Rent control to be argued before the Supreme Court?

While rent control laws do not affect Central Pennsylvania at this time, investors should take note of a New York case that may shortly be considered by the U.S. Supreme Court. An article by Professor Richard Epstein from earlier this year identifies a pending challenge to rent control in which the Supreme Court has invited responses from New York City and the tenants directly affected:

Supreme Court Justice Antonin Scalia exposed the deeply antidemocratic nature of rent control in Pennell v. City of San Jose (1988). If the government thinks some high social end is served by allowing tenants to sit on someone else's property in perpetuity, then it should use public funds, after democratic deliberation, to buy or lease the premises for market value which it can then lease out to particular tenants. The correct way to handle this issue, he wrote, is by "the distribution to such persons of funds raised from the public at large through taxes," and not to use "the occasion of rent regulation to establish a welfare program privately funded by" landlords.

Mr. Harmon's grievance should resonate on social as well as personal grounds. Rent control and rent stabilization are inimical to the long-term health of New York City. Ordinary tenants paying market rents contribute their fair share to the public treasury. By contrast, rent-controlled tenants on lifetime leases who have a specially privileged legal status are a constant drain on the community, discouraging investment in residential rental real estate by posing a persistent if inchoate threat of subjecting future properties to rent control.

Hoover Daily Report, 1-4-2012

Life Under Rent Control

Last week, I wrote about the connection between rent control and one of the nation's biggest real estate boondoggles for which the taxpayers will be responsible. Stuyvesant Town and Peter Cooper Village ultimately failed because the owners could not escape the rent control laws of New York. American Spectator provides a more detailed look at how rent control works in practice:

In any normal housing market, landlords are focused on attracting tenants, fixing up properties and maintaining a reasonable level of service. With rent control, however, you want to get rid of your tenants. The longer they stay, the further below market their rents sink. There is usually some kind of vacancy allowance, so the longest-lasting tenants have the best deals. That is why so many prominent personalities from the 1960s and 1970s (Mia Farrow, Mayor Ed Koch, Katrina vanden Heuvel, editor of the Nation) had rent-controlled apartments while anyone just arriving in the city would pay $700 a month to sleep on someone's couch.

Deprived of any chance of evicting tenants, the only thing the landlord can do is reduce services. So another layer of law is necessary saying that if landlords don't provide heat or make repairs, the tenant doesn't have to pay rent. Now the tenant has an interest in seeing things fall apart. One of the most common confrontations involved a rent-controlled tenant refusing admission to the repairman sent to fix the leaky sink. In the end, the tenant can just create his own violations -- a missing smoke alarm, graffiti in the halls. "Paying rent in New York is really optional," one landlord after another told me. "It's lucky more people don't know the law."

The stories from this netherworld sometimes sounded like chronicles from the Spanish Inquisition. One Chinese woman, whose property-owning family had been murdered by the Communists, had been running an apartment house in Harlem. After one tenant refused to pay rent for two years, she finally got an order of eviction. The tenant responded by firebombing her office. She took him to criminal court. The judge looked at the case and said, "This isn't a criminal case, it's a housing matter." Back they went to housing court. The housing judge overturned the eviction. For firebombing her office, the tenant got to keep his apartment. "I think I'm going back to China," she told me. "Over there they just kill you and get it over with. Here they torture you first."

As more municipalities adopt more oppressive laws and regulations in Pennsylvania, we have to recognize the possibility that rent control may not be far behind.

Stuyvesant Town and Peter Cooper Village; rent control for upscale apartments; Fannie Mae and Freddie Mac bailout.

In October, I wrote about Stuyvesant Town and Peter Cooper Village in New York, a multi-billion dollar apartment community boondoggle for which some state employee retirement systems are on the hook as lenders.

Politicians in New York are now putting pressure on Fannie Mae and Freddie Mac to guarantee the loan payments.

The main reason that the loan payments are in default and in need of a bailout is that the landlord lost a court battle (in 2009) to "decontrol" the tenants' rents. Middle (and higher) class tenants are living in upscale apartments at rents that are far below the market rate. Those below-market rents are now being subsidized by various teachers' retirement plans from across the country, Fannie Mae and Freddie Mac and, ultimately, the taxpayers.

The American Spectator article linked above is significant not only for its description of the consequences of the government bailout, but for its depiction of life under rent control in New York. As municipalities become more oppressive in their regulation of rental properties, our own reality will get closer to the world that the Spectator describes.

Check back here later for more updates on rent control and the consequences for investors and tenants.

More casualties of the real estate bubble?; Stuyvesant Town and Peter Cooper Village; Manhattan disaster to cost Florida and California pensioners?

From New York City (via AP) comes the story of the largest ever U.S. real estate deal heading toward bankruptcy, foreclosure or both:

It was the most expensive real estate deal in U.S. history. Now it's poised to become one of the biggest flops.

At the height of the real estate bubble in 2006, an investment group led by New York City real estate firm Tishman Speyer Properties and BlackRock Realty Advisors paid $5.4 billion for a pair of gigantic Manhattan apartment complexes known as Stuyvesant Town and Peter Cooper Village.

Click here for more background on the original purchase. In addition to the bubble collapse that has devastated so much of the real estate market, this particular deal has been hampered by lawsuits from tenants resisting the new owners' conversion to higher priced units:

Tenants fought back, conversions happened much slower than expected and a state court ruled Thursday that about $200 million in the company's new rent increases were improper.

The AP article speculates on foreclosure possibilities. The bottom line is that a court's proclivity to limit rent may partially contribute to history's most costly foreclosure. If you are thinking "so what?" consider the following:

Some of the biggest equity investors in the deal are public pension funds that manage retirement system benefits for millions of government employees.

Florida's State Board of Administration had put $250 million into the project. It has already written off the entire investment as a loss.

California's two largest government pension funds, the California Public Employees' Retirement System and the California State Teachers Retirement System, invested a combined $600 million. CalSTRS has also already written off its $100 million stake.

The real estate bubble will affect everyone, even those who did not know that they were participating. The consequences in this case are being aggravated by rent limits being imposed by the courts.

Stuyvesant Town and Peter Cooper Village (New York Times photo)