of the Los Angeles Homeless Services Authority. City and state officials are hoping that rent vouchers will help abate this crisis, but that measure so far has shown poor results.

Rent vouchers are, in the eyes of officials, a quick and easy solution to the increasing homelessness problem. The voucher, subsidized by the federal government, can be used to pay rent to a landlord. But quick fixes often fail to provide long-term solutions, and the rent voucher approach has been no exception.

 

Homeless man and his dog sleeping via photopin (license)
Homeless man and his dog sleeping via photopin (license)

 

While vouchers increase the capability of the poor to access housing, they provide minimal incentive for landlords to increase the residential housing supply. Thinking in terms of supply and demand, vouchers serve to increase demand, but a lack of increase in supply to meet that demand ultimately defeats the program’s purpose. People tend to attribute the lack of supply to zoning and rent control–and indeed these issues are a part of it. However, the most overlooked factor is that the supply of land is fixed, and thus the owners can make an easier buck just sitting on undeveloped property and waiting for it to rise in value.

As a result of these simple market dynamics, recipients of vouchers are facing a harsh reality – the Los Angeles rental market is crowded and extremely competitive. LA County currently has very little housing inventory available for immediate rental – an incredibly low 2.7% rental vacancy rate. At a vacancy rate below 5%, the power dynamic between landlords and renters shifts dramatically towards landlords. Landlords can afford to be selective about tenants, choosing those that are least likely to fail to pay their rent. Often, the tenants that lose out are veterans and minorities.

These landlords have been reluctant to take on the homeless as tenants, citing concerns that they will be troublesome tenants and will fail to pay rent. But the County is taking action to erode these barriers by providing financial incentives to landlords. Through the voucher program, the city guarantees first and last months’ rent, as well as a security deposit, to landlords. Santa Monica County has gone a step further and gives landlords a $5,000 bonus for accepting rent vouchers.

In general, subsidies such as guarantees and bonuses have much the same effect on housing supply as vouchers. Subsidies of all kinds spur demand without any significant increase in supply, resulting in even higher rents for everyone. This goes to benefit landlords while hurting renters.

 

FOR RENT - Central Avenue via photopin (license)
FOR RENT – Central Avenue via photopin (license)

 

The city is educating landlords to reduce stigma and make the benefits of accepting vouchers clear. Vouchers are guaranteed rent, and voucher tenants have substantial support from the city in the form of case managers and tenant mediation, helpful in the case that a disagreement arises. The city also hopes that appealing to landlords’ sense of civic duty will increase their willingness to accept vouchers. Convincing hesitant landlords, however, is just one piece of the homelessness puzzle.The best additional measure would be one that encourages building more housing units.

Rent vouchers cannot be applied to 1- and 2-bedroom apartments that rent for greater than $1,150 and $1,500, respectively. With housing costs in Los Angeles soaring, and new rentals averaging $2,094 per month, federal vouchers cannot be applied to a large swath of available housing. Some counties have eased restrictions on these caps but have still not seen an increase in the number of voucher recipients renting apartments. This further validates the notion that this is a supply problem that calls for incentives to build the necessary units.

The voucher program is, in addition, actually squeezing low-income families that do not qualify for vouchers, creating a problem where there previously wasn’t one. When a homeless person receives a voucher, they are competing for the same rentals as low-income families, says Santa Monica housing administrator Jim Kemper. So while the program has had some success in taking homeless people off the streets, it is often at the expense of the working poor, making a bad situation even worse. Legal analysts have long criticized the City and State for focusing on voucher programs instead of building new units at the rate necessary to decrease rents. Ultimately, for the voucher program to succeed, Los Angeles must enact policies to ease its housing shortage.

 

Haley Pk 01 via photopin (license)
Haley Pk 01 via photopin (license)

 

To address the housing crisis, Los Angeles should consider implementing a land value tax (LVT) to replace its current, traditional model of limited property taxation, which may well require changing California’s constitution via voter initiative. In the late 19th century, political economist Henry George observed that a tax on property improvements reduces a landowner’s incentive to build, as improving the value of his or her property would increase the amount of taxes owed. Henry George hypothesized that, by eliminating the tax on improvements and implementing a relatively high LVT–which depends only on location value and surface area–landowners would be incentivized to increase residential and commercial space in order to create the necessary revenue to pay the LVT while generating desired return on investment.

Despite the proven success of the LVT in several countries around the world, Los Angeles cannot, at present, implement such a change. The California constitutional change known as Proposition 13 makes it exceedingly difficult to enact any measure of change to either land or building value taxation. Enabling such changes would require either changing or circumventing Proposition 13’s limitations.

At present, the human cost of inaction is quite severe. While a reaching an effective long-term solution requires bold measures, the humanity in us demands that we commit to positive change for all.

 

Cover image: Renting Property via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Roots of the San Francisco Rent Crisis: New Insights Using Old Data

If you’ve considered moving to San Francisco recently, you might have abandoned the idea when you learned that median rent for a 1-bedroom apartment is an astonishing $3,500 a month, essentially requiring an income of over $100,000 for a basic standard of living in the city. Those figures are very real. San Francisco rents are out of control.

As a San Francisco resident, Eric Fischer wanted to know exactly what was driving those figures. He dug into housing data and discovered that comprehensive records on city-wide rents only go back to 1979, which is coincidentally the year that rent control became law and mere months after the passage of Proposition 13, which effectively limited both the amount of growth and rate of property taxes statewide. This information inspired Fischer to unearth and examine previous data trends and answer the question of how rent control has affected rent prices.

Fischer spent hours studying pre-1979 “for rent” ads in the San Francisco Chronicle archives, amassing sufficient data to draw conclusions about rental rates from 1956 to 1979. He released a number of informative charts in his blog post on the topic. I have included one of the more telling charts below:

 

30YearRentChart1

 

The chart above shows the increase in median rents over the past 70 years. This chart is surprising for two major reasons. First, with the exception of the tech boom around the year 2000, rent prices have consistently risen 6.6% each year, which is about 2.5 percentage points above inflation. Second, rent control had no effect on year-by-year rent increases.

After tracking trends in rent prices, Fischer wanted to figure out exactly why rent prices have increased at this rate and what we might do to slow, and even reverse, this incline.

 

30YearRentChart2

As the chart above shows, Fischer identified key variables affecting rental rates: total housing inventory, the number of jobs in San Francisco, and the total amount of money paid to every person with a job in San Francisco. Based on this information, Fischer has an idea for how we can drop the cost of housing in San Francisco by 66%. According to Fischer, “It would take a 53% increase in the housing supply (200,000 new units), or a 44% drop in CPI-adjusted salaries, or a 51% drop in employment, to cut prices by two thirds.”

Yes, that is dramatic. Current construction patterns forecast that 3,600 units will be added to the city each year over the next seven years. Consider that along with the fact that over 10,000 people move to San Francisco each year, and you will understand why the city is poised to fall deeper into its affordable housing crisis. Fischer’s idea of a 44% drop in CPI-adjusted salaries is also not feasible given current trends, as salaries in San Francisco continue to rise between 3 and 4 percentage points each year.

 

Balancoire, Mission Street via photopin (license)
Balancoire, Mission Street via photopin (license)

 

Fischer’s discovery mirrors an idea from the 19th century British political economist, David Ricardo. Drawing from Adam Smith, Ricardo formalized what is known as the Law of Rent. It shows that the productivity of labor compared to the best available rent-free land determines rents. Just like in Fischer’s data, if productivity goes up, rents go up, and vice versa. By extension, real wages are determined by the best available alternative to renting. In his day, the New World was full of decent opportunities to homestead, and this gave laborers bargaining power in the labor market. You can’t force someone to sell their labor for less than what they could go out and make for themselves. Workers in the Old World of Europe didn’t have this luxury.

Extending Ricardo’s law of rent, the American political economist Henry George argued that tax policy canes on buildings penalize building, resulting in a dearth in both housing and commercial sites, and reducing the wages left over to working people. To encourage more construction, he recommended abolishing taxes on buildings, and, crucially, argued that high land value taxation would encourage landowners to put more residential and commercial space on the market in order to meet the cost of the land value tax.

Both in the United States as well as abroad, this concept of shifting taxes off buildings and onto land has proven to increase residential supply and provide a general economic boost. The barrier to this in California lies in the limits imposed by Proposition 13, the altering of which would require a voter-approved constitutional amendment. Whether the political will exists to enact such a change remains to be seen.

Considering Fischer’s findings and the reality of what’s happening in San Francisco, the situation looks particularly precarious. Heeding his conclusions could prevent similar crises in rapidly growing urban centers like Denver, Portland, and Seattle. The biggest takeaway for these cities: either build sufficient housing to accommodate a growing population or face an out-of-control rental rate crisis like the one in San Francisco.

Cover image: A Better World, Castro Street via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail