Imagine your family worked for a generation to save enough money to buy a brownstone occupied with rent stabilized tenants on the Upper West Side. The family financed the purchase with a mortgage from a bank based on the premise that rents and cash flow would at least keep pace with inflation so you could pay interest and principal on the mortgage and hopefully have some cash flow left as a return on your investment. While you had rent stabilized tenants, you were led to believe that the NYC Rent Guidelines Board would be required to adjudicate rental increases each year by taking a measure of the inflation of costs to own and operate a building and setting rental increases appropriately. You believed the RGB would do its job as the board is comprised of two representatives each for landlords and tenants and five independent representatives that represent the general public. Now, a new mayor @NYCMayor Mamdani is elected on the promise of freezing rents. There are about two million rent stabilized renters that benefit if rents are frozen so by promising frozen rents the new candidate for mayor buys votes and wins the election. The new mayor achieves his objective by stacking the RGB with directors who do not follow their obligations and simply vote for a rent freeze as a preordained conclusion as evidenced by the statements of an RGB director who resigned in protest for this very reason. Meanwhile, inflation in NYC is rampant in utilities, real estate taxes, insurance, repairs and maintenance, etc. and now your rents are frozen. Real estate is a high operating leverage business which means that frozen rents and inflating expenses will cause property cash flows to plummet and your after debt service cash flow to go negative. I expect therefore there will be hundreds if not thousands of small NYC property owners who are now or will shortly be underwater on their mortgages, and without any cash flow to maintain their assets. If you remember the images of the South Bronx burning in the mid 1970s, you can viscerally understand what is happening to small NYC real estate owners. While the rent freeze appears to be short-term good news (long term it will lead to poorly maintained apartments) for 2 million NYC renters, it is bad news for the 2 million or more renters in the 1 million market rate apartments in the City because a landlord-hostile market is not likely to add meaningfully more supply and market rents will likely continue to escalate at a high rate. All of this seems quite unfair and wrong unless I missing something? Why am I wrong? For disclosure: I do not own any NYC rental apartments.
