Why 60,000 New York Apartments Sit Empty in a Housing Crisis, with Kenny Burgos

22:30Kenny Burgos:So if you were to means test it and maybe give it to someone who we can deem that is more eligible or deserves this low rate apartment, it doesn't fix the finances, right? I tell people you can put Mickey Mouse in these apartments, but if they're still paying$700 for the apartment and it's not paying for its operating or its expenses, then the building is still failing. We're still missing the underlying problem here that the government is squeezing the operations of these buildings, so much so that it's in beyond deteriorating conditions. And this is just to give a little bit of color for your listeners.

23:03Kenny Burgos:Rent stabilization has existed for a long time, but it's only been the past seven years where there's been this perfect storm that has really set it on a path of destruction. And I don't see that lightly. So people will hear these larger news stories about Mayor Mamdani and his goal of a rent freeze and bankrupting property owners. And that's all true. but what I also tell folks, it's not as if Mayor Momdani came in and he is the reason this housing stock is on the path to destruction. This was already happening for him. There was a law in 2019 that fundamentally changed the economics of these buildings so much so that you can buy a rent-stabilized building today for a price per apartment of about$50 ,000 in many parts of the city.

23:45Kenny Burgos:I've seen some as low as$10 ,000 per apartment and that's not an advertisement. That's a warning. The values have dropped so much because there's no path to cover your costs. Then you layer in COVID and no one saw coming. Super inflationary environment, spike in operating costs. Then you now layer in the mayor's two-year rent freeze. These buildings have just seen skyrocketing costs with basically flat revenue and more projected flat revenue going to the future. Anyone who's operated a lemonade stand can tell you that it's not sustainable. Right. So let's talk about that. The Price Index of Operating Costs, which is what the Rent Guidelines Board uses, theoretically uses, in order to set the rent increases.

24:25Can you tell us about what was in the, first of all, how was the Price Index of Operating Costs put together? Sure. And second, what was in the most recent report?

24:34Kenny Burgos:Yeah. So the Price Index of Operating Costs, or PIOC for short, is a report that the Rent Guidelines Board produces every single year. And what they do is they take what they estimate to be the cost increase to operate this housing. Now, I'll say just as a start, they ignore a ton of costs. There's tons of regulatory costs that come from the city of New York that are not even computed into this Price Index of Operating Costs. There's also no calculation for debt service. There's also no calculation for future CapEx, right? So it's not the entire picture, but they do a baseline of all the expenses I mentioned before, property taxes, insurance, water, all that.

25:12Kenny Burgos:What I often joke is that the Rent Guidelines Board basically does the math and then just ignores the math. So like this year, the PIOC produces every year what's called a commensurate adjustment, which is a simple calculation based on cost increases, what the rent adjustment would have to be for buildings just to stay steady, not to increase owner profit, but just to account for the increase of cost and keep the buildings financially healthy. This year was about four and a half percent. Mm-hmm. They then chose to somehow arrive at 0 % for two years, not quite sure how they're justifying that.

25:47Kenny Burgos:It's also important for people to know there are a lot of flaws with the way the rent guidelines board collects their data. I would say one of the most glaring ones is the inclusion of market rate rentals, right? If you go to Manhattan and you have a building that has but one rent-stabilized unit, and there are many cases of this, and I'll explain after why, You can have a building that is 40 apartments, two are rent-stabilized, one is rent-controlled, and 37 of them are free market renting at$8 ,000 a unit. That building, because it has a rent-stabilized apartment, they would pull what's called their RPIE, which is all their financial health, and bundle that with a 100 % rent-stabilized building in the Bronx that has an average rent of maybe$1 ,100.

26:31Kenny Burgos:That then becomes the aggregate data for which the Rent Guidelines Board makes a determination. So even that commensurate adjustment really masks some really high cost increases that other parts of the city may have seen or specific kinds of buildings have seen. And then they'll produce what's called the NOI number in that operating income. And they'll say landlords of rent stabilized buildings saw an increase of 6 % NOI last year, which then politicians will say landlords saw an increase of 6 % profit. Anyone that's for housing knows NOI is not profit. Right. Using that number as a metric is basically like saying, let's put Bill Gates in a room with nine other salaried workers in New York City and say, well, the average salary is a little over$40 million.

27:15Kenny Burgos:You just know that's not accurate, right? But you have these super expensive midtown Manhattan buildings that just skew the numbers way high and mask all the pain that's happening in the outer boroughs and the highly reinstabilized buildings. I may have gone off on a tangent from your original question. No, but that is really fascinating. So we'll come back to the original question in a moment, but to unpack that a little bit, because I want to emphasize that just for the listeners, because what you've just said is when we take that aggregate data, we are including these buildings that have market rate rents, new construction luxury buildings with market rate rents that may have a few rent stabilized units in them.

27:56We are including those very, very healthy buildings with all of our pre-1974 stock, throwing them all together into the same bucket and letting the super healthy market rate buildings skew the average.

28:11Kenny Burgos:Correct. Can I confuse your viewers even more? Yeah. There's a million units of rent-stableized apartments. Of that grouping, roughly 80%, a little more than that, are what we call pre-1974 rent-stableized units. So these are the legacy ones. These are permanently rent stabilized. There's no path to exiting the regulation. There's no government subsidy. And they have typically the lowest rents in the entire city. There is a small subset, the roughly 200 ,000 units that are also rent stabilized. These are temporarily rent stabilized. They're voluntarily entered in the system for new development because the city needs new development.

28:49Kenny Burgos:So they produce a tax credit previously known as 421A, today known as 45X. Don't worry about the alphabet soup. All it simply means is the city says, please build housing, but we need affordable housing. So put a set aside of like 20 % of the apartments at these AMI levels and the other 80 % you can charge market rent to help make the numbers work. In exchange, we'll give you a 30-year property tax abatement. So in the subset of rent-stabilized data is also a voluntary housing stock that actually receives a property tax abatement, one of the largest costs to operating multifamily housing in this city, and also has huge market rents and even rent-stabilized rents that are typically double of what pre-74 is.

29:32Kenny Burgos:So you can see how pre-1974 housing is just completely hidden in all this aggregate data. Right. And you're able to just point to the numbers and say, well, you know, property owners are doing fine. Right, right. That is actually one of the reasons why there is a broad misconception that rent-stabilized properties get a tax abatement because people are looking at the 20 % of units that voluntarily entered the program of new construction units. They're looking at that. They see that those get a tax abatement. And so they extrapolate that to the entire program, ignoring the 80 % of units that don't.

30:11Kenny Burgos:Correct. And then when you really want to put your tinfoil hat on, if you look at historically new development in this city that's utilized at tax credit, those numbers can only work in certain parts of the city, right? You can't go to the Bronx and take a property tax abatement and have market rate rents that are sufficient enough to pencil out a development. So what happened over the past two years is the utilization of that program to build new housing has really happened in concentrated neighborhoods. Those neighborhoods are some of the most progressive in our city. So if you look at Astoria, Bushwick, Brooklyn, Crown Heights, parts of Manhattan.

30:49So it's

30:50Kenny Burgos:interesting if you overlay what the new development has been in pockets of the city with how the electorate votes. There is a correlation there. And it's not shocking, right? If you are someone who lives in these parts of the city, I always say New York City is a big city, but depending where you live, you have an entirely different experience. So if you're someone who lives in Bushwick, Brooklyn, your perception of rent stabilization are these new developments. Your perception of the rental market in New York City are rents that only begin with a three and And only go up from there. Right. Right.

31:19Kenny Burgos:Your perception is these property owners are receiving a property tax abatement for what is probably subpar housing in some cases. And it's just extremely competitive. Not the same experience for a rent-stabilized tenant in the Bronx who lived in their apartment for 40 years and pays$1 ,000. Right. And their owner gets no property tax abatement. Right. That does translate to the electorate and the politics. Right. Right. One of the other reasons there's that broad misconception about the tax abatement are these two programs, DRIE and SCRE, D-R-I-E and S-E-R-I-E. Can you orient the listeners as to what those are?

31:50Kenny Burgos:DRIE and SCRE are actually programs that have been around for a number of years in New York City. We fully endorse them because these are rent freeze programs that have existed through the city that actually account for cost. It doesn't tell the property, hey, just freeze the rent and that's all we need from you. So DRIE is for disabled New Yorkers. And SCRE is for senior citizens. Most recently, the legislature has actually increased the income qualifications for both these programs and moved up to$75 ,000. A very good move. The problem is when it was previously at$50 ,000, it was still one of the most underutilized programs in the city.

32:25Kenny Burgos:The city knows every single individual who qualifies with this apartment. And yet they make it difficult to apply and certify and recertify. And what the program does is if I'm a senior citizen and I make less than$50 ,000 a year, today$75 ,000, I apply for this scree exemption and the city of New York says, okay, the property owner will freeze your rent at the level it is today for the foreseeable future. But every time the rent should have gone up, the city of New York will credit that property owner in his or her property taxes, a fair tradeoff. Right. Yeah. You give a senior or disabled person with a relatively low income a stable home.

33:01Kenny Burgos:Yeah. And you don't defund the building that they live in. Right. So we've been messaging and saying, why don't we try and get this to a 100 % utilization rate? This is a targeted program that is means tested, that accounts for costs, and actually helps people in need who are struggling with the affordability of New York City. Right. There's still a less than 50 % uptake on that program. Wow. And that's incredible. To your point, the two great things about that program, number one, it's means tested. which means it goes to the people who need it. And number two, it... Accounts for costs? Yeah, it accounts for costs.

33:34It compensates the owners for the actual costs, which is, from the city, a tacit acknowledgement that there are costs associated with this rent freeze.

33:45Kenny Burgos:Oh, there are many examples of that if you want to hear. Yes, tell me more. What are other tacit acknowledgements from the city? Oh, well, most recently, the whole city has seen, again, this increase in operating housing costs. So nonprofit providers are experiencing it, for-profit providers, rent-stabilized owners, and even something called Mitchell Lamas. So this is a unique program in New York City, started again some decades ago as an affordable housing program by the state, but has private management. But since the city manages the loans in many cases here, they have a fiduciary responsibility to make sure the building's finances are in good order.

34:21Kenny Burgos:Meaning the city can't just say, well, let's just freeze the rent on those buildings to provide affordability. So there's a famous example most recently of a development known as Tracy Towers up in the Bronx, a couple hundred apartments, many tenants who have lived there for 30 years plus, they are going to experience a 31 % rent increase over the next 40 years, sanctioned by the mayor's housing and preservation development agency because that agency has to do the math. They're responsible for the mortgage payments, for the capital expenditures, and that is only paid for by rent. And so those tenants are understandably frustrated because on one end, the mayor has run on this campaign to freeze the rent affordability and has famously frozen the rents, rent stabilized tenants who are not means tested, but then at the same time is raising the rent and an astronomical number for many of these residents who typically live on social security or fixed incomes to pay 31 % rent increases.

35:20Kenny Burgos:But this is an acknowledgement of the cost because the city can't ignore it in this case. Wow.

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38:03One point that I want to, again, emphasize for the people who are listening, when there is a rent freeze, when the costs cannot rise enough to cover operating expenses, those costs don't just disappear. They get pushed onto someone and there's in mixed use buildings. So in buildings that have a combination of market rate. Yeah. Yeah. Those costs often get pushed onto the market rate tenants.

38:29Kenny Burgos:There's no doubt that in a mixed regulated building, that cost being pushed onto the only apartments that can legally absorb that cost, which is a free market tenant. The cost has to go somewhere. Now, the, again, unfortunate part and the unfortunate reality for a rent freeze that's blanketed throughout the city that doesn't account for costs is that that will undoubtedly lead to increased rent for free market renters in New York City. You can come back to this a year from now and I guarantee you'll see an increase in market rent. But on top of that, if you have a tenant who lives in, again, one of these 90 % or 100 % rent stabilized buildings and the owner sees these costs increases and for the next two years has no ability to absorb these costs anywhere through the rental rolls, the only lever property owners have today is deferred maintenance.

39:15Kenny Burgos:So what would normally be a full-scale replacement is maybe a repair or just an outright deferral of something that's happening with the building, the elevators, the boilers, the roofs. And you get to a point, like I said, this has been the path of rent stabilization for a while now. You do get to a point where it becomes more expensive to repair these buildings and these units than just almost building a brand new unit of housing. So the question I always have is, who is going to take over these buildings if the mayor is successful in bankrupting these rent stabilized properties? and what happens to the tenants who have lived there for their entire lives, right?

39:55Kenny Burgos:We're using them as political pawns here because yeah, they may get a rent freeze for two years, but at what trade-off? At a deteriorating building, at a lower quality living experience and eventually the collapse of the housing they live in where no private property owner would be willing or crazy enough to buy this property, invest in it, guaranteed to lose money. The city is absolutely incapable of managing this level of housing. Right now, the city manages NYCHA, public housing, 177 ,000 units of housing in the city of New York and very famously, poorly run. I mean, absolutely horrid conditions.

40:30Kenny Burgos:When I was a state assemblyman, I represented well over a dozen NYCHAs and the conditions that I saw were deplorable. If families living in black mold, they'll do legitimate just waterfalls in their bedrooms. And the city is unable to manage the finances of those buildings. Rent stabilization is five times the size of NYCHA. Wow. So what is the plan for this housing if we are setting it on a path of bankruptcy? And NYCHA is New York City Housing Association? Correct. How many units do they have? 177 ,000. And that is a city run? City managed. City managed. Federally funded, city managed. So I'm not going to put entire blame on the city.

41:08Kenny Burgos:There's been a history of federal government certainly not funding it to the levels that it should be. but there's been a very, very checkered history for NYCHA's management overall. And just some of the conditions today are just not, they're just not excusable. So much so that, again, when I was a state of some member, the state had to step in and for the first time actually invest in NYCHA because how could I as elected official go back to my constituents and say, well, I can't help you because your housing is actually federally funded and city managed. The state technically has no responsibility to this housing, but it's becoming so dire that all three levels of government are just funneling in money into this housing stock and not seeing proper conditions repaired for the tenants here.

41:49Kenny Burgos:And there's a parallel track happening in rent stabilization where private property owners are exiting the system if they're able to sell their property, if they're not completely underwater on their mortgage because valuations have collapsed. And the city is already famously trying to intervene in some of these sales. Mayor Mondani's literal first day in office was spent in a rent-stabilized property run by the Pinnacle portfolio and where he highlighted the conditions of the apartment and was trying to block the sale because Pinnacle couldn't sustain the operations of their portfolio and they wanted to divert who buys this building.

42:25Kenny Burgos:But what I keep telling people and I've told the mayor this and others is it doesn't really matter who runs the building. If the underlying financials don't work, they don't work. You know, there's a growing push right now to allow tenants have the ability to buy their buildings. We say, go ahead. Nothing stops a tenant today. As I said earlier, there are buildings for sale at prices that make people's jaw drop. I mean, I can show you a building that has 24 apartments that's selling for$1.3 million. That is the price of a condo in the Upper East Side. Right. Those tenants could theoretically buy that building and pay it off in three years if they're paying about$1 ,600 a month toward the mortgage.

43:02Kenny Burgos:So why don't they do it? Because every tenant would actually find themselves increasing the rent on themselves if they purchased these buildings. on top of the ongoing responsibility of capital expenditures, replacement of boilers and roofs, regulatory overlay that these buildings have to face, like Local Law 11, which anyone who's traveled to New York City, you'll see the unique beauty of New York, which has hundreds of miles of covered scaffolding. And no other city has. That is regulation by the city that the city does not fund or give any subsidy to. And listen, safety is important, but New York City, I don't think, has somehow less safe buildings than Chicago or Los Angeles or Houston or any other metropolitan city that has skyscrapers.

43:42Kenny Burgos:And somehow we have to cover all of ours with scaffolding. And so then going to the, let's say you got a group of tenants together to buy a 24-unit building for$1.3 million, which so the cost per unit, I can't do that math in my head, right? I did it before. I think if I didn't mess the numbers up, it should be about$50 ,000 per apartment. Yeah, so$50 ,000. I mean, imagine buying an apartment in New York for$50 ,000, right? Oh, Oregon. Lots of the car. Right? Yeah, exactly. Exactly. On the surface, that sounds amazing. But there are bylaw regulations around the improvement that it must have before it can be occupied by somebody.

44:21Correct. And that is where the 2019 HSTPA comes in, which we have not discussed yet. Yes. But that is the big wrench that got thrown in that kind of took this entire situation and made it a thousand times worse. Right. So tell us about what happened in 2019 with the passage of the HSTPA.

44:40Kenny Burgos:2019 was an absolutely transformative year in New York. Just a little political history, folks. The Democrats gained control of the New York State Senate in 2018 after decades of Republican control. So basically the year before was when Democrats began to control all three branches of state government. And so because of that, there was a backlog in the hopper of so much legislation that never was passed because it was always killed in the Senate. One of these was HSTPA, Order 2019 Rent Laws. The architect of this law is actually Sia Weaver, who is famously today Mayor Mom Donnie's head of tenant protections in the mayor's office.

45:20Oh, and we should define HSTPA. So it's housing.

45:22Kenny Burgos:Housing Stability and Tenant Protection Act. Okay. So the name promoted as one of the most sweeping tenant legislations ever passed in New York. When you read the bill language, it really only focuses on the economics and operation of these buildings from a financing standpoint. So one of the biggest pieces that broke the housing, the HSTPA implemented, was something known as vacancy control. So every other rent control system in the country, and I've traveled to LA to examine theirs. I've even traveled to Vienna outside the country to examine a socialist haven of Vienna, which is their model.

45:56Even there, they account for cost.

46:00Kenny Burgos:So what does rent control system in US do? They allow for a reset after turnover. What does that mean? You live in a rent stabilized or rent controlled apartment for 10 years, very normal. After you leave, a property owner is able to invest in that apartment. Give it all the necessary upgrades. You've lived in there for a decade. The next tenant may be there for a while as well. The next tenant and that property owner set a first rent. Then the rent stabilization kicks in and protects the tenancy, again, from a price gouging, from price increase during tenancy. What the law basically tried to do was say, well, Paula's rent is$1 ,000 because she got the apartment in 1980.

46:37Kenny Burgos:The next tenant, their rent should be$1 ,000 as well. but also Mr. Property Owner, keep it at$1 ,000, but you can't rent that apartment until it's up to 2026 building and housing code because your grandfather, while Paulo, was a tenant. So today you're going to have to spend at least$25 ,000 because the lead laws were upgraded during your tenancy. You're going to have to break down sheetrock, go down to the studs. You have to upgrade your electrical, upgrade all your wiring. Flooring probably has to be leveled. Very easily can spend six figures in a renovation. This is in New York City, by the way.

47:09Yeah.

47:10Kenny Burgos:You will see no recoupment on that money. And then on top of that, this tenant is likely to live there for another 10 or 20 years. The rent growth will be so slow, it'll never pay for its own operating costs. So property owners are virtually guaranteed to lose money on the investment and then lose money in perpetuity. So the policy is so poorly written, in the midst of a housing crisis where everyone's looking for an apartment, New York City has at a minimum 60 ,000 apartments that are rent stabilized sitting empty. I go to these apartments on a weekly basis. I have never seen such a glaring failure of policy and law where New Yorkers are desperately looking for housing, where tens of thousands of families languish in shelter every night, where thousands of families have shopping letters for voucher payments that will pay for housing.

47:59Kenny Burgos:But the law is so stringent and poorly crafted that property owners find it a wiser financial move to keep the apartments offline. That to me is the most glaring illustration of how bad HSTPA has been on the housing stock. But that's a symptom, right? Those 60 ,000 plus are a symptom to a larger problem, which is, again, the economics of the building. So you now have empty apartments operating in your building. The values have fallen because you can project what the revenue will be and the cost you can cover. Now you can't borrow from a bank. What bank is going to loan a property owner money knowing that you literally cannot pay me back and you already have maybe a mortgage that is double what the value of your property is?

48:50Kenny Burgos:So I have gone as far as saying HSTPA is almost a state-sponsored redlining because now you have these communities in the outer boroughs who, again, are subjected to a bankrupted building where banks are unwilling to loan and property owners are unable or unwilling to invest for either lack of capital or just knowledge that their capital will just go into oblivion. Right. It's really scary stuff because we're not talking about 20 ,000 apartments here. We're talking about 40 % of New York City's housing stock. There is a domino effect here. With regard to the HSTPA, a couple of things come to mind.

49:28Number one, as you mentioned, no one would be eligible for a renovation loan from a bank. I mean, you wouldn't be able to show that you could pay that loan back.

49:36Kenny Burgos:Nope. There are already reports. Bloomberg did a story recently of a CMBS loan that is struggling right now due to the rent freeze and the 2019 rent laws. There have been a handful of banks who have actually merged recently, and the first thing they do is all flow their rent-stabilized loans. Many banks will not speak publicly about this. They're doing what we call extend and pretend. Obviously, banks are highly regulated at the federal level. Don't want to scare off investors. Don't want to scare off the SEC. But when given the opportunity, they will remove themselves of these loans. They will offload them.

50:07Kenny Burgos:They will extend people's loans if there is a path to do so. But they are not putting capital back into this housing stock. Right. I don't know if Dodd-Frank would apply in cases like this. or if that's more on the residential side. But I mean, with the passage of the Dodd-Frank Act, banks are required to make sure that the people who borrow money for housing purposes can pay it back. Yeah. It's a great question. I haven't explored that, but I'm sure there's some interplay there. But again, the reality is I don't think people are recognized. This is happening for the past seven years, and I think we're only beginning to see the true impact.

50:43Kenny Burgos:What we're seeing right now is a real spike in violation counts in rent-stabilized properties. And I know correlation isn't causation, right? But I mean, you have to really question if these properties that are under these stringent regulations and requirements are seeing explosion of violations, that is indicative of a housing or building that is going down in quality, that is unable to sustain itself. Going back to the Rent Guidelines Board data, you know, they do aggregate a lot of this data, but you're able to parse out some of the information. And there was negative NOI growth in parts of the city.

51:15Kenny Burgos:Again, parts of the Bronx, Inwood, Upper Manhattan. In fact, the Rent Guidelines Board, by their own numbers, which I told you omits some important ones and masks others. But even in that, they're unable to hide the fact that what they say is about 100 ,000 apartments are functionally bankrupt already in rent stabilization. And their definition of functionally bankrupt is very simply the income does not cover the expenses. Now, many profit owners tell you you're probably headed for bankruptcy well before you get there. But you already have 100 ,000 that just cannot cover their own costs. How many more are headed that direction given our rent freeze, given increased costs, given the high interest rate environment?

51:54Kenny Burgos:Or how many are already there and not being reflected in the data accurately? Right.

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54:35I was taking a look at a chart of vacancies in New York City, rent-stabilized vacancies. And what we've seen, well, obviously, COVID, there was a huge spike, and then it came down. But then the trend line, I believe starting in 2022 through today, is just an increasing trend line. When that vacancy count is taken, because it is a point in time analysis as of April 1st, I have heard people argue, well, we don't actually know how many of these are permanently offline because there might be normal tenant turnover. There also might be new developments that have opted, voluntarily opted for rent stabilization under 421A.

55:18They just haven't leased up yet. Yeah, exactly. What would you say to that?

55:22Kenny Burgos:I would say the trend line is a story, right? Like you mentioned, this trend line has only been increasing ever so more. So even if any of that were true, how do you then explain away this trend of 10 ,000 increase year over year? How does it overlap with new developments, new voluntarily rent-stabilized developments? So like you said, that data point is a static data point captured in time. Per the law, rent-stabilized apartments have to register with a state agency. And by April 1st, that is sort of the moment in time which they capture this data. So you can have, again, units that are empty just happen to be on April 1st.

56:00Kenny Burgos:But I often tell people that number is probably a baseline. There's a reason why I say at a minimum 60 ,000 are vacant because there are many property owners who would tell you the way you register units can vary, right? If I'm a property owner, I can register a vacant unit as owner occupied, right? Meaning that I'm occupying it. I may not actually be living there, but I'm entitled as a property owner to occupy one unit within my building. It can be a storage unit, right? It may be so. The apartment is such a low rent, so financially inviolable that I said, I'll use that for my super to store his supplies or construction sort of landing base.

56:37Kenny Burgos:That's not the right term. I'm forgetting what it is. You can be temporarily exempt or you can register as vacant. So there are other categories that are capturing the vacancies beyond just vacant units. But just in the vacant unit category, you're seeing about 60 ,000 and a trend line that is only increasing. And so as I keep saying, like, we're on this path. There's no arguing we are not on this path. And we haven't seen enough new development that would explain away this increase of vacant units. So the haven't seen enough new development, that was kind of what I was going for with the question is, because as I've thought about the rebuttal of, well, it's a point in time analysis and it includes normal tenant turnover.

57:20Sure. Sure. Normal tenant turnover would be relatively consistent year to year, especially because there's no seasonal variation. So the only other mitigating factor would be if a huge number of new developments suddenly voluntarily decided to get into the rent stabilization program prior to when they could get leased up. Is that a contributing factor?

57:43Kenny Burgos:No, because we only recently, like I said, City of Yes was just passed a year or two ago. I told you many of these developments can still take 10 years to see a true lease up territory. So we haven't even actually seen the acceleration of development yet in New York City. There are lots of policies and plans in place. Again, City of Yes, there's been a secret reform, which is basically environmental review process in New York State that has famously stalled a lot in development. That was just changed this year. So you really haven't seen the fruits of this policy until years later. But what we are a few years out from is the 2019 rent laws.

58:21Kenny Burgos:And I've explained what that trend line has been. And anecdotally, I can just, it's so easy to explain when you look at, I tell folks, if you go to Upper Manhattan and you go on Street Easy and you look for an apartment today under$2 ,500, you'd be hard pressed to see 12 apartments. Right. I can point to you to one single property owner who has 75 empty apartments in that neighborhood alone. So scale that out. There are thousands of property owners. We have well over 6 ,000 in our membership. We represent over half a million units. So we have a pretty good pulse on what's happening in rent stabilization, both from an anecdotal standpoint and just even data collection from our members.

59:02Kenny Burgos:And they have only seen increases in their vacancies. And like I said, every week I go to these apartments. In actuarial studies, in rent stabilization, an average 5 ,000 tenants die or move out a year. And if those tenants are dying, typically they're older. They've lived in the apartment for a long time. They tend to be lower rent units. Those are more likely the ones that do fall offline. Right. I have heard people argue that the reason that 2019 HSTPA was necessary is because landlords would pressure tenants to leave, pressure long-term tenants to leave so that they could hike the rent. How would you reply to that?

59:42Kenny Burgos:So the 2019 rent laws were a response to, remember I told you, rent stabilization has had multiple evolutions. So prior to 2019, there was a path to deregulation and you use the word pressure. I would ask you, is it pressure if I offer you$150 ,000 to vacate an apartment of which you do not own, of which you pay a sub-market rent and I'm paying you cash just to get access to my apartment back? And you have the right to say yes or no? Is that pressure? Compensating you far beyond what you actually own. And that was the case for many tenants. Many, many tenants, I mean, retired on the sale of their rent-stableized apartment that they did not own.

1:00:24Kenny Burgos:I'm not gonna sit here and say there weren't cases of harassment and bad practice. There always are. There's always bad actors in industries. But many would categorize what happened there as a loophole or pressure tactics. But the reality was it was written into the letter of the law. And what the law said was a property owner could deregulate a unit, exit rent stabilization if it met a certain threshold. That was a moving target. It started about, I think,$2 ,000 rent. This is why you see so many mixed regulated buildings in Manhattan and core Manhattan. This is why you don't see it in central Brooklyn or in the Bronx, because there was no path to even reach those rents, right?

1:01:03Kenny Burgos:Those market rents would never be achieved because no one would pay those rents at that time in these parts of the city. And so you had famous stories that were highlighted of probably bad actors doing whatever they could to deregulate the unit, but you also had so many unreported stories. Property owners tell me today that there are tenants that are unaware of the law changing and they'll say, hey, I'm ready to move out and go live with my family in Dominican Republic. would you be willing to give me$50 ,000 to vacate the apartment? And property owners are like, sorry, that game is done. In fact, if considered harassment, if I even offered to you.

1:01:38Kenny Burgos:So in many ways, it was actually a removal of a real windfall for low-income tenants at the same time helped to stabilize the finance of the building because that deregulation model, and we're not even advocating for deregulation anymore. We think there's a model to fix rent stabilization by allowing for that reset and maintaining it rent stabilized, keeping it forever stabilized because we know that that is a path. At the end of the day, they overcorrected so hard that they broke the funding model, right? That deregulation or that gradual increase of rent is what allowed other tenants to consistently pay below market rate or even below what their unit costs to operate.

1:02:17Kenny Burgos:Just like new developments today require a market rate rent to subsidize the 20 % set aside of affordable units. Right. There has to be accounting for the math here. This is why the city gives you a property tax abatement and gives you the high market rate rents. So now what you have is for rent stabilized property owners is, like I said, they pay the highest property taxes in the city. Property taxes are one of the most expensive costs operating these buildings. Insurance has gone through the roof. They pay all the costs to operate this housing. And they're dealing with regulated rents that have no path to increase and even upon turnover have no path to increase.

1:02:53Kenny Burgos:And so many of them already exist below the operating costs. So who is helping to fund the finance of these buildings? You now have the city taking a very hostile approach to property owners and actually threatening an increase on fines and fees and enforcement. So you have death by a thousand paper cuts. If you are already on shaky ground financially and the city is now tacking on more fines because you didn't compost the garbage correctly because you can't police your tenants and tell them to not put the banana peel with the recycling. It has to go in a new composting bin or a tenant propped open a door in a hallway.

1:03:30Kenny Burgos:And now that's a violation of the fire code that the property owner was not responsible for. You can have a building that just goes bankrupt by pure regulation and enforcement. You mentioned that you've been to Vienna to study what they do there. Yes. And to compare and contrast it to the New York City model. Yeah. Can you give us that comparison and contrast? It's very hard to give a direct comparison. I mean, it really is almost apples and oranges. Vienna has famously created social housing during the period of Red Vienna in the 1920s when socialists controlled most levels of government there.

1:04:06Kenny Burgos:and a lot of the housing has sustained itself, most famously the Karl Marx Hof, which every socialist goes on their pilgrimage to Vienna and takes a photo there. But even when I spoke with the government officials who run the social housing in Vienna and explain how our housing was operated here in New York City, they looked at me like I had two heads when they recognized that there was no accounting for costs in our housing. And so Vienna has provided a large amount of social housing to their residents, but because of that, they're extremely cognizant of the costs that get imputed in running that housing that come from government regulation or mandates.

1:04:44Kenny Burgos:So much so that they make sure not to increase the cost so high because they know it will translate to a need for a rent increase. There are also other models in Vienna's housing stock that require huge sums of investment from families, meaning$20 ,000,$30 ,000, $40 ,000 just to have this limit equity model of owning their housing. So it's very difficult. The way I summarize my trip is in Vienna, government funds housing. In New York, housing funds the government. That's as simple as I can boil it down. And the reason I say that, because again, they account for costs. They're cognizant of the costs that get imputed.

1:05:22Kenny Burgos:Here in New York, politicians completely ignore the costs. They pass bills based on intention and not the reality. So they'll say, you know, we do this because we need more affordable housing to do this. We need more safety regulations, things that people can get on board with, give absolutely no subsidy for it. Instead, increase the cost to run the housing through those policies. But since they don't have to deal with it, they ignore it entirely. And at the same time, are constantly increasing the property taxes for the housing, which helps to fund the city's bills. On any given year, the city's, what,$100 plus billion budget today, a huge portion of that comes from the property taxes paid for by rent-stabilized buildings.

1:06:05Kenny Burgos:But since this is a city of renters, renters don't see a property tax bill. They just get their standard rent-stabilized rent, and then the owner has to deal with all the costs. It's not my math to deal with. Right. I've thought a lot about this, how that makes it sort of a backdoor, because if something is taxpayer funded, then the books are open and the public can go through the numbers. But what New York has done is they've created regulations that increase the costs, many of which are good, you know, asbestos treatment, lead abatement, right? Those are all very good things, but they do increase the cost.

1:06:41But then they cap a landlord's ability to raise the rent in order to cover those costs, which, as we've talked about earlier, means that the landlord then just can't even get the loan to do it. It's not taxpayer-funded anymore. Now it's funded either by the landlord or by the market rate tenants. Correct.

1:07:02Kenny Burgos:An example that shows you the mindset of some of the advocates who craft some of these laws and elected officials who have passed them, going back to HSTPA, there's part of the rent regulation system that says there's a program known as IAIs, or individual apartment improvements. And that is to have the property owners have the ability to individually improve apartments. Right. Simply said. They changed the law in 2019 to make it so that the cap on an individual apartment improvement was$15 ,000 and$30 ,000 respectively. You had to meet certain requirements. Those amounts were amortized in a way that it took 144 months for repayment.

1:07:44Kenny Burgos:And after repayment, the increased rent burned off. So summarizing it, I'm a property owner. I get a 30 ,000 IAI. I forget what that would have equated to based on the amortization rate, but let's say$100 cleanly. So the state says you can get$100 return for 144 months. We're not going to account for the cost of financing or interest rates. You in fact, won't get all your money back. But once we think you got all your money back because we live in a vacuum world where there's no other factors here, the rent then goes back down to the previous level because you have made your investment back. They realized how ridiculous that was that they had to actually update that law in 2022, increase the numbers of 30 ,000 and 50 ,000 and they had to remove the temporary nature of the increase.

1:08:35Kenny Burgos:But it's still at an amortization rate of 144 months. So today, an IEI of$50 ,000, which requires a lot of qualifications for you to even get it would amount to a$347.22 rent increase. Most people say, well, it's a huge increase. But if you do the math on today's interest rates, a loan for$5 ,000 would cost more than$347 a month. Just that alone. So you'd lose money again there. But then it's also just not enough to improve what these apartments need in many cases. As you mentioned, lead removal alone is about$25 ,000 because of the new updates. So you can lose half of the increase just on lead.

1:09:15Kenny Burgos:So, again, just the policy is completely disconnected from reality. Right. For anyone who's listening who is a landlord in New York City, what would you say to them? Like, mom and pop landlord, what would you say to them? I mean, I feel incredibly sorry. I really do. I have conversations all the time of mom and pop landlords and even mid-sized ones and even large ones who tell me, this property has been my family for one generation two generations it won't go to my kids what is you know maybe their retirement or has been you know a means of providing for your family is fading away and at no fault their own of their own time of their own investment their sweat their equity because of government policy it's being destroyed and i think that's fundamentally un-American, but I also think it's a complete travesty to New Yorkers.

1:10:11Kenny Burgos:These are New Yorkers who own these properties and the government has vilified them for daring to do so. It's not to say that small property owners don't deserve sympathy, but it's often where the sympathy typically goes. But the reality is the housing is failing across the board. I just told you Pinnacle had 5 ,000 apartments. That's by no means a small landlord and they're failing and And no one's going to shed a tear for a multimillionaire property owner, sure. But my question always is, what happens to the tenants? We're putting these policies almost in a way to just get one over on the property owners, on what the socialist would describe as the oligarchs.

1:10:52Kenny Burgos:And what gets lost in all this are truly poor and low-income people who have no other means, no other ability to find housing in a city where they're asking rent. it's$5 ,500. Right. And you are putting their housing on a path of bankruptcy. Right. What are we doing this for? And that circles back to how we started this conversation because we talked about how the system protects incumbents. But if you don't already have incumbent housing and you're going out trying to find market rate housing, it's absurdly expensive. Right. And so to your point, then if you are an incumbent and that building goes bankrupt or if that building for whatever reason, I mean, we hear a lot about people who are just living in misfit housing because they're living in a one bedroom, but now they've got four kids, their family's expanded, they could really use a larger space, but they don't want to give up this incumbent housing.

1:11:51Want to know that fact? Yeah.

1:11:53Kenny Burgos:If you look at the data for the rental roles in rent stabilization, one would think the larger the apartment increase in bedrooms, you see an increase in rent. It's inverted. Three bedrooms on average are cheaper in rent stabilization than one bedrooms. And that is because of what you just described. If I have a three-bedroom rent stabilized and I've been an incumbent for a number of years, this is a deal of a lifetime. I've got a three-bedroom for$1 ,000 in the city of New York. The one bedrooms typically over the years had much more turnover, given that they were probably priced closer to market rate or just single adults.

1:12:24Kenny Burgos:So families tend to move out a little longer. So they were more IAIs or vacancy changes. So today, a three bedroom on average rents for lower than a one bedroom rent stabilization. Wow. And in many cases, it's a misfit in housing. You know, you'll have elderly grandmothers and grandfathers who maybe their children have moved out and grew up in the apartment. Now they're living in a three-bedroom apartment by themselves. Wow. We started this conversation by talking about the profile of some of the people who are listening. Yeah. So you've got some people who are listening who are mom and pop landlords in New York, but you've also got other people who are listening who are New York residents and they are aspiring landlords.

1:13:08Should they buy in New York or should they buy in Kansas?

1:13:11Kenny Burgos:Like I said, those prices are not an advertisement. They are a warning. You know, you do have people who look at these prices and say, well, I mean, I'm getting New York City land for pennies on the dollar. Certainly, I have to have some upside here, right? But the government can be irrational much longer than you can stay solvent. So I would not recommend entering the rent-stabilized space unless you have a tolerance for high levels of pain and a lot of cash to burn. We talked earlier about the price index of operating costs and about how in this most recent year, according to that data, the operating costs went up 4.5%.

1:13:50Kenny Burgos:Well, that was the commensurate adjustment they determined. I'm forgetting what the increase in expenses, but they decided 4.5 % was the right adjustment. Was the right adjustment. Yeah. So they decided 4.5 % was the right adjustment. And that's taking into account water, sewer, insurance, other basic operating costs like that. they actually chose zero instead of 4.5%. As we move into the future, when it comes to those basic operating costs, water, sewer, insurance, property taxes, do you see them continuing along that same path? What do the next two years hold? Unfortunately, yes. The costs that you just highlighted are costs that have been highlighted for a number of years in New York City.

1:14:36Kenny Burgos:The property tax system is notorious for being completely lopsided and actually doesn't benefit renters. I mean, going back as far as probably even before Mayor Bloomberg, politicians have come in and acknowledged a need for property tax overhaul. Mayor de Blasio did it and then released his proposal his last few days in office and famously said nothing to rent stabilized housing stock. Mayor Adams ran a campaign saying that he would address a property tax system and did not. But Mayor Mom Donnie himself on the campaign said, you know, one realm that I agree with Kenny Burgos is that the property tax system is not helping renters and should be overhauled.

1:15:14Kenny Burgos:We've yet to see what the proposal is to fix that plan because it is a very politically sticky issue. There will be winners and there will be losers. No politician wants to be the one who decides that. Insurance costs are rising because New York State has this unique law dated back to like 1856 known as a scaffold law. and it's not to be confused with scaffolds outside, but it is basically the sausage maker for trial attorneys. It's why you can't drive on a single highway or street or billboard in New York City without seeing a trial attorney. This is absolute liability when it comes to insurance claims on the property owner.

1:15:50Those costs have been blowing up for the past five years.

1:15:54Kenny Burgos:I don't expect the legislature or politicians to change that in any way. It's protected heavily by unions, by the trial lawyers. Many New Yorkers can get pretty significant paydays because of the way the insurance laws are written in our state. And so unfortunately, I'm a bit pessimistic in the government's ability to curb these costs. Water and sewer rates have increased 35 % in the past five years. May Mom Donnie just approved the 6 % one in July. I haven't seen a proposal that actually will attack these cost overruns in any meaningful way. What we have seen is an implementation of a 0 % rent increase for two years to rent stabilized tenants because clearly that's what the mask calls for.

1:16:34Right. So we are heading into a future of continuing increasing costs with price caps.

1:16:41Kenny Burgos:Unfortunately. And that spells disaster for thousands of buildings and hundreds of thousands of tenants. Well, on that cheerful note. Sorry to end on a high note next time. Thank you for spending this time with us. Where can people find you if they'd like to learn more? Thank you for indulging me and allowing me a space to talk about this. People can find me on any social media at Kenny Burgos NY. They can also follow our organization at Housing NY. We produce content weekly. I try and distill some of these issues in 90-second format. If you're a property owner, get involved with us. We are an advocacy organization.

1:17:17Kenny Burgos:I don't just talk on podcasts. We actually lobby. We speak to government. We propose policy changes. So we're doing as best as we can to fix the housing here in New York. Thank you, Kenny. Now for anyone living anywhere who wants to be more financially literate, whether or not you have any connection to New York real estate, for anyone who wants to learn from this how to be a better consumer of information, here are three key takeaways. Key takeaway number one, averages can hide the real story. There are these headlines that are designed to get you to click because that's how news organizations make money, by making things outrageous so they go viral on the internet.

1:18:05So there are these headlines, these big scary headlines that say, oh, the typical asking rent for an apartment in Manhattan is$5 ,500 for a one bedroom. Well, sure, you're going to share that. You're going to click on that and you're going to share that and it's going to go viral. That's why the headline is there. But the median rent that New Yorkers actually pay across all units citywide is closer to$1 ,600. So when you see an average, ask what's inside it. And that applies to your own finances as well. You know, if you're going into a raise negotiation with a salary survey, find out who's in that sample because a handful of outliers can distort the whole picture.

1:18:45Also find out both the average and the median because, again, you don't want the outliers destroying the sample set.

1:18:52Kenny Burgos:Using that number as a metric is basically like saying, let's put Bill Gates in a room with nine other salaried workers in New York City and say, well, the average salary is a little over$40 million. You just know that's not accurate, right? But you have these super expensive midtown Manhattan buildings that just skew the numbers way high and mask all the pain that's happening in the outer boroughs and the highly rent-stabilized buildings. And for those of you who are interested in how this applies specifically in New York, every year, New York's Rent Guidelines Board publishes this report on how rent-stabilized buildings are doing financially.

1:19:27But that report lumps together very different buildings. It lumps together a luxury Manhattan Tower with two rent-stabilized units and 37 market-rate apartments that are renting for$8 ,000 each. And that goes into the same pile as a building in the Bronx where every unit rents for$1 ,100 a month. So the profitable luxury towers might pull the average up and the struggling buildings disappear inside of that number. So then politicians will take that figure. They'll take the net operating income before mortgage payments and major repairs and they call it profit. And it's a way that they lie through numbers.

1:20:09anyone who's a real estate investor understands that net operating income prior to debt servicing and capex is not actually the same thing as free cash flow but there are people who get paid and who get put into positions of power by distorting the numbers in order to make you angry and that's how we need to be more critical consumers of content more critical thinkers and we do that through a sharp understanding of how numbers work, how investment works, where profits actually come from. So averages can hide the story. That's key takeaway number one. Key takeaway number two, a bargain price often comes with a warning label.

1:20:53Kenny talks about how there are rent-stabilized buildings in parts of New York that are selling for about$50 ,000 per apartment. And there are actually some that go for as little as$10 ,000 per apartment. So imagine buying a$10 ,000 apartment in New York City, not 10 ,000 a month, like the 10 ,000, the whole apartment, you can buy a home for$10 ,000. Sounds like a deal, doesn't it? But no, it's not. It's actually a terrible idea to even put$10 ,000 into an entire apartment. The problem is that since 2009, the law keeps rents low even after a tenant moves out, even though the property taxes, insurance, water bills, these all keep climbing.

1:21:38And legally, a whole bunch of renovations need to be done in order to make it habitable. And the rent adjustment cannot keep up with the costs. And that's the reason that the sellers are essentially trying to give these properties away, right? There's a 24 unit building that's for sale for 1.3 million, 24 units for 1.3 million. That's$54 ,000 per unit. A unit is an entire apartment. A unit is somebody's home. Imagine buying an entire home for a couple or a family for$54 ,000. Like those are the prices that these things are going at and still nobody's buying, don't get excited by cheap prices because cheap prices are often warning labels.

1:22:28And if you are building wealth through rental property or in buying any business, maybe you're buying a laundromat or an accounting firm or a food truck, whatever business or rental property you're buying, if it's cheap, that's a red flag. Because what you're really buying, when you buy a business, you are buying future cash flow. If that business is cheap, that means there is some hiccup to that future cash flow. In this case, in New York, it's that the regulators have set such a severe ceiling on that future cash flow that the asset is actually just not worth it. You couldn't give it away.

1:23:08Kenny Burgos:Like I said, those prices are not an advertisement. They are a warning. You know, you do have people who look at these prices and say, well, I mean, I'm getting New York City land for pennies on the dollar. Certainly, I have to have some upside here, right? But the government can be irrational much longer than you can stay solvent. So, I would not recommend entering the rent-stabilized space unless you have a tolerance for high levels of pain and a lot of cash to burn. For anyone buying a business, remember, a cheap price is a red flag. That is key takeaway number two. Finally, key takeaway number three.

1:23:47When the math doesn't work, changing the people involved is not going to fix the math. In New York City, rent stabilization has no upper income limit, which means that very high income people, including people who make over$200 ,000 a year, can keep these ultra cheap apartments and can keep them for decades. And that's not a hypothetical. Approximately 10 % of rent-stabilized apartments, which is 86 ,700 households, are occupied by people who are earning more than$200 ,000 a year. That is according to the Wall Street Journal. So again, 86 ,700 households that make more than$200 ,000 a year are living in these rent-stabilized apartments and that's because there's no means testing.

1:24:37So one of the questions that I asked Kenny, I said, well, wouldn't means testing be a good idea? And I loved the answer that he gave. He said it would change who lives in those apartments, but it wouldn't change the underlying math. If an apartment brings in$700 a month in rent, but it costs more than that to run, then the building loses money no matter who the tenant is. And that shortfall has to land somewhere else. Sometimes that means that all of the neighbors who are paying market rate end up paying that. Sometimes it means that the building doesn't make repairs. It patches the boiler instead of replacing it.

1:25:16Or there's an elevator that stays broken for a really long time. If the underlying financials don't work, then it doesn't matter who owns it. Math, in any investment, math must be identity agnostic.

1:25:28Kenny Burgos:If you were to means test it and maybe give it to someone who we can deem that is more eligible or deserves this low-rate apartment, it doesn't fix the finances, right? What I tell people, you can put Mickey Mouse in these apartments, but if you're still paying$700 for the apartment and it's not paying for its operating or its expenses, then the building is still failing, right? We're still missing the underlying problem here that the government is squeezing the operations of these buildings, so much so that it's in beyond deteriorating conditions. That is the third key takeaway. Thank you for listening to this episode.

1:26:04If you are interested in learning more about rental property investing, we have a free guide around the mistakes that rental property investors often make. These are really common mistakes. Actually, one of them is that math needs to be identity agnostic and a lot of beginner rental property investors don't approach the math in an identity agnostic way. So for example, it's really common for a beginner investor to think like, well, if I do some of this work myself, then the cost is zero. No, the cost is not zero. There's still a cost. Like you still have to pay yourself for your own time at market rate, just like you would pay anybody else.

1:26:43The returns don't improve. So lack of delineating how to actually assess the returns on the investment from the money that you yourself might pocket, like that lack of the math identity agnostic angle. That's one of the many mistakes that beginner investors make. But in this free guide, we talk about seven mistakes. And these are big mistakes that can cost you tens of thousands if you don't catch them early. These are mistakes that a lot of beginner rental property investors make from the school of hard knocks. So if you want to learn what these mistakes are so that you can avoid them when you manage your own rental properties.

1:27:22You can download this guide. It's absolutely free. It's at affordanything.com slash rent. That's affordanything.com slash rent. Thank you so much for being part of this community. If you enjoyed today's episode, please share it with the people in your life. Share it with any New Yorkers you know. Share it with rental property investors. Share it with entrepreneurs, with business owners, with people who've thought about getting into the game, that is the single most important way that you can spread these ideas, this message, and the notion of really taking a deep look at what's beyond just the headline numbers.

1:27:59Please share this with the people in your life. Also, remember to download our free guide, affordanything.com slash rent. It's a free guide to the seven most common and most expensive mistakes that beginner rental property investors make. affordanything.com slash rent. Thank you again. This is the Afford Anything Podcast. I'm Paula Pant, and I'll meet you in the next episode.