RGB examines data for rent increases
REAL ESTATE WEEKLY
MAY 5, 1999
By LOIS WEISS

What's a better reflection of apartment building upkeep the actual income and expenses filed under penalty of law by property owners; or a potpourri of costs that's been hauled in the same basket since 1969?

That's one of the questions being asked by owners' representatives as they examine the 1999 Income & Expense Study which was released to the members of the Rent Guidelines Board last week.

The seven-member RGB board will be reviewing that data, as well as the so-called market basket - the Price Index of Operating Costs (PIOC) - and other evidence, over the next few weeks. The data will technically be used to set rent guidelines increases for approximately 900,000 New York City rent stabilized apartments, SRO's and hotels that have leases which become effective on October 1, 1999.

But no matter what the data, few can argue that politics and raw emotions have traditionally been just as much a part of the guidelines process as the statistics. In the early 1990's, when inflation created double digit PIOC numbers, owners were told the RGB would "make it up" to them in the future, and rents were increased by only small amounts.

Now that inflationary costs have been controlled, however, tenants claim building owners should not receive any rent increases at all.

Since 1989, the net operating income (NOI) per apartment per month has gone down each year, and this is the first time the data shows the NOI exceeds the 1989 amount-but not by much. In 1989, the NOI was $258, and in 1997, the report shows NOI per apartment at $265.

"The NOI, on an inflation adjusted basis in 1997, is virtually identically to the NOI in 1989," explained Dan Margulies, executive director of the Community Housing Improvement Program (CHIP), a middle market owners' group. "Over the eight years, there was a three percent increase."

Rent Guideline Board owner-member Vince Castellano wonders if there should be a different system to determine rents for core Manhattan, since rent stabilization is less important in preserving low rents in the outer boroughs.

Staten Island is given hardly any notice in the figures because the number of rent stabilized buildings is statistically so small.

A study of recent movers released last year showed that 75 percent of those moving to borough apartments received a preferential rent - which is lower than the permitted rent allowed under the regulations - because owners realized the rent would be too high for the borough market.

While in core Manhattan, Castellano said, "the numbers are almost flipped."

The 60 percent moving into Manhattan chose to pay more than an 18 percent increase over their previous rent, but 75 percent of the movers in the rest of the city paid less than an 18 percent increase.

"The $265 NOI is misleading and it's very political," Castellano added.

The NOI figures do not take into account any debt service paid by owners, money needed for improvements, or money needed to pay income taxes.

For the first time, the RGB study notes, the PIOC and the RPIE data provided identical results, showing a growth in expenses of 1.9 percent.

The PIOC, which is based on costs expected to be paid to vendors on an April to April cycle, reacts faster when expenses are going up.

Eighty-eight percent of the 1998 RPIE filings were based on the 1997 calendar year, and a comparison with the previous year filings - known as a longitudinal study - is very accurate, but the study advises the data is not available to the RGB in a timely manner.

The RGB report states, however, "The RPIE data... is a highly reliable measure of cost trends over both the short- and long- term because the I&E Study relies on actual empirical data supplied by a large representation of the City's stabilized owners.

Still, from 90/91 to 96/97 the PIOC costs grew 26.4 percent, while over the same time period, the RPIE costs increased by 24.6 percent. Increases in fuel and insurance costs also "vary considerably" in the two indices over the six years.

"We should look at the breadbasket. There has to be a change," said Joseph Strasburg, president of the Rent Stabilization Association (RSA), which represents 25,000 owners, in referring to the weight given to each PIOC cost.

For instance, owners recognize that fuel costs have gone down, but they remain heavily weighted in the PIOC. Over the same time, water costs have substantially increased, particularly for those that were caught with high population buildings on metered billing, and yet that remains a small component of the PIOC. In July, too, the Water Board is expected to institute yet another 4 percent hike.

There are also worries about ongoing percentage increases in costs dictated by all levels of government. "Virtually all the costs are determined by government," said Castellano.

Recent federal, state and city administrative burdens and reporting requirements include such items as recycling signage, separation and fines; new fire signage; notices and fines; new lead paint work advisory notices and abatement costs; and steadily increasing property taxes, because the levy has been increasing even while the administration honors a technical freeze on the overall tax rate.

There is an increase in administration to comply with Major Capital Improvement recapture (and retroactivity is lost forever if the tenant moves); as well as the J-51 programs; RPIE filings; property tax assessment challenge forms - where the full amount must be paid, and although resolved years later, no interest is paid on the overcharges; index number purchase costs to begin court actions; Senior Citizen Rent Increase Exemption program filings; window guard notifications and follow-ups; and Americans with Disabilities Act compliance, to name a few.

"Since 1969, the regulatory burden has increased and management needs trained bodies to comply with the paperwork,' observed Castellano.

Labor costs also increase each year. While Bronx buildings just concluded a four-year pact with local 32E, with the change in 32B-32J leadership and an end to its three-year agreement coming early next year, unionized labor costs could become a wild card for 3,000 residential buildings in the other boroughs.

On April 21, the 32B-32J union employees received annual weekly raises and increased benefits. According to Realty Advisory Board figures, it currently costs an owner about $200,000 to provide residents with a doorperson 24-hours a day, seven days a week.

The 1997 costs in Manhattan's post-war buildings for labor and administration ran $40 and an astounding $221 respectively for 11-19 unit buildings; $98 and $66 for 20-99 unit buildings; and $200 and $100 for 100-unit plus buildings. By comparison, the same expenses in Queens ran $41 and $45; $50 and $45; and $87 and $53.

Total costs for Manhattan's post-war 11-19 unit buildings were $1,035 per unit, but they enjoyed an average rent of $754 and a total income per apartment per month of $1,920. So while they obtained a large income, it appears they worked hard for it, and paid for it with higher taxes. Older small buildings generally fared less well. That sample is probably skewed, since the buildings reporting were of higher value to begin with, and were likely from core Manhattan neighborhoods.

It is well known in the affordable housing arena that the smaller buildings are generally owned by the least knowledgeable, and have the most difficult time keeping up with the administrative burden and costs. Yet the data shows that even buildings of 20-99 units can have serious financial problems.

Owner advocates say savvy tenants in a building where an owner is likely to miss any one of the numerous filing requirements can keep it tied up in court over violations or non-payment proceedings and cause rent strikes, rollbacks or treble damages from which the ownership might never recover.

Housing Preservation and Development (HPD) warns in the proposed budget beginning in July, 1999, that it expects to issue 300,000 housing violations, including 10,000 lead paint violations.

That agency still has over 14,000 occupied units under its management, after earlier administrations foreclosed on properties that did not pay their property taxes.

About 1,500 of those units are scheduled to return to community and not-for-profit operation in the coming year after being rehabilitated at a cost of more than $80 million in city finds and twice that in leveraged funds from state, federal and private sources.

Overall, the RGB reports units in buildings that did not have some commercial income, such as from a laundry room or retail store, had an avenge NOI of $216 per month, 19 percent lower than the norm.

So while overall income jumped 11.4 percent citywide, that merely served to bring some buildings back to 1989 adjusted income levels, and did not touch all neighborhoods equally. "It's a citywide figure and the disparities are enormous borough to borough," noted Castellano.

The RGB study accounts for that jump in part by indicating owners rented more vacant units and collected more of the rents they were entitled to receive.

It also attributes some of the increase to the rent guidelines applicable during the end of 1996 and beginning of 1997, which were 5 percent for a one-year lease and 7 percent for a two-year lease, well over the previous year's 2 percent and 4 percent, respectively.

Last year's guideline was just 2 percent for a one year lease.

"Two years ago, we advocated the elimination of the Rent Guidelines Board and suggested it be replaced with a standard formula," recalled Strasburg. He said one thought would be to use the Consumer Price Index "plus."

Even though the CPI number has lately been low and slow, it has reacted during inflationary times. Strasburg said when the PIOC had double digit increases, owners were asked to hold down rent increases - with promises of being taken care of when the economy evened out.

"From an annual perspective, we recognize that in those years, the industry was justified in getting double digit increases, and we lost it forever," Strasburg noted. "Now we're fighting over getting nothing or very little."

Margulies of CHIP thinks rent increases of 4 percent for one-year leases and 8 percent for two-year leases are reasonable for the coming year.

"Maintaining the status quo is not enough to encourage investment," he warned, because the repeating pattern shows the city could be nearing the top of the economic cycle.

Approximately 8 percent of the sample, which is 902 buildings, have income that is less than their expenses. These building have operating expenses 12 percent higher than avenge, and rent which is 37 percent less than average.

These buildings are burdened by "low rents, lack commercial income and suffer high operating expenses," the study noted, while contributing less in property taxes and incurring lower labor costs.

Distressed buildings tended to be of pre-war vintage and located in Manhattan, where six had over 100 units, 250 buildings had between 20-99 units, and another 173 buildings contained 11-19 units.

The concentration in Manhattan may simply be a reflection of these higher assessed properties having to comply with the reporting requirements of the RPIE.

The city no longer takes over distressed buildings, but has programs that help owners with items such as low-interest loans for repairs, and maintains building income streams by providing low-income tenants such as senior citizens and certain others with rent supplements. HPD expects to spend $75 million in city money on these programs during the next fiscal year, and twice that in non-city leveraged funds.

In July, the Mayor's proposed budget expects overall property tax revenue to increase by 4.3 percent. with the actual levy increasing by 4.1 percent. In 1999, only 92.5 percent of taxes were collected, equivalent to the 1993 collections at the height of the real estate recession and the previous worst year for collections in the decade.

The RGB study shows property taxes as the largest component of costs per unit in rental buildings. Post-1946 buildings pay a citywide average of $155 per unit per month, dropping to $107 on average for all buildings. This represents an average of 23 percent of total building expenses. But Manhattan's post-war small and large buildings have closer to 30 percent of their outlays going towards taxes.

The Manhattan owners of the smallest (11-19 units) and largest buildings (100+) paid the most by far of any borough at $161 and $167 per unit per month, respectively, for pre-war units. They paid $324 and $329 per unit for post-war, while pre-war buildings of 20 to 99 units paid $112 per unit, jumping to the post-war tab of $192 per unit.

While property taxes were also lower for larger buildings in The Bronx, Brooklyn and Queens, compare the Manhattan costs to taxes paid in the Bronx of $54, $47 and $36 per unit per month for small, medium and large pre-war buildings, respectively.

Similar costs in Brooklyn are $70, $65 and $65, while pre-war Queens owners paid $78, $78 and $61 per unit per month for similarly sized buildings. Queens post-war buildings paid $109, $95 and $93 per unit in taxes for the small, medium and large buildings, respectively, while Bronx and Brooklyn tax costs were just over the $80 per unit range.

The city sells liens on unpaid property taxes in bulk to companies that collect the money owed for the year, along with the city's 18 percent interest charge (where the total yearly tax is under $2,750, and a 5 percent lien surcharge.) If those payments are not kept current, it is now the bulk buyers who are permitted to foreclose and then sell individual buildings.