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Editorials • November 3, 2009

The Scourge Of Rent Stabilization

 

The Scourge Of Rent Stabilization

Richard A. Epstein
11.03.09

Why not scrap it, root and branch?

 

One central libertarian tenet is that governments should not use subsidies or price controls to distort the operation of competitive markets. The soundness of that position was brought home once again in the recent decision of the New York State Court of Appeals in Roberts v. Tishman-Speyer, a case in which both subsidies and price controls were far too much in evidence.

Roberts required the New York State Court of Appeal to interpret New York's antiquated rent stabilization law, which it did in a way that will roil for years to come New York City's rental housing market. The saga began on a hopeful note when in an partial move to market liberalization, the New York State legislation added in 1993 a luxury decontrol provision to New York's rent stabilization law. As currently configured, that inelegant compromise is supposed to return to the open market any rent-stabilized apartments whose tenants' combined income exceeds $175,000 per year, so long as the unit rents for more than $2,000.

The prospect of those increased rentals through luxury decontrol induced a Tishman-Speyer-led syndicate to plunk down over $5 billion to purchase two large Lower East Side complexes, Stuyvesant Town and Peter Cooper Village. Unfortunately, the arcane interaction between luxury decontrol and the city's tax subsidies for capital improvements under its so-called J-51 program have rendered its financial calculations worthless.

The underlying legal dispute turns on an obscure statutory provision that excludes from the luxury decontrol option any unit "which became or becomes [subject to rent stabilization] by virtue of receiving tax benefits under [the J-51 program.]" New York State Division of Housing and Community Renewal read this provision to block luxury decontrol only if receipt of J-51 benefits were the sole reason for making an apartment rent stabilized. Accordingly, any previously stabilized unit would remain eligible for decontrol even if its landlord accepted J-51 benefits. That assurance was critical given the size of the two programs. J-51 benefits gave the Tishman properties a one-time benefit of $25 million. Its past gains from luxury decontrol now total about $215 million and climbing. No sane investor would let the tax subsidy jeopardize the luxury decontrol program.

Unfortunately, complex statutory provisions raise knotty questions of interpretation. In Tishman a 4-to-2 majority of New York's high court gave zero deference to the administrative ruling on which Tishman had relied. Instead the court found that the statutory exception was "unambiguous" in its intent to require landlords to make an election between the two programs. The word "sole" was not in the statute before the phrase "in virtue of," and the overliteral Court would not read it in. Tishman sensibly claimed that the word "become" covered only units that entered rent stabilization to get the J-51 benefits. No dice: The Court adopted, in a secular version of the Second Coming, the dubious reading that the word "become" meant a unit was able "to achieve, for a second time, a status already obtained." On this view, the statutory exception swallows the rule, for now no rent-stabilized unit could ever qualify for luxury decontrol once the landlord takes J-51 benefits.

 

The New York high court took its reckless course, knowing that New York City rental markets would react: the next day, in fact, when several large deals became unglued. But it is not as though the tenants have won anything tangible either, for their Pyrrhic victory guarantees only further litigation on such technical subjects as class certification, measure of damages and statutes of limitation--unless of course the state legislature accepts the Court's invitation by undoing the Roberts decision.

Instructively, Roberts did utter a word about the constitutional validity of rent stabilization statutes. Too bad. It is the built-in structural differential between market and statutory rates that sparks the endless jockeying of position over who really owns these apartments. What is called for, even at this late date, is a frontal constitutional challenge to the whole apparatus that becomes ever more convoluted with each statutory fix. Just that type of frontal attack was launched this past September inGuggenheim v. City of Goleta. There, federal court judge Jay Bybee used some very fancy legal footwork to strike down on its face a California rent stabilization statute that allowed mobile home owners to capture the gains from stabilization by selling their beat up units to a new buyer for a huge premium that chiefly represented the continued right to pay below market rentals.

Bybee was rightly appalled by the naked wealth transfer wrought by the California law, which he held violated the U.S. Constitution's Takings Clause: "nor shall private property be taken for public use, without just compensation." Rent stabilization flunks both parts of that provision. The taking is for the private benefit of the privileged tenant--and to the misery of everyone else. So the program counts as a "public use" only in the most Pickwickian sense. Similarly, the statutory rent proffered under rent control does not make good in hard cash the loss of the landlord's property right to reclaim the premises on expiration of the lease. There's no principled difference between plopping a mobile home on the landlord's pad and plopping a tenant down forever in his landlord's apartment.

Enough of the stabilization mess: after Roberts, the only principled thing for Albany to do is scrap rent stabilization root and branch. And if it won't do it, some energized state or federal court should do it for them.

~~~~~~~~~~~~~~~~~~~~~~~~~~

Richard A. Epstein is a professor of law at the University of Chicago, a senior fellow at the Hoover Institution and a visiting professor at NYU Law School. He writes a weekly column for Forbes.com.

 
 
 
 
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