On February 20, the US Supreme Court declined to hear challenges brought by rental unit owners to recent changes made to New York City’s Rent Stabilization Laws. Since these changes went into effect in 2019, news outlets have reported how enhanced rent stabilization protections have positively affected tenants’ largest expense — rent.

However, these affordable housing protections have likely diminished the valuations of affordable housing properties for owners (and their lenders) in the city.

While rent stabilization remains in place, the US Supreme Court opened the window for challenges to similar rent stabilization laws recently enacted throughout the country. As other jurisdictions have moved to address the housing affordability crisis afflicting much of the United States, this Supreme Court ruling to maintain New York City rent stabilization to lessen the loss of affordable housing has broad implications.

New York City’s Rent Stabilization Laws

History

New York City’s rent stabilization laws were originally enacted in 1969 due to sharply rising rents in city apartment buildings. It was seen as a temporary measure but has been subsequently amended several times to adjust to continuing low city vacancy rates. Rent stabilization impacts buildings with at least six units that either were built before 1974 or are part of a tax abatement program, affecting almost half of all rentals in New York City. These laws limit how much a landlord can increase rent for the affected units but also include various other regulations.[1]

Recent

In 2019, several amendments to the Rent Stabilization Law were passed in response to the affordable housing shortages the city was facing at the time. This situation has only worsened since the onset of the COVID-19 pandemic in 2020, with a 1.5% vacancy rate in 2023 as compared to a 4.5% vacancy rate in 2021.

Current Housing Affordability Crisis and Related Rent Stabilization Laws

New York City

The rent stabilization amendments were a response to a housing affordability crisis that had gripped New York City for decades, and affected or even displaced many city residents. Observers trace the crisis largely to prior landlord-friendly reforms that went into place in the 1990s. Weakening rent stabilization resulted in landlords moving more than 300,000 apartments from being rent stabilized to market rate units over the 25 years preceding the most recent changes, which removed the biggest source of affordable housing in the city. As a result, one in three NYC households pays at least 50% of their income in rent. A livable rent is generally considered to be 30% of income.

Beyond NYC Environs

Of course, housing affordability is not just an issue for residents of the Big Apple. It has become a crisis throughout New York State and across the country (and even globally), exacerbated by the pandemic, lack of housing supply, and higher interest rates. Unfortunately, this lack of supply is expected to get worse for renters.

Over 40% of renters are cost-burdened (i.e., more than 30% of income is spent on housing), and housing prices are rising faster than wages in 80% of US markets, further straining renters’ wallets. Housing analysts estimate the United States needs four to five million more homes than currently exist. Contributing to this lack of supply, institutional investors have been buying single family homes as rental properties,[2] a practice that began in earnest when homeowners defaulted in record numbers during the Great Recession and hedge funds purchased hundreds of thousands of homes at distressed prices.

The resulting lower housing supply has increased single family home prices so that younger people are becoming more and more likely to live with parents rather than purchasing a home – historically, the largest generator of wealth in the United States for a typical household.

In response to the lack of affordable housing, many jurisdictions outside of New York City have also introduced housing legislation, as described further below.

Significant Rent Stabilization Changes

1990s

In 1994, various rent stabilization protections were repealed. The New York City Council implemented “vacancy decontrol,” which made it easier for landlords to raise rents to market rates once tenants moved out of apartments. These reforms came amidst a backdrop of NYC struggling with large budget deficits and thousands of buildings being foreclosed upon because owners failed to pay their taxes. As a result, these changes benefited landlords at the detriment of tenants.

2019

In response to weakened rent stabilization laws, more recent rent stabilization changes inured to the benefit of tenants rather than landlords.

For example, prior law had “decontrol measures” which removed units from rent stabilization regulation when either the rent or the tenant’s income reached a certain threshold, allowing landlords to charge market rate; now landlords are prohibited from deregulating apartments in almost all cases.

Additionally, there were provisions which allowed landlords to raise rent above the rent stabilization designated limits in certain scenarios which had also been put in place in the 1990s. Many of these provisions have since been repealed. Other renter beneficial changes included allowing courts to put evictions on hold for one year and restricting landlords’ ability to reclaim units for their family’s use to one unit per building.

Recent Change Impacts

Landlords

While rent stabilization attempts to strike a balance among protecting tenants, landlords, and other affected parties, commentators have remarked that the recent amendments overwhelmingly favor tenants. Since the changes went into place, there have been various reports that landlords and lenders have been negatively impacted (as compared to the prior changes which primarily benefitted landlords).

Valuations

Landlords (and their lenders) are also financially impacted by these recent changes. Units that may have been removed from regulation are staying regulated and bringing in less rent than owners had projected. In fact, sale prices for buildings with regulated units have fallen 34% since the 2019 amendments went into effect, indicating the decreased value of owners in these units.

Decreased Supply

The New York City Housing and Vacancy survey estimates that, in 2023, there were 26,310 rent-stabilized apartments that were vacant but not available for rent. Part of this could be contributed to “warehousing”, a practice in which landlords intentionally keep their properties vacant rather than making repairs. Housing observers also find that there is less incentive for owners to develop new units if subject to rent regulation. This could potentially lead to the worsening of living conditions in a rent-regulated unit.

Deferred Maintenance

Some developers have concluded that it is no longer profitable to make necessary renovations to rent-stabilized units since unit rents cannot increase accordingly.

Lenders

Lenders on rent-stabilized apartments have also been affected by the recent rent stabilization law changes. Lenders that loan on rent-stabilized apartments face greater risks due to the decreased value associated with these properties.

For example, New York Community Bancorp, a regional bank recently in turmoil due to its significant real estate exposure, is the largest lender on rent-stabilized units. In fact, it recently reported that 14% of its loans on rent-stabilized buildings are at an elevated default risk. Other banks were also reported to face exposure to the changing market dynamics of rent-stabilized apartments, particularly as these loans mature and borrowing costs reset to current increased interest rates.

Legal Challenges

Lower Federal Courts

Two owners of small and midsize rent-stabilized apartment buildings in New York City challenged the 2019 rent stabilization changes. These owners first complained in federal district court in New York that the amendments were an unjustifiable taking of their property and thus violated the Fifth Amendment to the US Constitution. This Constitutional Amendment bars the government from taking someone’s property without just compensation. The owners argued that the amendments, in essence, permitted tenants to have perpetual options to renew their leases (which amounted to a per se physical taking of the landlords’ property) along with caps on rent that were divorced from the landlords’ costs (which put owners on an unsustainable financial path and further constituted a taking).

The district courts dismissed the owners’ complaints, finding the challengers had insufficiently pled that the rent stabilization amendments were a taking. The Second Circuit reaffirmed, prompting the landlords to request a hearing by the Supreme Court.

Supreme Court

Despite noting that the constitutionality of laws like NYC rent stabilization was an important question, the Supreme Court denied review. In a brief statement, Justice Clarence Thomas explained that the owners’ petitions contained mostly general allegations that were not specific enough to facilitate a proper understanding of rent stabilization and review of the related constitutional issues. Nonetheless, Justice Thomas ended by declaring that the Supreme Court should grant a hearing to address regimes like NYC’s rent stabilization “in an appropriate future case.”

While other Supreme Court cases found that rent regulation laws could violate the Takings Clause, recent cases in other courts have not seen success at challenging rent regulation laws.[3]

Parallel Cases

Outside of the Supreme Court, challenges to New York’s various rent regulation have gone both ways. In Manocherian v. Lenox Hospital, landlords challenged a law requiring apartment owners to offer lease renewals to not-for-profit hospitals. The Court of Appeals, New York’s highest court, found the regulation unlawful because the taking was not supported by a valid public purpose, as required by the Takings Clause. However, in Greystone Hotel Co. v. City of New York, the Southern District of New York analyzed a challenge to a limited rent regulation that required hotels to grant six-month leases to any occupant that requests it. The court found that no taking had occurred and reaffirmed the city’s ability to impose rent regulations.

Given the foregoing, future challenges could turn upon whether a taking was justified for public policy purposes with less burdensome viable alternatives unavailable to protect the interests of owners.

Other States and Cities with Rent Regulation

The US Department of Housing and Urban Development (HUD) reports that over 180 jurisdictions throughout the United States have rent stabilization policies of some kind. Among these are:

Oregon

Oregon passed the first statewide rent control law in 2019 limiting rent increases on many buildings to no more than 7% per year plus inflation. Due to recent high inflation, some renters still saw double-digit rent increases in 2023, which lawmakers are trying to address.

California

The Golden State followed Oregon in passing the Tenant Protection Act in 2020 and made amendments strengthening tenant protections to become effective on April 1. It imposed statewide rent control on multi-unit buildings older than 15 years, capping rent increases to no more than 5% per year plus change in cost of living for different metro areas or 10% per year, whichever is lower. California’s law sunsets in 2030 unless renewed, whereas Oregon’s has no expiration date.

St. Paul, Minnesota

Voters in St. Paul passed a rent stabilization ballot initiative that went into effect in 2022, which restricts landlords from increasing rents more than 3% in a one-year period unless an exception is obtained.

New York State

New York State passed the statewide Housing Stability and Tenant Protection Act of 2019 which, besides NYC, permits other localities in the state to enact rent stabilization if a declaration of emergency regarding available apartments is made (i.e., if the vacancy rate for affordable housing is less than 5%). It only permits rent to be increased in rent stabilized apartments with written informed consent of the tenant, if the owner increases services or equipment, or if the owner makes improvements to an apartment.

End Note

The Supreme Court’s openness to a potential future case is noteworthy given the nationwide housing crisis, with state and local governments enacting legislation to try to get this situation under control. As mentioned above, affordable housing is no longer an issue limited to the New York City’s boundaries.

While housing advocates view the Supreme Court decision on rent stabilization as a victory for tenants’ rights and housing affordability, rent stabilization critics see a possibility to challenge laws where there is a taking of an owners’ property rights in a disproportionate manner. As the housing crisis and jurisdictions’ responses to same show no sign of abating soon, we will continue to monitor developments in this important area as they affect a multitude of stakeholders including:

• tenants
• owners
• lenders
• state and local housing agencies
• Federal housing entities such as:
  • HUD
  • Federal Housing Finance Agency (FHFA)
  • Fannie Mae
  • Freddie Mac

Critical Future Considerations

Important questions to consider in any efforts to adequately address affordable housing needs in this country include, but are not limited to, whether:

• A high-income person should be permitted to remain in a rent-stabilized apartment, because the rent is below the rent threshold, instead of being rented to a more deserving lower-income tenant.
• An apartment should be deregulated because rent reaches a certain threshold.
• Owners of older buildings subject to rent stabilization should be the primary private owners bearing the burden of maintaining affordable housing if they have maintained such buildings as affordable for decades.
• Owners of newer affordable housing developments should retain their property tax, and considerable federal financing benefits if they do not maintain affordability during the timeframes built-in to these tax and financing programs, meaning that the costs of these programs do not justify their benefits.
• It makes sense to limit options to improve on the maintenance of affordable housing stock to the detriment of maintaining livable conditions (see New York City Housing Authority).
• Years or even decades-long waiting lists for affordable housing means that such housing is currently being developed in the most effective manner for all concerned.

The best answers will need to consider the conflict between two schools of thought on community development – build affordable housing projects, isolated from the rest of the community so as to immediately deal with the crisis for speed and ease of execution as Robert Moses once did in New York City as the ultimate Power Broker or, instead, yearn for a longer-lasting impact, with a mix of residents to maintain a vibrant community as Jane Jacobs once advocated[4] to Moses’ chagrin, in The Death and Life of Great American Cities.

Needless to say, this battle continues into the 21st Century…

[1] It should be noted that New York City has both Rent Stabilization and Rent Control, which are separate and unique programs that regulate the rental market. Rent Control is the older of the systems of rent regulation, impacting a much smaller number of units as it only covers buildings built before 1947 which have had continuous occupancy since before 1971. Rent stabilization impacts a greater number of units, but the regulations are less strict. The amendments enacted in 2019 and subsequent challenges affect rent stabilization only, not rent control. https://hcr.ny.gov/system/files/documents/2024/01/fact-sheet-01-01-2024_0.pdf.

[2] As an example, the article highlights that institutional investors such as hedge funds own 20% of single-family rentals in Charlotte, NC.

[3] In Chastleton Corp. v. Sinclair, the Supreme Court found that a rent control law that was put into place to provide housing availability during wartimes was no longer justified because the war ended, and thus violated the Takings Clause. Chastleton Corp. v. Sinclair, 264 U.S. 543, 549, 44 S. Ct. 405, 406, 68 L. Ed. 841 (1924) However, in 1992, when California’s rent control of mobile homes was challenged, the Supreme Court found that no taking had occurred. Yee v. City of Escondido, Cal., 503 U.S. 519, 539, 112 S. Ct. 1522, 1534, 118 L. Ed. 2d 153 (1992).

[4] And generally encouraged by federal housing financing laws since the 1980s.

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