Tuesday, September 02, 2008

The price of community -- and economics of rent control.


A group of rent-stabilized tenants are fighting to keep their East Village neighborhood affordable by turning down buyout offers of up to $125,000 apiece from a pair of real-estate barons.

The residents charge that the buyout bid by Icon Realty Management, owned by Terrence Lowenberg and Todd Cohen, would destroy the building's sense of community.

"They offered me $120,000," said Carolyn Chamberlain, 65, a secretary who pays $400 for her two-bedroom apartment in the six-story, prewar building at 176 E. 3rd St.

"I told them I would only be interested if it was middle-six-figure offer. It's outright harassment," she said....

Thus we see the dollar value of preserving the building's sense of community.

But residents estimate that at least six of the building's 48 tenants have already snatched up Icon Realty's offer and moved out.

Gentrification has changed the gritty neighborhood - once a magnet for struggling artists and drug activity - into a desirable downtown hotspot with upscale restaurants and bars...

Construction is now going on in the vacated apartments to modernize the digs. Linda Alexander, a spokeswoman for Icon Realty, said the management team did not harass any tenants.

"The [representatives] made several generous buyout offers, and when people refused, they accepted their answer," she said. [NY Post]

All this makes perfect sense within the economics of rent control. For persons intending to stay in the neighborhood, these buyout amounts are nowhere near enough to cover the cost of a comparable market-rate rental.

For instance, the $120,000 offered to Ms Chamberlain if invested at 5% (a good bit more than available from a safe savings account today) would earn $6,000 a year or $500 a month. That and the $400 rent she's already paying would total $900 a month, not anywhere close to the market rent she'd have to pay for a two-bedroom apartment in the area.

Her demand of "mid six figures" actually is a quite reasonable "ask" figure in negotiations, backed by negotiating position claims about "the need to protect affordable housing" and "harassment". And it's remarkable just how close the market price of a replacement apartment is to the value she sets on "preserving the building's sense of community".

Not that I doubt she is sincere in her claims -- nothing is easier than believing moral right is on your side in negotiations, that it's not just about money, until you get enough money.

On the other hand, for one planning to leave the neighborhood in the future for any reason, $120,000 cash is a very nice windfall that can be grabbed by moving up the departure date. You can't take a rent stabilized apartment with you.

From the landlord's point of view, increasing the rent by $2,000 a month (which seems modest) or $24,000 a year, given an interest rate of 5%, would have a capitalized value of $480,000 ("mid six figures") that could be borrowed up front. After paying $120,000 to the departing tenant that leaves $360,000 for the landlord to use to improve the building or other purposes -- times "at least six" departed tenants gives $2 million. Not bad. So the "low" offer from the landlord is reasonable too.

(I'm assuming that after current tenants are bought out and leave it is legal for the their apartments to be rented at market rate under the myriad complexities of the NYC rent stabilization laws. If not, the landlord may be planning to sell them at market value by taking the building co-op. But any landlord paying a hundred grand per departing tenant will have paid to check that out with a lawyer.)

Of course, life would be simpler if apartments here in NYC were just rented our at market rates as in almost all the rest of the US ... so each tenant in this building wouldn't be putting his/her hands in the landlord's pocket to transfer "mid six figures" of wealth to oneself ... and market rents would be lower as apartments wouldn't be hoarded off the market by people with bargain rents, while landlords invested more in housing ... and the city's taxpayers wouldn't be paying the cost of a big rent-administering bureaucracy, enforcement system and housing court system, not to mention all those housing lawyers ... and so on.

But that's a whole 'nother story, In fact, it's one that was told in some detail by John Tierney in the New York Times about this very neighborhood a few years back.