Issue #148, Winter 2006


A Very High Stakes Deal

The $5.4 billion sale of Manhattan's last middle-class enclave might have been prevented if there had been progressive policies in place.

By Brad Lander


This fall, New York City witnessed the biggest real estate deal in U.S. history. The Metropolitan Life Insurance Company announced on August 30 that it would sell Stuyvesant Town and Peter Cooper Village, two massive complexes with 11,232 apartments on Manhattan's east side. The asking price: a cool $5 billion. Over the next six weeks, many of the city's largest real estate firms - Apollo, Vornado, Kushner Companies and the ultimate winner, Tishman Speyer Properties - took part in a high-stakes scramble to put together bids for the 110 buildings, and the 80 acres of Manhattan real estate beneath.

Built in the 1940s to house returning WWII veterans, with the help of eminent domain and public subsidies, Stuyvesant Town and Peter Cooper Village are remarkable for remaining an affordable, middle-class community amid Manhattan's spiraling luxury housing market. The residents who live there perceived that the sale put their community at risk and that the stakes were even higher for them than for the bidders. "The future for the lives of 25,000 people is at stake," Nanette Ross, a 20-year resident, told the New York Times.

But the highest stakes of all might actually be for the 3 million New York City tenants who live in rent-regulated housing. The sale highlights the erosion of rent regulations in the city over the past decade. But will it also serve as a harbinger of irrevocable decline of the rent laws; of vanishing units affordable to middle-, moderate- and low-income families in Manhattan; and of increasing segregation in the city? Or could it instead change perceptions of rent regulations, and thus help to restore them as a smart 21st century policy to maintain diversity and affordability - in NYC and around the country? Can this debate help rent laws become, as they once were, a central part of progressive movements to share the benefits of growth and development in our cities a bit more fairly?

Complex Beginnings
While Stuyvesant Town and Peter Cooper Village have come to be viewed as a success, there was significant opposition to the project in the beginning. The 18-block area was home to 600 buildings with 3,100 apartments, 500 stores and small factories, churches, schools and theaters. All were razed via eminent domain by New York City's legendary power broker, Robert Moses, forcing 11,000 people to move. The March 3, 1945, edition of the New York Times called it "the greatest and most significant mass movement of families in New York's history." Echoing today's debates around eminent domain, lawsuits were brought by the property owners challenging the constitutionality of the redevelopment law, the granting of tax exemptions and the use of eminent domain to the benefit of a corporate giant.

In exchange for land and tax breaks from the city, MetLife agreed to keep the rents below market to serve moderate- and middle-income families, and to limit their profits to 6 percent for 25 years. In 1947, when the first units at Stuy Town became available, the median rent was $76. The median NYC household at the time, with an income of $5,866, paid about 15 percent of their income for rent.

Many criticized the urban design of the project because it closed off public space to city residents and failed to incorporate schools or stores. Jane Jacobs disapproved of the way it turned its back on the "life of the street," for its interiorized (and therefore largely privatized) public spaces, for its lack of retail and commercial space, for its homogeneity.

Stuy Town and Peter Cooper Village was also a segregated community: blacks and Puerto Ricans were not allowed to live there. (New York State courts ruled at the time that it was a private development and, therefore, allowed to discriminate. MetLife subsequently built a similar, but smaller, exclusively black, project in Harlem.)

Over the years the racial mix has changed somewhat. By 2000, 17 percent of Stuy Town residents were people of color and about 15 percent were foreign born. The complex has remained decidedly middle class despite being surrounded by a dramatically gentrified area.

The Difference Rent Regulations Make
In the 1970s, the affordability requirements, imposed in exchange for the land and tax breaks, expired. Fortunately for the tenants, New York City's rent regulation laws kicked in to keep the complex affordable. The laws were originally passed in 1947, just as Stuy Town was being built, to address the city's housing imbalance that surfaced as soldiers returned home from WWII, as blacks and Puerto Ricans migrated to the city and as the city's post-war manufacturing economy kicked into high gear. The plan was that the regulations would stay in place until the vacancy rate grew to over 5 percent, the sign of a healthy marketplace; but this has not happened yet. The current vacancy rate is 3.09 percent and has only been above 4 percent once in the past 30 years.

In 1971, 25 years after they were adopted, city officials, hoping to jump-start a slowing housing market, sought to do away with the laws and to allow units to be deregulated when they became vacant. The result was chaos: many families were displaced after being harassed by owners seeking to take advantage of the profits they could reap upon vacancy. The rent laws were reinstated in 1974, but only for buildings built before 1974. Owners of newer buildings are not required to comply with rent regulations, but may choose to be governed by them in exchange for a generous property tax break.

Conservative opponents who argue that regulations dampen new construction often overlook the fact that rent regulations do not cover buildings constructed post-1973, and that the periods of highest construction in NYC over the past century have actually been when rent laws were tightest.

New York City's rent laws regulate the annual increase that landlords can charge tenants, ranging from 2 to 5 percent over the past decade. But the system works for landlords as well, by including investment and hardship provisions to help them keep their buildings operating successfully. When units become vacant, they are still subject to regulated increases.

Or at least that was the case until 1994, when the New York State Legislature changed the laws, rewarding many years of lobbying by landlords and ideological battle by the Manhattan Institute and the New York Post, all seeking to impose their vision of the virtues of the "free market" on anything that looks like a tradeable commodity. Eventually the rent laws were renewed, but a new provision known as "high rent vacancy decontrol" was included. It stipulated that when a unit renting for $2,000 a month or more became vacant, it could be deregulated and rented at market rate. Landlords quickly seized the opportunity to charge higher rents by making "major capital improvements" that allowed them to increase monthly rents by1/40 of the cost of the work.

Over the past decade, this law change has taken a heavy toll on the number of affordable rental units available in New York City, causing more than 50,000 units to be deregulated. When you add in other types of deregulation - co-op/condo conversions, expiration of tax subsidies - more than 145,000 low-, moderate- and middle-income units have been removed from regulation over the past 10 years.

It was that weakening of rent laws brought about by the 1994 change that invited MetLife to eliminate affordable housing at Stuy Town and Peter Cooper Village, where 100 percent of the units were rent regulated. In the summer of 2001, MetLife announced that all vacated units would be rented at market value, rather than renewed under rent regulations. (The company undertook major capital improvements that allowed it to increase the rent by $1,000, taking units over the $2,000 ceiling.) Today, only 70 percent of the units are regulated.

The offering circular provided by MetLife to bidders projects there could be as few as 30 percent regulated units by 2018. The prospectus touted that Stuy Town could in fact become the "city's most prominent market-rate master community," suggesting the incorporation of an elite private school, a gated community, doormen and other "value-added ideas" that appeal to "the discerning tastes of Manhattan's market-rate apartment community."

Those Who Call It Home
But other values were also in play. Tenants have made Stuy Town and Peter Cooper Village into one of the most desirable middle-class communities in the city, and they quickly mobilized to try to keep it that way. New York City Councilmember Daniel Garodnick, a 35-year-old, lifelong resident of Peter Cooper Village, led the tenants' effort to acquire the buildings. Working with the AFL-CIO Housing Investment Trust, several banks and a team of lawyers, the Stuyvesant Town-Peter Cooper Village Tenants Association made MetLife's first cut. To make their bid competitive, they resigned themselves to gradually taking most of the units to market, but pledged to retain 20 percent of the units as affordable rental housing for the long-term and another 20 percent as affordable ownership units that would be sold to existing residents at a discounted price. But even so, their offer was "only" $4.5 billion - $900 million less than Tishman Speyer's winning bid of $5.4 billion.

Tishman Speyer owns many high-profile Manhattan buildings, including Rockefeller Center and the Chrysler Building. Principals Jerry Speyer and son, Rob Speyer, promised to "become stewards of the property" and to make "no sudden or dramatic shifts in the community's makeup, character or charm." But they stopped short of committing to keep any of the units affordable over the longer term. "I find it very hard to believe that someone who would come up with $5 billion to buy a property like this wouldn't be trying to make money," said Ross, the Stuy Town tenant. "And the only way to make money on a property like this is to turn it into luxury housing."

Private Choices, or Public Ones?
Mayor Michael Bloomberg's administration has rightly been praised for creating the largest municipal affordable housing program in the country, pledging $7.5 billion over 10 years to create or preserve over 165,000 affordable units. Therefore, it was disappointing to the tenants' association when the administration did not support their bid to purchase the MetLife property.

It would have cost an extraordinary sum of money to save Stuy Town and Peter Cooper Village by subsidizing tenants to buy it from MetLife at the market-rate price. It is financially unsustainable - and somewhat absurd - housing policy to subsidize the creation of affordable housing, gradually let it rise to market rate (with private owners reaping the windfall), and then use (much) more public subsidy to buy it back from the owner at the market price in order to keep it affordable!

But this need never have become a question of subsidy. With smart regulatory action, by repealing vacancy decontrol, Stuy Town could be preserved as affordable housing for the long-term. And the same is true for other rental housing, subsidized and unsubsidized, in cities around the country. It is possible to use smart regulations, in an economically, socially and politically viable way, to permanently preserve affordable housing in rising markets. In many cases buildings will need additional investments over the years, but these will be far more affordable if they are geared to the successful operation of the building, rather than the speculative windfall profits of deregulation.

The pending loss of affordable units at Stuy Town, and the broader loss of rent-regulated units around the country, reveals the problem with an affordable housing strategy based primarily on leveraging the market. The Bloomberg administration has undoubtedly the strongest municipal housing program in the country, but it is based largely on leveraging the success of NYC's housing market to create new units of affordable housing. The administration has sought to preserve existing subsidized units, but generally through financial incentives rather than regulation.

However, the challenge of affordability in hot market cities cannot be solved exclusively through adding new affordable units. From 2002 to 2005, even as the Bloomberg administration's aggressive new 10-year plan kicked in, the number of units renting for less than $1,000 (the rent affordable to a family of four earning $36,000 per year, or two workers working full-time at nearly double the minimum wage) fell by 155,000. The share of families paying more than half of their income for rent grew from 28.6 percent to 31.2 percent. And for hundreds of thousands of low-income New Yorkers not lucky enough to live in subsidized housing, the share paying more than half of their (low) incomes for rent rose from 43.9 percent to a staggering 50 percent. There is simply no way for New York City to exclusively build its way out of this problem.

Public radio host Brian Lehrer, generally known as an objective observer of NYC politics, sums it up best, saying, "As government struggles to create new affordable housing, it's just plain weird in my opinion to have a [vacancy decontrol] law that is systematically abolishing it." Victor Bach, a senior policy analyst for the Community Service Society, shares a similar logic. "We're losing more at one end than we're gaining in affordable housing at the other end through the mayor's plan," he says. "This just tips the balance even worse. It's more difficult to make the argument that the efforts of the city in affordable housing, which deserve a lot of praise, are going to compensate for the market losses that occur through sales."

The Bloomberg administration does recognize the problem of one-generation affordability going forward. In several innovative new programs, they are requiring units to be permanently affordable to avoid this problem 25 or 30 years down the road. But thus far, they have not supported strengthened regulations to maintain affordability on existing units - either the 1.1 million rent regulated units, or the more than 300,000 publicly subsidized units. They have not supported efforts to strengthen rent regulations or repeal vacancy decontrol, and they opposed efforts that would require owners of subsidized properties with expiring restrictions to sell to the tenants or a nonprofit to maintain affordability under favorable terms.

Seeking additional help, New York City tenants have already turned their focus upon their new governor, Eliot Spitzer, a Democrat who was elected in November. During the campaign, Spitzer expressed support for the idea of indexing the $2,000 vacancy decontrol level, so it would rise over time. Tenant advocates were encouraged by this suggestion, but also pointed out that it would need to be raised substantially first. If it had been indexed to average rent increases in 1994, it would be over $3,300 today. Most still believe that repeal of vacancy decontrol is necessary to save the rent regulations system. The current rent laws are not up for renewal until 2011, and Governor Spitzer has indicated that he does not plan to raise the issue before then. But tenant advocates hope to force the issue, in order to save tens of thousands of affordable units that will otherwise be lost in the meantime.

Progressive Metropolitan Politics
The story of rent regulations over the past two decades of conservative government has been one of decline. After reaching peak in the late 1970s - with regulations in hundreds of municipalities, and statewide laws in California, New Jersey, New York and Massachusetts - the elimination of rent laws was a successful part of Reaganism.

But with newly ascendant Democrats in Congress and many statehouses, could rent regulations again become part of social justice campaigns? When rent laws were first adopted in the 1920s, and again in the 1940s, they were seen as a way to bring some degree of balance and fairness to unstable housing markets and to combat "unjust, unreasonable and oppressive" rent hikes. Over the past few years, U.S. cities have seen the emergence of vibrant campaigns for justice at the metropolitan level - living wage laws (led by ACORN and others), accountable development (led by the Los Angeles Alliance for a New Economy) and environmental justice. In January 2007, three groups engaged in this work - Strategic Action for a Just Economy, the Miami Workers Center and Tenants and Workers United - are convening a "right to the city" conference in Los Angeles. Could rent regulations and permanent affordability become a significant part of this effort for more just cities? Could the sale of Stuy Town prompt a rethinking of rent laws - not as an old solution to a WWII-era problem, but as a surprisingly fair, cost-effective and reasonable solution to a serious 21st century problem?

For all the work conservatives have done to give them a bad name, rent regulations - especially when smartly tailored - could be broadly appealing as progressive metropolitan policy. They help to solve the problems with a housing strategy that only focuses on "leveraging the market." They address the challenges of displacement and gentrification as neighborhoods improve, without preventing new development. They can unite poor, working-class and middle-class families and help a very broad range of households. And yet they require no new public expenditures.

Or to put it more simply, as Brian Lehrer does: "Better yet, why not repeal any law that throws affordable housing away?"

Brad Lander is the director of the Pratt Center for Community Development in New York City (www.prattcenter.net).


Resources

"I'm a Tenant and I Vote!: New Yorkers Find Victory in Rent Struggle," by Peter Dreier and Winton Pitcoff. Shelterforce. www.nhi.org/online/issues/94/dreier.html

Stuyvesant Town-Peter Cooper Village Tenants Association
www.stpcvta.org

All About Rent Control: Explaining and Defending Tenant Protections and the Rent Regulatory System
http://tenant.net/Alerts/Guide/papers/index.html