17 Million Reasons Rent Control is Efficient

Yves here. This story is a variant on the case of Stuyvesant Town, where developers bought a large New York City apartment complex at insanely high prices, based on unrealistic assumptions about their ability to get rent stabilized* tenants to give up their apartments. They then tried illegal means, like harassing tenants, to get them to leave. That proved not to work so well either, so the investors declared bankruptcy. Moreover, any developer who needs to buy a series of separate in order to launch his project should be well aware of hold-out risk; there are plenty of examples in NYC of small building owners demanding and getting top dollar when they were the last to sell to a developer assembling a parcel. Here, the consequence of failing to understand clearly-written, well established rent regulations was merely costly, as opposed to fatal.

To put the matter more simply: wealthy investors love to talk about the sanctity of contracts until little guys assert their rights. Then the idea that they might have to fork over a lot of dough to get the other side to give up its right is presented as an offense against nature.

By Rumplestatskin, a professional economist with a background in property development, environmental economics research and economic regulation. Follow him on Twitter @rumplestatskin. Cross posted from MacroBusiness

The case of Herbert Sukenik being paid $17million in 2005 to leave his rent-controlled NYC apartment has been receiving a great deal of attention online recently.

At the risk of perpetuating the brilliant viral marketing campaign for Michael Gross’ new book, which is in fact the source of the story, I want to make a brief comment about it to counter some of the bizarre, emotional, and inconsistent reactions I have seen.

A short version of the story is that billionaire developers Arthur and William Zeckendorf paid $401million for the Mayflower Hotel adjacent Central Park, planning to turn the site into 202 super-luxury apartments.

The building was occupied by many long-term tenants under New York’s rent-control laws. This meant that tenants could only be evicted upon mutual agreement, which in turn led to the new owners offering attractive lump sum payments to tenants for them to leave the building. While most tenants accepted offers ranging from $650,000 to $1million, the final tenant held out for an astonishing $17million lump sum payment, in addition to the developers offering him another apartment to live in for the rest of his life for a peppercorn rent of $1 per month.

To me the most astounding part of the story has been the reaction by the press and social media, which has been of outrage over the injustices of rent control – that for some reason poor old Sukendik didn’t deserve the money.

There have also been cries of rent-control hindering development – that somehow rent-control is ‘inefficient’.

This absolutely wrong. Wrong, wrong wrong.

First, almost everyone has ignored the key fact that a developer buying the building knowing that rent-controlled tenants are occupying it should have expected these expenses and subtracted them from the purchase price. Thus, the tenants win at the expense of the previous building owner. The developer does not lose unless some unexpected legal loophole was exploited (which doesn’t appear to be the case) – it is merely that the economic rent was shared between the previous owner and the previous tenant.

It is therefore not any less efficient than in the absence of rent control. No one sees the previous building owner holding out for $401million as inefficient, yet it is exactly the same dynamic at play.

The second point routinely ignored is that rent-control describes a general set of rules about renting. That the NY set of rules allows this to happen doesn’t mean that another set of rent-control rules could be implemented that had mechanisms for relocation and prescribed methods for calculating compensation payments to tenants. After all, in the freehold world there are generally accepted methods for compensation for land owners upon compulsory acquisition by a government authority.

Third, if Sukenik owned his apartment in freehold he would have had the same power to hold out and extract this price from the developer. This happens routinely in Australia and elsewhere when strata-titles buildings are redeveloped. The last hold out seller extracts a massive payout. Yet we see nothing at all wrong with that because they have ‘the right’ to do it. Yet under a different set of laws, tenants could also have such rights, which they did in this case.

What really surprises me is that almost everyone who has written a reaction to the incident seems to fall on the side of the developer. If the developer had kicked out the tenant for $10,000 it wouldn’t be news, but it would have been equivalent to ‘Developer screws tenant of their rightful $17 million compensation’.


*For the uninitiated, rent stabilization means rent increases are set by the Rent Guidelines Board after input via tenant and landlord groups. The increases are meant to reflect increases in landlord’s costs and so roughly track inflation. And a critical bit if is you are current on your lease payments, the landlord has to offer the tenant a lease renewal, subject to some very limited exceptions.

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  1. /L

    It’s always so unfair when poor people get a break, in just world such doesn’t happen. When the wealthy make big money without lifting a finger it’s something to admire, just think of the trickle down that maybe can happen. Of course it have to be condemned when lazy poor people make a buck without hard labour.

    “A hotel hermit living in a filthy rent-controlled room was paid $17 million to leave – the highest price ever to relocate a single tenant in the city of New York, while the son of legendary General MacArthur only got $650,000 in the same deal. Sukenik, and Arthur MacArthur were two of the four hermits who stood in the way of the Zeckendorf brothers from knocking down the Mayflower Hotel and erecting their $1 billion 15 Central Park West – now home to A-Rod, Denzel Washington and Sting.

    When Grabow first met Sukenik, he was struck by the mess of his tiny room, which had a kitchenette, a bathroom and views of Central Park and the East and Hudson Rivers – but the windows were so filthy they could not be seen.”

    Does such a person even deserve to live?

  2. allcoppedout

    You have to love lotteries. We seem to forget these payouts are part of an economic rent of the rest of us. Soon we might think of constructing social housing with the costs discounted against a redevelopment sale price in 50 years time. The units will house real people in this temporary period but designed for eventual reconstruction as empty looting and tax shelters. Instead of mortgage purchase, tenants would receive a wage based on the final conversion price. This new property would be built by labour on kafala contracts paying very substantially less than the wage for the sitting tenants. A private finance initiative would ensure all this was kept off the government balance sheet. You have to love the efficient allocation of resources under private sector discipline.

  3. J Sterling

    “Property right” is almost redundant: a property is a right (the legal right to say what happens to the property) and a right, unless inalienable, is a property (you can alienate it, for a price).

    As the article says, no one thinks the property owner is wrong for giving up his property in return for $401 million, but there’s supposedly something wrong with a right owner giving up his right in return for $17 million.

  4. Juneau

    I read this and think about several families I know, some with children, who claimed they were railroaded by developers to leave their rent stabilized apartments or low cost subsidized coops. 1 or 2 got forced out of their homes. A few are people who have less than 20k a year income. Perhaps they were made to look like a fraud and accused of keeping a second residence for having a second mailing address. They all claimed they were harrassed by board members, landlords, or some other representative of their buildings. Some would cry at the prospect of becoming homeless. So, I am sorry to say, some developers’ efforts to get people out are quite effective. Ugly.

  5. j gibbs

    Is this guy Sukenik perhaps named Harold; is he now about 71 yrs old? If so, he is a lawyer, which explains how this happened. Harold was nobody to monkey with when I knew him forty odd yrs ago. He sat sleeping in his office recliner all day long with a law book folded open over his face. I wish I could say I liked him, but he was royal pain in the a&s.

  6. diptherio

    The guy gets $17 mill and a $1/month apartment from some uber-wealthy developers and everybody sides with the developer??? What has happened to this country? Are those poor developers gonna be out in the street? Are they gonna have to sell their yachts and private jets to pay-off this feisty hermit? Not on your life.

    Finally, we actually see some real “trickle down” and everyone complains? Let’s be honest, the real problem is no one likes seeing somebody else get something for nothing, unless of course that somebody is wearing a $5,000 suit. But the thought of someone who probably doesn’t even own a sport jacket walking away with that kind of windfall is just sickening…

    All the hand-waving and sour grapes are the result of people seeing someone rocket from far beneath them in financial status to far above them. Being hung up on financial status as they are, people just can’t bear such a thing…it makes them feel inferior. But, but…I used to look down on this guy and now he’s got ten times the money I do…that’s not fair!

  7. Charles 2

    I think that was is perceived as unfair is not that a holdout receives a compensation, but that he receive 20 times more than the others. Singapore has a good mechanism for that, similar to what happens in IPO : the developer makes a request for the whole building, and if 90% of owners accept, the holdouts are required to sell. The 90% hurdle ensure that the compensation is fat for the existing owners, but buildings can still be redeveloped. Actually it even happens that it is the owners association that goes and try to find a developer to purchase the condo !

    1. Ditto

      Its not an investment
      Nor is there a fairness issue when one is protected evenly under the law here in a way that keeps economic cost down

      These stories are actually typical of landlords attacking rent control and stabilzed housing

  8. Lord Koos

    “while the son of legendary General MacArthur only got $650,000 in the same deal”

    Because being the son of a famous person means you deserve more? WTF…

  9. MikeNY

    IMO, the story is just another symptom of the obscene disparity of wealth in this country. Sukenik held out for a particularly tasty morsel from the billionaires’ table, and it fell to him. Well, bully for him. But there shouldn’t be so much caviar and Cristal up there to begin with, while millions of others must eat baloney and cheese sandwiches.

    If we had a just distribution of wealth, rent control wouldn’t be so necessary — or so valuable.

    1. bmeisen

      I don’t think so – the wealth distribution analysis is off-target here. Maybe you want to argue that rent control wouldn’t be necessary because with equally distributed wealth everybody could own their own home. If so then you’re buying in to the notion that a somewhat free-market society can function with home ownership rates moving toward 100%. Under more equitably wealth distribution you might think that the middle class would have enough to buy, the less than middle class would too, and the poor would own their own home too and rent control would be something that only the truly destitute needed. Most of us would be happy and there would be no need to coddle renters, or pay them millions to move.
      The ownership society is a delusion, a fairy tale concocted by the Clinton/Bush housing policy schysters. Even with just wealth distribution, in a somewhat free-market society there is a ceiling to home ownership rates. It’s currently at 60+% for the US, probably tending downwards over the last 6 years. It isn’t just that space is not unlimited. Location location location drives prices in the real estate market. Add the potential for restrictions on personal mobility associated with energy issues and it is not unreasonable to ask if housing policy should target an ownership rate that is substantially lower than 60%.
      Once the society acknowledges that home rental is a necessity, and not just for the under-financed, but also for the middle class in tight real estate markets, then it acknowledges that long-term protection for renters benefits the economy by stabilizing communities and … distributing wealth more equitably.

      1. MikeNY

        I didn’t say there would be no rent control, nor no need for it. I did say that nobody would be paying one dude $17 million to move out unless there was enormous concentration of wealth at the top. I stick by my thesis that a bigger wealth disparity makes rent control more necessary in markets with a limited housing stock, and more valuable.

  10. down2long

    I’m going to climb into the hornets nest here. Agreed that the developer knew what he was getting into.

    Here in L.A. we have draconian rent control laws that change drastically every year. When I bought my first building, in 1998, you could pay a tenant $2,300.00 up to $6,500 for a ‘qualifying’ tenant, i.e., $6,500.00 for people 62 years old or with a family. You had to spend $10,000 to upgrade the unit with permits. Obviously, to avoid the headaches of going through the city, I paid tenants double on a five unit building, with the offer that i would help any tenant who wanted it to qualify to purchase a house. Only one family took me up on the offer – an $8.00 an hour baker, with a wife who was a housecleaner and three teenage kids.
    Geranimo bought a three bedroom two bath house. He was glad to get away from that neighborhood because he was afraid his son would be kllled because he refused to join a gang. i wrote letters regarding Geronimo, I made the desposit directly into escrow, I did not collect rent for month because I wanted everyone who left that building to be better off than they were in building, I lobbied my (then) councilman Eric Garcetti (now mayor) to set up a program like this city wide using the $800 million the city has squirreled away in it’s “Housing Agency” which is supposed to help poor people find homes, but which instead goes into politically connected developers’ pockets to build subsidized “low income” housing, i.e., condos selling at $600K, with two or two three apartments set aside for low income people. Or, in the case of another building which cost over $40 million for 35 one and two bedroom apartments on Bonnie Brae St., which was constructed by a blacklisted HUD contractor who was convicted of fraud, but in the meantime doled out $40K each to several Hispanc councilmen. (Sliced an diced to meet our “strict” donation amounts.) Never mind big developer Rick Caruso who doled out $100K to his staff to “donate” to our local politicians, got caught, paid the fine, then ran for mayor.
    I digress. Four years after I bought my first building, just after closing on another rent controlled building, city council changed the law: no more payouts to renovate buildings. Payouts up to $18K to go condo. You could pay as the owner to move into one of your units, up to $18K.
    Now, no more moveouts if the tenants have been there more than ten years for owner occupancy. I have a tenant using an apartment for storage. When it looked like I would lose all my other property to foreclosure I asked, can I pay that tenant $18K to live there since he is not living there. No dice. Lifetime tenancy since he has been a tenant more than 10 years, and is over 62 years of age. During this time, he inherited a two bedroom house by the beach. i was in bankruptcy, near homeless, this guy has a new car, a new house, two of my apartments, and is paying 1/3 market rent, and I am stuck.
    And, although I am an old liberal, I think back to when I offered he and his wife $20K to buy, (she’s a teacher so qualifies for 1 % financing, low down.) I think, “I should’ve moved in there when the law allowed.”
    Now in L.A. to rehab a place you have to put a tenant in a hotel for the duration, pay their tab, and pay for their food. Then you must move the tenant back into the unit and can raise rent only 10% more than their base rent before, and only for ten years. I have three rent control tenants (out of 11.) They all pay $550 a month. That would be at most a raise of $55.00 a month per year for 5 years – a little more than $3300 for the five years.
    NC has an intelligent crowd – $3K doesn’t do much.
    The rent control tenant buildings were all bought under the old laws – and now I am stuck. The city will not spend – or will not spend efficiently – any of its more than $1 B purse to build realistic housing for poor people.
    Come on $600K for a one or two bedroom apartment. I did go to COuncil at the bottom of the crisis when a 2 BD house could be bought at foreclosure for less than $300K and encourage the city to buy these things and get people into homes, but that went nowhere.
    The bottom line, of course, is that as long as politicians can keep tenants thinking they are on their side, the tenants will vote for the them. And obviously, there are vastly more tenants than owners.
    The sad truth, as I have told many a poor person, at many a public meeting, is that the politicians could care less about providing actual housing. In the meantime, it;s people like me, (and many others I know) who are actually providing the housing, and doing the subsidizing in the constantly shifting laws of the political minfield of Los Angeles. And yes, just for clarity – my rent raises are limited to 3% a year on rent controlled apartment. (Thankfully, if an apartment does become vacant, it can go to market.)
    It looks to me as though NY rent laws has been pretty stable.
    Two things I should add – any new construction since 1979 is not subject to rent control, so all the big developers can give freely to the politicians, get free city land (a common occurance – such as for the recent “W” hotel (yeah, lot of low income housing there!!!) and get city subsidies. A lot of them uncle Gov. Brown mercifully shut dowm the Community Redevelopment Administration, aka the Public Funded Slushfund to reward your developer buddies, or a payroll for a lot of people not even to build anything at all but to do lots of studies!!
    Of course, the downside of these restrictions is an upsurge in total tear downs ($18K, here’s your money, this place is dust. Soon to rise again as a condo, or whatever, out of rent control. This is of course, once again, only for the deep pocketed and well connected.)
    There have also been an observable increase in fires.

  11. down2long

    My connection is so unreliable I posted before complete proof read. I misquote the “capital improvement” law.
    Once you have renovated the unit, after you moved your tenant to a hotel and paid for their food, you move the tenant back and you can only raise the rent a max 10% a month for FIVE years, NOT ten. So you see the numbers do not really add up.
    We’ve been waiting an interminable amount of time for another city-funder “study” on how well this “plan” is working out, but I venture to bet, no one is using it. You’d go broke.

  12. OMF

    Rent control is absolutely essential.

    Landlords ultimately add no value to their lands or buildings. Yet, those who do add value, producers and workers, upon reaping the rewards of the labor, are more often than not forced to hand an increasing share of that over to someone who added nothing. Who is only raising rates to to take advantage of changing circumstance, and who is siphoning off wealth solely as a result of a) their ownership of land and more critically b) their ability to shape the laws under which that land may be rented. This is to say nothing of the wealth transferred to landlords when local government adds value to roads, amenities, etc.

    But worst of all, most landlords achieve their positions, not through investment or labour or value adding, but by borrowing themselves into property. Property indeed has no vale, it rises and falls on waves of speculation, specualtion fueled in no small part by unreasonable rents. As workers labour, the value they add generates wealth in society; yet this same wealth, via the banks, is given on credit to landlords who outbid workers for property and raise their rents in response. So a large part of the workers labour works against him.

    Rent and landlords must be regulated and controlled strictly, harshly, and to the end goal of making rent as cheap as possible. Rent is a product of two things: ownership of land and the laws governing how land may be rented. The law should be structured around rewarding value adders over rentier at all times.

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