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Borough President Diaz proposes new policy to prevent homelessness and displacement of tenants of preferential rent units. On December 13, 2018, Bronx Borough President Ruben Diaz, Jr. issued a report titled “The Preferential Rent Crisis in New York City.” The report examines the scope of the preferential rent issue in all five boroughs and the risk tenants of preferential rent apartments face should landlords increase their rents to the legal registered rent for those units. The report argues that it would cost the City billions of dollars to respond to such an occurrence, as over 145,000 families could end up homeless if all preferential rents were increased at once. To prevent such drastic spending by the City, the Borough President Diaz recommends a solution that will help preferential rent tenants remain in their homes, while making it worthwhile for landlords to continue charging preferential rents.
Preferential rents are rents that have been granted by a landlord that are below the legal New York State Homes and Community Renewal (HCR) registered rent for rent stabilized units, which are regulated by the New York City Rent Guidelines Board. According to the report, landlords grant preferential rents for a variety of reasons. Typically, however, landlords will offer preferential rents because higher prices are not supported by the market.
Based on the latest data from HCR for 2017, there are approximately 260,378 apartments in New York City that are registered as rent preferential units. This constitutes approximately seven percent of the City’s overall housing stock, and 29 percent of the total number of rent stabilized units.
Borough President Diaz argues that if all landlords of preferential rent apartments were to at once raise the preferential rents to the legal rents, 145,812 households would be at risk of eviction and current laws do not prevent landlords from taking such action. Such rent increases are a problematic possibility, particularly given that in 2017, 56 percent of the City’s renter households were rent burdened, defined as paying at least 30 percent of gross household income for rent and monthly utility costs. According to Borough President Diaz, the high increase in homelessness that would result from rent increases on the preferential rent households would cause a fiscal burden on the City upwards of $17 billion, with $6 billion in shelter costs and another $11 billion in new construction costs for affordable housing.
To prevent this expense, Borough President Diaz makes three recommendations. First, that the State legislature pass a law that would prevent a landlord from adjusting the amount of preferential rent upon the renewal of a lease, unless the apartment is vacant. Second, as part of the law, give landlords in the City property tax breaks for the difference between the preferential rent and the legal registered rent in a given rent stabilized apartment. Third, increase civil penalties and compensatory damages against landlords if it is proven that they have harassed tenants with preferential rents in an effort to create a vacancy.
To determine the amount of tax breaks that would be necessary to achieve these recommendations, the Borough President looked at the “preferential rent discount,” or the cost of the gap between the preferential rents tenants are paying and the rental cost legally allowed in rent regulated apartments. Based on an analysis by the City’s Independent Budget Office, the median of these discounts were $307 for the Bronx, $303 for Brooklyn, $453 for Manhattan, $354 for Queens, and $423 for Staten Island. Based on these numbers, the City is estimated to forego approximately $93.5 million in tax dollars if his proposal is adopted. Borough President Diaz argues that in comparison to the $17 billion that the City would have to spend if his proposed measure is not adopted, the $93.5 million foregone tax revenue loss is “a mere drop in the bucket compared to the significant savings the proposal allows for.”
“Addressing the affordable housing crisis requires us to not only build new units, but to keep families in their existing homes and neighborhoods. Eliminating the preferential rent loophole in conjunction with new tax breaks for landlords will help our city prevent displacement and keep our neighborhoods intact,” said Borough President Diaz.
By: Viktoriya Gray (Viktoriya is the CityLaw Fellow and New York Law School Graduate, Class of 2018).