Wednesday, June 18, 2008

Cost Of NYC Rent Regulations

I have never seen an analysis as to the annual cost of the current rent regulation system in New York City, but by my own estimation the city is losing at least $1 billion a year in lost real estate tax revenues due to apartment rents being kept at a below market level. This $1 billion shortfall would be sufficient to fund the construction of 20,000 units of affordable housing every year.

This estimation is based upon the existence of 1.1 million rent regulated apartment in New York City and the assumptions that each rent regulated unit rents at an average monthly rent of $400 below market (this seems reasonable, but needs to be verified), and that real estate taxes generally are 20% of the gross rents of a building. Based on these figures, the city is foregoing the receipt of $1 billion per year in real estate taxes because of the existence of rent regulations. In essence, the city is spending $1 billion a year to provide rent subsidies to individuals regardless of their need.

The most public example of the ludicrousness of this system is the rent subsidy our current governor is receiving. It has been reported that Governor Patterson lives in a $1200 per month apartment that has a market rent of $2600. Because of the existence of rent regulations, the governor is receiving what in essence amounts to a rent subsidy that costs $3360 per year in lost tax revenues. Do we really believe that our governor needs a rent subsidy that costs taxpayers $3360 per year?

This $1 billion in lost tax revenues represents about 2% of the current annual city budget of $59 billion. In addition, assuming it costs approximately $250,000 to build one unit of affordable housing, $1 billion a year could be used to finance the construction of 20,000 units of affordable housing every year (assuming 80% financing).

This analysis does not even include the cost of operating and implementing the system of rent regulations nor the lost income and capital gains taxes to the City, State, and Federal governments due to the fact that the annual net operating incomes of rent regulated buildings are also artificially depressed due to the existence of rent regulations. If these costs were included, the numbers would be even more compelling.

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